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What Investors Should Know About First Real Estate Investment Trust’s 2018 Full Year Results

On Wednesday, 16 January, First Real Estate Investment Trust (SGX: AW9U) released its financial results for the fourth quarter and full-year of 2018. First REIT has been in the spotlight recently, after a dramatic two-day spell in November when its shares crashed by more than 15%. Some market participants were worried that the credit downgrade of its sponsor and main tenant Lippo Karawaci Tbk would hurt the REIT going forward.

Investors are, therefore, keen to find any clues or updates by management during its earnings update. Here’s what I found out from its earnings release.

Financial performance remained robust

1) Distribution per unit (DPU) for the fourth quarter remained unchanged from a year ago at 2.15 Singapore cents.

2) During the quarter, gross revenue, net property income, and distributable income increased by 2.7%, 1.9, and 1.4% year-on-year respectively.

3) Over the full year, DPU increased by 0.4% from 2017.

4) Full year gross revenue, net property income and distributable income rose 4.7%, 4.5% and 1.5% respectively.

5) The table below shows the trust’s DPU track record over the last six years:

Source: First REIT FY2018 presentation slides

What’s behind the numbers?

First REIT delivered another strong set of results over the quarter. The higher revenues and net property income was partly due to the contributions from the new properties acquired in 2017 — Siloam Hospitals Buton & Lippo Plaza Buton and Siloam Hospitals Yogyakarta.

Additionally, the existing properties with their built-in rental escalations was also a contributing factor to the higher revenue and property income.

Healthy financial position

1) Total debt increased to S$503.0 million from S$478.6 million a year ago.

2) Gearing ratio, while higher at 35.0% compared to 33.6% last year, still remained some way below the 45% regulatory cap.

3) The REIT has S$176.0 million in debt headroom before it reaches the regulatory limit.

4) Net asset value increased by 1.04 Singapore cents to 102.51 Singapore cents.

5) 59.0% of its debt is on a fixed rate basis.

6) “Trade and other receivables” decreased to S$32.4 million from S$49.3 million a quarter ago.

Positive signs

The gearing ratio of a REIT is the ratio of debt to assets. The lower the gearing ratio, the more financial flexibility the REIT has to take on more debt for growth through acquisitions. As of 31 December 2018, First REIT had a gearing ratio of 35.0%, which is a safe distance from the regulatory limit. It also affords the REIT additional debt headroom.

Ever since Lippo Karawaci’s credit downgrade, investors have been keeping a close eye on the “trade and receivables” line of the balance sheet. The “trade and receivables” in this case refers to the cash that is owed to the REIT by its tenants. A high trade and receivables could be an early sign that its tenants are not able to pay First REIT its due.

In the last quarter, trade and receivables increased by S$24 million. However, this quarter, the trade and receivables was reduced by S$17 million, which is a positive sign.

Key developments this year

OUE Ltd (SGX: LJ3) and OUE Lippo Healthcare Ltd (SGX: 5WA) (OUELH) have completed the acquisition of Bowsprit, First REIT’s manager, from Lippo Karawaci. 

OUELH also completed the acquisition of 83.6 million units from Lippo Karawaci, which represents 10.6% of the total unitholding of First REIT. After the acquisition, Lippo Karawaci and OUELH have equal stakes in the REIT and have become joint sponsors.

With the addition of OUELH as sponsors, First REIT now has right of first refusal (ROFR) to both Lippo Karawaci’s and OUELH’s pipeline of healthcare properties.

The manager of First REIT has said that it is looking to rebalance its portfolio by exploring other geographical regions which the new sponsor has assets in.

The Foolish bottom line

Overall, 2018 was a year of major changes for the REIT. With the change of ownership and addition of OUELH as a sponsor, the REIT now has plans to leverage on OUELH to expand its geographical reach.

The concerns that Lippo Karawaci was unable to pay off its rental obligation has also partially been eased as the latest report showed strong cash flows and a decrease in trade and other receivables this quarter.

At the time of writing, First REIT’s units changed hands at S$1.00 per piece, which translates to a price-to-book ratio of 0.95 and a distribution yield of 8.35%.

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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 has a recommendation for First Real Estate Investment Trust. Motley Fool contributor Jeremy Chia owns shares in First Real Estate Investment Trust.