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What Does the Future Hold for First Real Estate Investment Trust? Part 2

Welcome to the second part of the series looking at First Real Estate Investment Trust’s  (SGX: AW9U) ability to grow its distributions.

In my previous article, I covered the REIT’s sources of revenue and sales growth over the past five years from 2010 to 2014 (the REIT’s financial year coincides with the calendar year).

In this article, I’d like to look at the net property income (NPI) and debt profile of the healthcare property owner.

As a recap: First REIT 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.

Over the past five years between 2010 and 2014, 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

A closer look

Ideally, we would like to see the revenue dollars drip down to the bottom-line. For that, we look into the net property income (NPI)  of the properties. The NPI is defined as rental revenue minus all direct expenses.

First REIT - 2

Source: First REIT’s Earnings Report

As expected, the NPI from First REIT’s properties in Indonesia is the major contributor again, making up 96% of 2014’s total NPI. NPI also tripled over the past five years under study; that’s a similar rate of growth when compared with the REIT’s gross revenue.

Foolish investors might want to keep an eye on a REIT’s debt profile. The debt profile may provide clues on how a REIT is funded, and its sensitivity to the interest rate environment. We can see how First REIT’s latest debt profile (as at 31 December 2014) looks like:

Gearing Ratio 33.10%
Fixed / Hedged 100%
Total debt $401.3 million

Source: First REIT’s Earnings Presentation

The information provided for borrowings by First REIT is lighter than most REITs. But, we are able to note from the chart below that the REIT would only need to refinance its borrowings from 2017 onwards.

Additionally, the REIT’s 2013 annual report suggests that the interest rates for borrowings secured were around 3.5% per annum.

First REIT's debt maturity profile

Source: First REIT’s Earnings Presentation

Foolish summary

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the REIT’s share price is supported by the quality of growth that we are looking for.

First REIT offers healthy (pun!) exposure to the growth in Indonesia’s healthcare industry. The pipeline of hospitals from the REIT’s sponsor may also offer room for future growth as well.

That said, changes in the foreign exchange rate between the Singapore dollar and the Indonesian rupiah could make it challenging for its tenants to keep up with rental rates which are denominated in Singapore dollars. Additionally, we should also be mindful to risks from regulation changes in Indonesia as well.

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.