facebookIs First REIT's Share Price of S$0.42 a Buy?
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Is First REIT's Share Price of S$0.42 a Buy?

profileSudhan P
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Right now, First Real Estate Investment Trust‘s (SGX: AW9U) share price (technically known as unit price for REITs) is at S$0.42.

At that price, First REIT is valued at a price-to-book (PB) ratio of 0.4x and a trailing distribution yield of 13%. 

With First REIT’s valuation certainly looking enticing, would I invest in it?

Let’s explore using my 10-step guide to pick the best Singapore REITs.

How to pick the best REITs

As a summary, here are the 10 steps I use to pick the best Singapore REITs:

  1. Growth in Gross Revenue and Net Property Income
  2. Growth in Distribution Per Unit
  3. Property Yield of Between 5% and 9%
  4. Gearing Ratio of Below 40%
  5. Interest Coverage Ratio of Above 5x
  6. Healthy Portfolio Occupancy Rate
  7. Positive Rental Reversions
  8. Presence of Growth Prospects
  9. Acceptable Price-to-Book Ratio
  10. Distribution Yield of Above 5%

Business Background

First REIT is a healthcare REIT that owns 20 properties — mainly hospitals and nursing homes — in Indonesia, Singapore, and South Korea. 

First REIT portfolio
Source: First REIT earnings presentation

First REIT is managed by Bowsprit Capital Corporation Limited, which is collectively owned by OUE Ltd (SGX: LJ3) and OUE Lippo Healthcare Ltd (SGX: 5WA).

First REIT is jointly sponsored by OUE Lippo Healthcare and PT Lippo Karawaci Tbk, Indonesia’s largest listed property company.

1. Gross Revenue and Net Property Income (NPI) Check

Check for: Increasing gross revenue and NPI

First REIT has a financial year that ends on 31 December each year.

The REIT’s gross revenue (more specifically known as “rental income” for First REIT) and NPI have been growing over the past five years.

 FY2015FY2016FY2017FY2018FY2019Compound Annual Growth Rate (CAGR)
Rental income
(S$' million)
100.7107.0111.0116.2115.33.4%
Net property income
(S$' million)
99.3105.8109.5114.4112.93.3%

From FY2015 to FY2019, rental income and NPI grew around 3% each on an annualised basis. 

For the nine months ended 30 September 2020, First REIT’s rental income declined by 31.3% year-on-year while its NPI fell 31.8%. The poor performance was due to rental relief extended to all tenants to cushion the impact caused by the COVID-19 pandemic.

Verdict: Pass

2. Distribution Per Unit (DPU) Check

Check for: Increasing DPU

First REIT’s DPU has increased from FY2015 to FY2019.

However, over the last two years, DPU has stagnated, which is a yellow flag.

 FY2015FY2016FY2017FY2018FY2019CAGR
Distribution per unit (Singapore cents)
8.308.478.578.608.600.9%

Verdict: Pass (0.5 point instead of 1)

3. Property Yield Check 

Check for: Property yield of between 5% and 9%

For FY2019, First REIT’s NPI stood at S$112.9 million while its portfolio valuation was S$1.34 billion.

The figures translate to a property yield of 8.4%, which is a resounding pass.

Verdict: Pass

4. Gearing Ratio Check

Check for: Gearing ratio below 40%

As of 30 June 2020, First REIT had a gearing ratio of 34.9%, which is acceptable.

First REIT gearing ratio (as of 30 June 2020)
Source: First REIT earnings presentation

Its latest gearing ratio is below the revised regulatory limit of 50%.

Verdict: Pass

5. Interest Coverage Ratio Check

Check for: Interest coverage ratio above 5 times

For FY2019, First REIT’s interest coverage ratio came in at 5.5x, given its NPI of S$112.9 million and finance costs of S$20.4 million.

Verdict: Pass

6. Portfolio Occupancy Rate Check

Check for: Healthy portfolio occupancy rate

All of First REIT’s leases are under long-term master leases of 10 to 15 years for each property. Therefore, 100% of First REIT’s properties are occupied.

