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I used to write in the past that First REIT is one of those good REIT that investors should investigate why it is so good. It was one of the examples that I used to explain what experienced real estate investors look for when selecting the properties to put their money into. Per my Dividend Stock Tracker, we can see the dividend yield is 7. Now that to me is attractive territory, not because of the yield alone. When you evaluate a stock, you got to take in the whole package, whether the business has quality or there are some aspect that is negative such that it trades at this valuation.

And for First REIT there is definitely some overhang. OUE Lippo Healthcare to acquire 10. It would seem on the surface that ownership have changed but it will still remain in the Indonesian owner’s hands. If you add this with the rights issue to acquire OUE Downtown by OUE Commercial REIT, then what these transactions do is that they seem to be indirectly funding Lippo Karawachi.

Lippo Karawachi is the parent of First REIT, a developer who is also the largest owner and operator of private hospitals in Indonesia. The tenants of First REIT’s Siloam hospitals is Lippo Karawachi. First REIT have various 15 year triple net master lease with Lippo Karawachi. These are very solid lease with a possibility to extend it for 15 more years. When each master lease is signed, Lippo agrees to pay First REIT shareholders in SGD at an exchange rate pegged at the start of the lease. This means that First REIT shareholders do not suffer from the brunt of currency fluctuations over the years, compared to REITs with properties paying foreign currency rental.

The closest example is how the weakening Rupiah partly killed Lippo Malls Indonesia. But there is always a cost to these currency fluctuations. It is who will bare the cost. In this case, this currency cost is borne by Lippo Karawachi. Per a report on Siloam hospitals, it shows the amount of cost these rentals are to the hospitals. The model continue to work if the cost of rental is a manageable portion of the bottom line.

However, this is a difficult judge because Siloam Hospitals have frequently shown to have negative free cash flow. This is due to the aggressive model of plowing cash flow back into the business. So given the recent deals happening and this information, are there any cause of concern? First REIT announced their Q3 Results yesterday it does show some cause of concern.

The above shows the third quarter cash flow statement. We can see a marked rise in the about of trade receivables. In the balance sheet, we can also observe a market rise in the trade receivables. To be fair this was not the first time this was brought to my attention. Some web blog, which I cannot remember also wrote about the increase in receivables.

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