Want Dividends? Here’s Why You Can’t Ignore Singapore’s First REIT

July 7, 2023

In Singapore, we are always on the lookout for dividend-paying stocks. A lot of them can be found in the real estate sector.

First REIT (SGX: AW9U) is Singapore’s first healthcare real estate investment trust (REIT) that aims to invest in a diversified portfolio of income-producing real estate and real estate-related assets in Asia.

These assets are primarily used for healthcare or healthcare-related purposes, such as hospitals.

Over the years, First REIT has successfully built a high-quality and diversified asset portfolio of 32 properties comprising 15 in Indonesia, three in Singapore and 14 in Japan.

The properties are collectively valued at over S$1.15 billion as of 31 December 2022.

First REIT’s healthcare properties in Indonesia are operated by PT Siloam International Hospitals Tbk (Siloam), while well-established third-party operators operate its healthcare properties in Singapore and Japan.

Here are some reasons investors should not ignore First REIT and some of the risks to consider when investing in it.

Restructuring of the MLAs in Indonesia

First REIT was severely affected by the COVID-19 pandemic, with a potential default by its principal tenant, Lippo Karawaci.

This prompted a restructuring of the Master Lease Agreements (MLAs) for its Indonesian hospitals in 2021.

The new rental rates are pinned to a higher base rent, promising an assumed yearly escalation of 4.5%, superseding the former 2% cap.

The rent is now payable in Indonesian rupiah (IDR), marking a shift from the previous payment in Singapore dollars (S$).

With this shift, the revised rents offer a long-term viability for hospital operator, Siloam.

Exciting long-term growth of the healthcare industry

The new rental structure allows First REIT to capitalise on Siloam’s enduring growth.

Notably, an accelerated growth trajectory from Siloam could lead First REIT to progress towards a higher performance-based rent formula.

An exciting future beckons as First REIT is expected to grow in sync with Siloam’s substantial long-term expansion.

Siloam’s hospitals have witnessed a robust 5-year historical revenue Compounded Annual Growth Rate (CAGR) of 16%.

If this growth is sustainable, First REIT’s rents may follow a similar upward trajectory.

Expansion into Japanese healthcare market

In March 2022, First REIT made its foray investment into the Japanese market by acquiring 12 nursing home assets from its sponsor, OUE Group.

The Japanese assets, which currently contribute about 14% of rental income, are backed by a 30-year lease profile and fixed annual rents.

Over time, First REIT aims to increase its exposure to developed countries to more than 50%, ensuring a stable income flow.

First REIT has also planned to dispose of non-core, non-healthcare and mature healthcare assets to further bolster its growth, thereby securing funding for its Japanese expansion plans.

Decline in dividend in Q1 2023

Despite the strong growth prospects in its healthcare venture in Japan and the restructuring of Indonesia’s rent structure, First REIT saw a 6.1% year-on-year (yoy) decline in its distribution per unit (DPU) to 0.62 Singapore cents.

The decrease in DPU was due to higher financing costs and currency depreciation, offset by increased income from rental properties in Japan, Indonesia, and Singapore.

While there are no financing requirements until May 2025, only 62.8% of its debt is fixed to manage interest rate risk.

This means First REIT could see a rise in interest expense amid the rising interest rate environment.

Attractive dividend yield for long-term investors

First REIT is currently trading at an attractive valuation relative to its pre-restructuring level.

With a 12-month forward dividend yield of 9.5%, this represents an attractive investment opportunity for long-term investors interested in tapping into healthcare exposure in Asia.

Investors should not ignore First REIT because it’s ideally positioned to capitalise on the escalating demand for healthcare in Asia, with its diverse portfolio of healthcare properties and potential for significant income generation through reputable healthcare operators.

However, investors should recognise the importance of conducting comprehensive due diligence to understand the full landscape of their investment in First REIT.

This includes an analysis of various factors, such as the trust’s debt management strategy, the potential risks associated with currency fluctuations, the economic and financial policies of the countries where the properties are situated, and how management responds to changes in these areas.

Notably, First REIT’s exposure to various currencies introduces a level of risk, as their financial performance can be affected by the appreciation (or depreciation) of the Singapore dollar against foreign currencies.

An in-depth assessment of these elements can provide valuable insights, allowing investors to make well-informed decisions.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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