Verdict: Pass

7. Rental Reversion Check

Check for: Positive rental reversions

First REIT’s leases have built-in annual rental increment terms.

In Indonesia, the annual base rental escalation is twice Singapore’s CPI (Consumer Price Index or simply put, the inflation rate) with a cap at 2%.

As for the assets in Singapore and Korea, there is a yearly rental increase of 2%.

First REIT lease structure
Source: First REIT earnings presentation

However, things are likely to change going forward (more on this below).

Verdict: Pass

8. Growth Prospects Check

On top of growing in Indonesia through its existing assets and acquisitions, First REIT can also grow by purchasing assets from its sponsor, OUE Lippo Healthcare (OUELH).

Victor Tan, chief executive of Bowsprit (First REIT’s manager), has explained previously:

“With OUELH’s existing portfolio of assets, First REIT will have opportunities to expand into new territories, including the vast and well-developed network of healthcare facilities in Japan and the rapidly growing healthcare market in China. This effectively expands the Trust’s geographical reach within Asia and its potential to deliver greater returns to Unitholders.”

First REIT growth prospects
Source: First REIT earnings presentation

However, in terms of lease structure, things are looking shaky. 

Late-2021, First REIT has four master leases expiring in Indonesia, and they contributed to around 26% of First REIT’s 2019 rental income. 

Those master leases, together with many others in Indonesia, are due for restructuring as there’s a high probability of those leases defaulting under the current master lease agreements. 

First REIT lease restructuring overview
Source: First REIT presentation

Under the proposed rent structure, the rental currency will no longer be in Singapore dollars (SGD) but will be in Indonesian rupiah (IDR). This will cause the total base rent (based on FY2019 figures) to fall from S$92.2 million to S$56.7 million. 

The annual base rental escalation of twice Singapore’s CPI will also be changed to a 4.5% escalation annually. 

First REIT lease restructuring comparison table
Source: First REIT presentation

Over the past 17 years, SGD has strengthened by around 4.6% annually against the IDR. So, the base rent escalation in the proposed rent structure seems to compensate for this. 

IDR-SGD currency chart
Source: Google

The restructuring of the leases under PT Lippo Karawaci is subject to approval from unitholders at an extraordinary general meeting to be scheduled. 

With the restructuring of the leases, First REIT’s future prospects are not as attractive as they used to be. 

First REIT’s manager also anticipates that the impact of the pandemic would be significant and structural over the medium term. 

Verdict: Fail

9. Price-to-Book Ratio Check

Check for: Acceptable price-to-book ratio 

At First REIT’s unit price of S$0.42, it is valued at a PB ratio of 0.4x, based on FY2019 results. 

Over the past five years, its average PB ratio stood at around 1.2x.

Assuming the lease restructuring was completed on 1 January 2019, First REIT’s net asset value will drop to S$0.518. This gives an adjusted PB ratio of 0.8x. 

Therefore, First REIT still looks undervalued at the moment.

Verdict: Pass

10. Distribution Yield Check

Check for: Distribution yield to be above 5% 

At First Real Estate Investment Trust’s unit price of S$0.42, it has a trailing distribution yield of 13%. 

Assuming the lease restructuring was completed on 1 January 2019, First REIT’s DPU will drop to 4.44 Singapore cents from 8.60 cents. This gives an adjusted yield of 10.6%. 

Verdict: Pass

The Final Verdict

First REIT has a final score of 8.5/10.

First REIT has had strong past growth. 

However, going forward, things are looking questionable. Even though the REIT is trading at enticing valuations, I would prefer to wait and see how the proposed restructuring pans out. 

Therefore, I will be putting First REIT on my watchlist. 

Would You Invest In First REIT?

Come discuss your thoughts and more at Seedly under a page specifically dedicated to First REIT (SGX: AW9U). 

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. 

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About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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