First Real Estate Investment Trust (SGX: AW9U), or First REIT, held a webinar last week to share an investors’ presentation. The event was hosted with help from SGX Academy. First REIT is managed by Bowsprit Capital Corporation, and is sponsored by PT Lippo Karawaci.
Here is a summary of the presentation:
1. To start, Tan provided an overview of the REIT:
a) Between 2007 and 2017, First REIT grew its gross revenue from S$28 million to S$111 million, and its net property income from S$27.8 million to S$109.5 million. In both cases, the growth rate was 14.7% per year, an impressive figure.
b) Over the same 10-year period, assets under management (AUM) also increased from around S$325 million to S$1.35 billion, up over 15% annually.
c) In 2017, the distributable amount to unitholders was S$66.7 million, up from S$19.3 million in 2007.
2. For First REIT’s distribution per unit (DPU) growth, Tan provided some background:
a) In 2010, First REIT undertook a 5-for-4 rights issue to finance the acquisition of two significant assets from its sponsor; Tan said that it was the REIT’s only rights issue since IPO.
b) First REIT divested an Adam Road property in 2011, and decided to distribute the gains over four quarters from the third-quarter of 2011 to the second-quarter of 2012.
c) The DPU has steadily increased since 2011 (when if we nett out the divestment gain).
d) In all, Tan said that unitholders of First REIT would have netted an annual gain of 21.3% (including distributions) if they had invested in the REIT during its IPO, participated in the 2010 5-for-4 rights issue, and held all the way till 15 Feb 2018.
3. As of 31 December 2017, First REIT had total debt of around S$479 million, which gives it a gearing ratio of 33.6%. Tan noted that the regulatory limit was 45%, and that First REIT had a bit of headroom to gear up for future acquisitions.
4. At the end of 2017, 41.6% of the REIT’s debt will come due in 2018, with another 49% maturing in 2019. Tan reported that the REIT has secured a S$400 million syndicated secured financing facility from a local bank (we checked, it’s Overseas-Chinese Banking Corporation (SGX: O39)) on 1 March 2018. With that, he said that the debt that are maturing in 2018 and 2019 will be shifted three to five years down the road, removing the risk of not being able to refinance these loans.
5. Tan also provided an overview of the REIT’s properties, with some key highlights:
a) There are 20 properties in all, with 16 assets in Indonesia, 3 nursing homes in Singapore, and one rehab hospital in Korea.
b) All of the properties are under master leases, therefore the REIT has a 100% occupancy rate. The leases are long-term, ranging between 10 years and 15 years, and come with rental step-up escalation terms. The nearest lease renewal date is in 2021.
c) On land titles, Tan said that most of the REIT’s properties in Indonesia are under the HGB (Hak Guna Bangunan) title. He compared the HGB title to a freehold title, saying that renewals can be done in alternating tenures of 30 years and 20 years, up to perpetuity. A small fee is levied for each renewal.
d) The other land title would be BOT (build, operate, and transfer) which Tan compared to a leasehold property title. Under the BOT title, he said that the Indonesian government grants the use of the asset for 25 to 30 years.
6. Next up, Tan went into the details of First REIT’s leases by country:
a) All the Indonesian properties are leased for 15 years, with an option to renew for another 15 years. Rental is received in Singapore dollars or its equivalent. Under this arrangement, Tan said that the tenant will bear the forex risk. The leases are also triple-net, which means that the tenant will bear the cost for the property’s maintenance, taxes, and insurance. For context, Indonesia makes up about 95% of the REIT’s rental income.
b) Singapore properties are straight forward, as rental is collected in our local currency. Two out of three of the Singapore nursing homes are also on a triple-net lease.
c) The only forex exposure for the REIT comes from its Korean property whereby rental is in US dollars. While there is risk, Tan said that the Korea property is less than 1% of its total AUM. The Korean lease is based on a triple-net structure as well.
7. Given that First REIT’s Indonesian tenants are the most important, Tan delved deeper into the lease structure, saying that there are three components:
a) A fixed base rental, which is agreed with the tenant at the start of the lease.
b) An annual base rental escalation, which is based on two times Singapore’s CPI (consumer price index), and is capped at 2% and has a floor of 0%. Tan added that Singapore’s CPI is used as the rental is received in Singapore dollars.
c) The last component is a profit sharing component which is based on the increase in the tenant’s revenue over the previous year. To be sure, Tan said that this variable component makes up only about 1% of the total rental income. It’s not big, but it’s good to have, he said.
d) In contrast, the Singapore and Korean property leases only have two components: a fixed base rental with an annual increment of 2%.
8. The closest lease renewal date is in 2021, as mentioned earlier, and it involves the first four properties that were injected into the REIT as part of its IPO (initial public offering). Tan expressed confidence that the leases will be renewed for another 15 years. He added that the renewed rental rates will not fall below what was paid out in the final year for the existing lease; that is, that there is no risk of the properties’ rental rates going down. The main risk would be if the tenant decides not to renew at all; in such a scenario, First REIT would have to look for a new tenant, which might not bring the same rental rates. Tan reiterated that this would be a “highly unlikely” event as the current tenants are doing well.
9. Looking into the future, Tan said that its sponsor has a very healthy (no pun intended) pipeline of properties. First REIT has the first right of refusal for assets under its sponsor and the sponsor’s subsidiaries. At the moment, Tan said there are 31 hospitals operating under the Siloam Hospital Network. On top of that, there are another 40 plus hospitals under development, and are expected to be completed over the next five to 10 years.
10. Tan also spent time to outline the debt and equity financing options that First REIT has used in the past. For the former, First REIT has used secured term loans, medium term notes, and bonds. For the latter, First REIT has the rights issue in 2010 (as mentioned earlier), a small private placement in 2012, and issued perpetual securities. Tan mentioned that the REIT has an ongoing distribution reinvestment plan (DRP) where unitholders have the option to receive their distributions in units, instead of cash; the program provides First REIT with another source of funds.
Disclosure: The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of First REIT and Singapore Exchange. Motley Fool Singapore writer Chin Hui Leong own shares in Singapore Exchange.