First Real Estate Investment Trust (SGX: AW9U) was in the headlines for all the wrong reasons last year.
In October, its sponsor and main tenant, Lippo Karawaci Tbk, suffered a credit downgrade. Upon the news, market participants started to panic and began a brutal sell-down of First REIT shares.
But, despite all of that, First REIT remains one of my top REIT picks. Not only has it been in my portfolio for a few years now, but I also intend to keep it there for the long-term. Here are three reasons why First REIT remains a staple in my investment portfolio.
Credit risk has eased
In March this year, Lippo Karawaci secured US$1.01 billion (S$1.37 billion) in funding through a rights issue and by divesting some of its assets. The injection of cash into the Indonesian property giant should provide it with the financial muscle to pay off its rental obligations.
It is also in a much better position to make long-term commitments to renew leases when some of its rental agreements with First REIT expire.
Favourable rental contracts
With the risk of rental default considerably lower, we can turn our attention to the positive aspects of First REIT. One of which is the REIT’s favourable rental contracts with its tenants.
Its Indonesian properties, which make up the bulk of its rental income, have triple net leases and include an annual base rental escalation of two times the consumer price index of Singapore. Triple net leases imply that the tenants are responsible for maintenance, certain property taxes, and property insurance. Because of this clause, First REIT does not have to worry about rising operating costs.
On top of all that, First REIT’s Indonesian properties are rented out based on Singapore dollars. As such, First REIT is not susceptible to any foreign exchange volatility. Investors should also take heart that the first few lease expiries of its assets only occur in 2021, thus providing the REIT with visible rental income over the next two years at least.
Despite the run-up in price recently, First REIT’s units are still trading well below their all-time high and sport a fairly attractive valuation. Based on the results for the first half of 2019, First REIT’s units have an annualised yield of 8.2%. This compares favourably against the average yield for Singapore REITs of around 6.2%.
In addition, given that First REIT has multi-year master lease contracts that provide organic rental growth and income visibility over the next few years, the REIT can easily sustain its DPU for the foreseeable future.
The Foolish bottom line
Despite the risks of its dependence on Lippo Karawaci, I believe the potential rewards of First REIT far outweigh the risks. With its high yield and visible organic growth drivers, I intend to keep First REIT in my portfolio for the next few years, at least.
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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 writer Jeremy Chia owns shares in First Real Estate Investment Trust. The Motley Fool Singapore has a recommendation on First Real Estate Investment Trust.