Dear all
I am sure everybody here is familiar with Parkway Life Reit. It owns 64 properties located in the Asia Pacific region, with a total portfolio size of approximately S$2.25b as at 30 Sep 2024. Most of the us here would have conveniently thought that Parkway Life Reit is the first healthcare reit listed on SGX.
However, this is not the case.
It may come as a surprise to many of us, including myself that First Reit is actually the first healthcare reit listed on SGX on 11 Dec 2006 whereas Parkway Life Reit was listed on SGX on 23 Aug 2007.
What’s interesting on First Reit? Read on for more.
Description of First Reit
Based on Figure 1 below, First Reit has a portfolio of 32 properties comprising of hospitals; nursing homes and healthcare related assets. As of 31 Dec 2023, 74.5% of its assets under management (AUM) is in Indonesia; 22.7% of AUM is in Japan and 2.8% of AUM is in Singapore.
Figure 1: First Reit – 32 properties comprising of hospitals; nursing homes and healthcare related assets
Source: Company
Interesting points on First Reit
a) One of the few reits to pay quarterly distributions
Based on Chart 1 below, First Reit is one of the very few reits which still gives out distribution to unit holders every quarter. Notwithstanding the general rise in interest rates, First Reit’s distribution per unit (DPU) to unit holders is fairly stable. Based on Bloomberg, consensus estimates First Reit’s FY24F and FY25F DPU to be around S$0.024 / share and S$0.025 / share respectively. At the closing price of $0.260 on 8 Nov, this translates to around 9.2% and 9.6% respectively.
Chart 1: First Reit’s DPU over the past few quarters
Source: Company
b) Defensive sector
Based on Straits Times article dated 11 Aug 2024 (click HERE), Indonesia government has been making significant strides in expanding healthcare access across the nation and has plans to allow private healthcare firms to open more hospitals and clinics in its more populous cities
In Japan, First Reit noted the number of people aged 65 or older hit a record high of 36.25m in 2024. This comprised of 29.3% of the total population.
As such, the healthcare sector and nursing home sector which First Reit operates in continues to see favourable tailwinds.
c) First Reit works hard to educate the investment community
As First Reit holds predominantly overseas assets, they are cognisant that investors are generally not very familiar as they are unable to see or “feel” the assets. Thus, First Reit continues to be extremely active in engaging with the investment community. In Mar this year, it hosted a site visit (click HERE) by inviting analysts from Lim & Tan Securities, UOB Kay Hian, Phillip Securities and KGI Securities. I was extremely honoured and fortunate to be the only trading representative / remisier to be invited along with the analysts.
During the site visit, I also had the privilege of interviewing Mr Victor Tan, Executive Director & CEO of First Reit’s Manager. Readers can watch the interview HERE.
Since Mar 2024, First Reit has done numerous engagements with the investment community. For example, it just participated in the Securities Investors Association (Singapore) Corporate Connect on 5 Nov 2024.
At the moment, First Reit has rated coverage from the following brokers, viz. DBS Research, Lim & Tan, Maybank Securities, Phillip Securities etc.
d) Arguably one of the least sensitive to interest rates
First Reit is arguably one of the least sensitive reits to interest rate movements. As at 30 September 2024, First Reit’s proportion of debt on fixed rates or hedged is 86.0%. Its weighted average term to maturity is 2.8 years; and First REIT has no refinancing requirements until May 2026.
It is noteworthy 30% of interest rate hedges will roll off by year end and the fixed rates hedging ratio will fall to under 60%. Thus, there may be some interest rate savings in FY25F based on the assumption that U.S. interest rates have peaked and are likely to continue to go lower in FY25F.
e) Potential sale of hospitals to Siloam may yield several positives
During a recent analyst call with Siloam, CGSI analyst wrote in a report dated 27 Sep 2024 that Siloam’s management indicated that there is a possibility that Siloam may purchase from First REIT the 14 hospitals it currently manages.
To prevent an earnings vacuum and should this materialise, it is likely that First Reit may structure the deal in a staggered manner (e.g. sell the hospitals in tranches). Furthermore, it may be possible to arrange the deal in a manner to pair it with acquisitions.
Should the above materialise, there may be several positives.
Firstly, it has always been First Reit’s 2.0 growth strategy to increase its portfolio of assets in developed markets to >50% of AUM by FY27F. Secondly, if the sale happens, there may be scope for First Reit to sell off its non-core assets such as its Indonesian malls and hotel so as to have a clean exit from Indonesia. By doing so, they will also have strengthened their tenants mix as they will not have Lippo Karawaci (LPKR) and PT Metropolis Propertindo Utama (“MPU”) as their tenants anymore.
It is noteworthy that there is nothing concrete at this point. The above is based on grapevine and based on my personal interpretation.
f) Country club Imperial Aryaduta Hotel & Country Club – looking to dispose
First Reit has been planning to dispose its country club Imperial Aryaduta Hotel & Country Club (IAHCC). Based on FY23 valuations, this property is worth approximately IDR332.2b (equivalent to around SGD27.9m). Based on PhillipCapital’s research report, they mentioned that this property is unlikely to be sold below valuation. First Reit is hopeful that a divestment can be done in FY25F.
Potential noteworthy points
As usual, there are risks involved. Due to time constraints, I am only pointing out some of the possible risks. Besides the usual business and geographical risks which lead them exposed to the jurisdiction laws in Indonesia and Japan and FX risks, below are some other potential risks.
a) Rentals arrears from MPU
It is noteworthy that rentals outstanding from PT Metropolis Propertindo Utama (MPU) amounted to approximately S$7.9m as at 30 Sep 2024. The security deposit received from MPU amounted to S$2.3m, which comprises of S$1.7m for the mall and S$0.6m for the hospitals.
Based on First Reit, on 18 May 2021, First REIT entered into a deed of novation and variation with MPU and PT Siloam International Hospitals Tbk (“Siloam”) to add Siloam as a joint tenant with MPU to each of the three MPU Hospitals Master Lease Agreements (“MLA”). As at 30 September 2024, the security deposit from Siloam for the three MPU Hospitals MLAs for its proportion of the rent amounted to approximately S$4.3m.
In the worst-case scenario if there is no repayment by MPU, First Reit believes that it may need to make provisions. Notwithstanding this, First Reit has been actively following up with MPU in and is hopeful that MPU doing their best to pay for the outstanding rentals.
b) Disposal of units by a director
Martin Lechner, First Reit’s independent director sold 2,796,900 units at $0.275 on 23 Sep 2024. His last purchase was on 18 Sep 2023 where he bought 796,900 units at $0.210 per unit. Some market watchers may view this as a negative sign that the insiders may feel that First Reit may have reached its near-term peak in terms of share price.
c) Valuations are not cheap
Based on Bloomberg, First Reit trades at 0.9x P/BV, 1.0 standard deviation above its 2Y average P/BV of around 0.8x.
Conclusion
It is noteworthy that there are risks involved such as the aforementioned risks (e.g., foreign exchange risks, various business risks; potential for provisions etc.). Nevertheless, First Reit’s defensive sector, potential disposal of IAHCC and its hospitals, coupled with its relatively high dividend yields are some of the factors which may encourage investors to take a closer look.
For a more complete picture, it is advisable to refer to First Reit’s analyst reports (Click HERE); SGX website (Click HERE) and First Reit’s corporate website (Click HERE).
Readers have to assess their own % invested, risk profile, investment horizon and make your own informed decisions. Everybody is different hence you need to understand and assess yourself. The above is for general information only. For specific advice catering to your specific situation, do consult your financial advisor or banker for more information
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Disclaimer
Please refer to the disclaimer HERE