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First REIT: Yield accretive purchase in South Korea.

Saturday, July 9, 2011

First REIT has bought a hospital in South Korea. This has a nett property income (NPI) yield of 9% and is a yield accretive purchase. The purchase is most likely going to increase the distribution per unit (DPU) for unitholders since it will be fully funded by debt, increasing its gearing level from 13.8% to 16.4%. Expectations of a higher DPU could account for the recent strength of the REIT's unit price as it closed at 80.5c/unit in the last session.

I generally like the numbers and I also like the fact that the debt is to be a US$ denominated bank loan. Expecting the US$ to continue weakening against Asian currencies in time, I believe this to be a good idea. However, it remains to be seen if the management would be able to manage this single property so far away from S.E. Asia efficiently.

For example, the recent divestment of its single property in Japan by AIMS AMP Capital Industrial REIT was a prudent move as it could not benefit from any economies of scale having only one property in Japan and it chose to concentrate on its operations in Singapore instead. Could First REIT's latest acquisition be a bad idea in a hasty effort to expand the REIT's portfolio to the targetted $1b value? Time will tell.

Going back to dollars and cents, how much would the DPU be, post acquisition? Based on 9% NPI yield and the purchase price of S$16m, very roughly, I estimate an annual income contribution of $1.4m. The REIT currently has an annual NPI of about $60m. So, by proportion, we could see  >2% increase in DPU. The current DPU of the REIT is about 6.4c per annum. Not much to rave about but nice to have.

My investment in First REIT remains a relatively large one and it is likely to remain that way in the near future.

See presentation slides here.
See announcement here.


mark said...

Sir. Hit your fair value already.

AK71 said...

Hi Mark,

Yes, it has and I divested partially. :)

OT83 said...

Hi Ak,

I had divested mine fully but it was only a small investment.

AK71 said...

Hi OT83,

Taking profit is never wrong. Anyway, uptrends climb a wall of worries. They are usually not a straight line up. I am waiting to accumulate at supports. :)

Anonymous said...

Again FR.

Why ? It seems to me that there is a run up of the prices prior to the announcement.

Just like the weeks or days leading to the recent rights issue.

Surely that there isn't that much of a coincident ?

Or just that I am being over sensitive here about some people knew & acted before we did prior to the announcement ?


AK71 said...

Hi SnOOpy168,

Your guess is as good as mine. ;)

As long as I am on the right side, I am happy. :-)

Anonymous said...

8% yield on a portfolio of predominantly Indonesia properties seems fair value

But to be honest i rather hold on and make 8% p.a. With market volatility of late, doubt you can find much decent alternatives which give stable yields of up to 8%

AK71 said...

Hi Anonymous,

Yes, from the angle of FA, it is not easy to get a stable 8% yield from the stock market. It is even tougher in today's environment.

TA, however, shows that the counter could be overbought. So, a partial divestment with a possibility of buying back at a lower price cannot be discounted.

Could you include your name or initials in future comments? Thanks. :)

Gregg said...

This is very good move for FIrst Reit that finally expand its foodprint to other region (other than Singapore and Indonesia).

Its price has been weaken since hitting all time high at 0.815 which closed price at 0.795 last friday. I would happy to load more units if price weaken again....

AK71 said...

Hi Gregg,

Like you, many I know are waiting for First REIT's unit price to retest supports before loading up or adding to their long positions. Me too. ;)

Anonymous said...

2Q 2011 results are out today


AK71 said...

Hi SnOOpy168,

Thanks for this. Will look at it over the weekend. :)

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