What Does the Future Hold for First Real Estate Investment Trust? Part 1

First Real Estate Investment Trust  (SGX: AW9U), has outperformed the market over the past five-plus years.

The REIT had recorded total returns (after adjusting for rights issues and distributions) of about 235% from 1 January 2010 to yesterday.

By comparison, the capital gains of the SPDR STI ETF (SGX: ES3) – a proxy for the Straits Times Index (SGX: ^STI) – was 15.5% for the same duration.

First REIT is a healthcare-focused REIT. It has a portfolio of 16 properties with 12 located in Indonesia, three in Singapore, and one in South Korea. Its sponsor is Indonesia’s largest listed property company, PT Lippo Karawaci Tbk.

Being a shareholder of a REIT gives you partial ownership to all the real estate that it owns. As per the Monetary Authority of Singapore (MAS), REITs are mandated to distribute at least 90% of its profits as dividends to enjoy tax transparency. I also wrote about a few pointers for picking REITs here.

Over the past five years between 2010 and 2014 (First REIT’s financial year coincides with the calendar year), First REIT has paid out steadily increasing distributions totaling almost 38 cents per share.

Financial Year Distribution per unit (Singapore cents)
2010 7.72*
2011 7.01
2012 7.26
2013 7.52
2014 8.05

Source: First REIT’s Earnings Presentation; * pre-rights issue distribution per unit

Although the returns from First REIT has been healthy, as Foolish investors, we should still look behind the curtains to understand how the REIT can grow and how sustainable its distributions are.

A closer look

To get a sense of the resiliency of First REIT’s property portfolio, we can look at the gross revenue in each country.


Source: First REIT’s Earnings Report

Between 2010 and 2014, First REIT’s gross revenue has more than tripled; on an annualized basis, gross revenue has grown by a healthy 32.5% per year.

As you can see from the chart above, the vast majority of First REIT’s revenue and revenue-growth in the past five years had come from the properties in Indonesia. In 2014, more than 95% of First REIT’s revenue was derived from Indonesia.

The quality of First REIT’s revenue is also worth noting. A paragraph from the REIT’s latest earnings report gives more insight to its main source of revenue:

“Indonesia will remain the key focal market for First REIT. The recent weakening of Rupiah will not affect the Trust as rentals from Indonesia are collected in Singapore dollars.

Its sponsor, PT Lippo Karawaci Tbk continues to strengthen its portfolio of hospitals in Indonesia, owning 18 hospitals operated by the largest and most prominent hospital group, PT Siloam International Hospitals Tbk and still has a strong pipeline of 29 high-quality hospitals to which First REIT has the right-of-first-refusal for acquisitions.”

The lease expiry profile for First REIT’s property portfolio (shown in the chart below) is another important thing worth keeping an eye on. This will help the Foolish investor understand how sustainable future revenue would be.

2015-02 First REIT Rental Profile

Source: First REIT’s Earnings Presentation

Furthermore, the lease agreements tends to have a base rental and variable rental component. A snippet from the 2013 annual report explains more:

“Generally, the lease agreements provide that the lessees pay rent on a quarterly basis in advance, which rent shall comprise: (a) an annual base rent for the first year of each lease and (b) a variable rent.

The base rent is subject to increase every year thereafter subject to a floor of zero percentage and a cap of an agreed percentage. The variable rent is calculated based on a percentage of the growth of the lessee’s gross revenue in the preceding calendar year.”

As such, it is important for First REIT’s tenants to be able to grow profitably in the future in order for the REIT to enjoy similar gains itself.

Foolish summary

The exercise above is to look at the dynamics of First REIT’s sales alone. As a next step, we should observe if the top-line growth trickles down to the bottom-line so that the distributions – and by extension the share price – can be sustained.

But, that’s for the next article.

First REIT last traded at S$1.35 on Tuesday. This translates to a historical price-to-book ratio of 1.33 and a trailing twelve months distribution yield of around 6%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.