01 July 2013

First REIT - Some Thought on It (28 June 2013)

Some factors that I think it's important to calculate the value of a REIT:

1. Stability of the income stream (mainly in rental income) 
2. Acquisition / Disposal of the real estates that may create value to the portfolio
3. Credit Market - Stability of the borrowing cost or the future trend of it
4. Debt Ratio - How far can a REIT to acquire new assets without risk on deteriorating its credit ratings / further dilute the DPU. 

Introduction of First REIT:

First REIT is Singapore’s first healthcare real estate investment trust that aims to invest in a diversified portfolio of income-producing real estate and / or real estate-related assets in Asia that are primarily used for healthcare and / or healthcare-related purposes.

Managed by Bowsprit Capital Corporation Limited, First REIT’s portfolio consists of twelve properties located in Indonesia, Singapore and South Korea, namely 1) Siloam Hospitals Lippo Village, 2) Siloam Hospitals Kebon Jeruk, 3) Siloam Hospitals Surabaya, 4) Imperial Aryaduta Hotel & Country Club, 5) Mochtar Riady Comprehensive Cancer Centre, 6) Siloam Hospitals Lippo Cikarang, 7) Siloam Hospitals Manado and Hotel Aryaduta Manado, 8) Siloam Hospitals Makassar, 9) Pacific Healthcare Nursing Home @ Bukit Merah, 10) Pacific Healthcare Nursing Home II @ Bukit Panjang, 11) The Lentor Residence and 12) Sarang Hospital.

Its hospital assets in Indonesia are operated by Siloam Hospitals Group, a division of PT Lippo Karawaci Tbk, a strong brand name in the Indonesian healthcare industry supported by a team of international healthcare professionals whereas The Imperial Aryaduta Hotel and Country Club and Hotel Aryaduta Manado are operated by The Aryaduta Hotel and Resort Group. In Singapore, the nursing homes at Bukit Merah and Bukit Panjang are operated by Pacific Healthcare Nursing Home Pte. Ltd. and Pacific Eldercare and Nursing Pte. Ltd., respectively. The Lentor Residence is operated by First Lentor Residence Pte. Ltd. In South Korea, the Sarang Hospital is operated by a private doctor.

With Share Price of $1.19

Trailing DPU Yield => 7.26 c / 119c = 6.1%

Forecast DPU Yield => 7.06 c (annualized DPU based on 1Q2013 result) / 119 c = 5.9%

As First REIT Rental Agreement normally is a long term contract (Health Care Center / Hospitals are normally have a longer term agreement with REIT managers), the income stream is considered stable, except for the interest expenses that might increase as FED hinted that the long term interest rate in US may increase eventually on year 2015 and Singapore Interest Rate always follows after it. So this may be a double effects ( the spread between risk free rate and the DPU yield will be reduced as well as the DPU may also be reduced in later years due to increase in interest expenses). 

First REIT is having Total Debt To Equity Ratio of about 0.5x and I see no default risk in paying the rental income as those are healthcare / hospitals that having strong cash flow. It is up to you to decide the spread you wish to earn in future. Below is the history of acquisition / disposal of First REIT:

Acquisition:

November 2012 – Siloam Hospitals Manado & Hotel Aryaduta Manado and Siloam Hospitals Makassar.

March 2013 - proposed acquisitions of two additional hospitals from the Siloam Group - Siloam Hospitals Bali in Bali and Siloam Hospitals TB Simatupang in South Jakarta.

Disposal:

Adam Road property

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