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First REIT: Bumper distribution 3Q 2011.

Sunday, October 23, 2011

Ex-rights, with a pro forma DPU of 6.4c for 2011, I estimated First REIT's fair value to be at 80c per unit many moons ago. This was based on an expectation that 8% distribution yield was fair for the REIT. With the latest announcement of a DPU of 1.92c for 3Q 2011, is the estimated fair value of 80c outdated and probably too low?


I still hold the units I bought during the last bear market at 42c per unit as well as the rights units at 50c per unit. I also bought quite a number of nil-paid rights at 16c per unit and the final cost on those units is 66c per unit. In the recent market weakness, I bought more units at 73c, 74.5c and 76c. These, I partially divested as price tested resistance. On cost, the distribution yields on my current positions in the REIT are between 8.8% to 16%.


First REIT's unit price ended the last session at 79.5c. NAV/unit stands at 77.88c. So, the REIT is trading above NAV now. This could change in future even if the REIT's unit price stays at the current level as the management is in the early stages of talks with its sponsor for more acquisitions. With gearing level at 16.4%, the REIT has a very comfortable debt headroom. Another round of equity fund raising is, of course, possible but there is less necessity for one in the near future.


With news of higher DPU for 3Q 2011, could we see unit price testing and probably even breaking the psychological resistance at 80c in the new trading week? We could, of course.

Am I going to increase my investment in the REIT at current prices? I won't. Why?

The DPU of 1.92c for 3Q2011 includes 0.34c which is a special non-recurring distribution. This is from divestment gains of the REIT's Adam Road property. If we remove 0.34c, the DPU is 1.58c which is more in line with expectations. 0.34c is just a bonus.

So, although some want to increase their investment in the REIT tomorrow, I won't.

XD: 28 October.
Payable on 29 Nov.

Maintaining my current investment in the REIT, I am very pleased with the bumper distribution and look forward to its payment on 29 Nov.

Read announcement here.

Related post:
First REIT: XR and fair value.

19 comments:

AhJohn said...

Wah! you bought at 42c! I just got the historical price in crisis from a blog, I think it's really true to be extreme patient!
Btw, as compare with price in crisis, can see which reit is more resilient.

http://dont-losemoney.blogspot.com/2011/10/s-reit-snapshot-in-crisis.html

AhJohn said...

Also, even 0.34c is non-recurring distribution, that this will lower buying cost about 0.34c. I don't think price will drop 0.34c after this dividend.

AK71 said...

Hi Ah John,

I bought into quite a few other counters in the last crisis. First REIT was one of them. :)

I am rather doubtful that these counters, including First REIT, would retest the lows they formed in the last crisis but one can never be too sure. ;)

As for comparing with historical prices to see which REITs have been more resilient, I don't think it is very useful although it could be an interesting distraction. Why? The REITs could have seen some changes in their fundamentals since the last crisis.

Price is, after all, about sentiments. Examining fundamentals will yield value. I buy when I see value. This should never change (even if prices should be higher). :)

AhJohn said...

Sorry AK, I wish to post a question again, maybe not related to your post, but I hope your fans can help.

I have this question because I was shocked, 8% should not be the criteria, maybe should look for 20%. But anyone has idea how to preserve but make a little and very safe capital gain? Money fund? eg. money fund at Fundsupermart, is it really safe?!

AK71 said...

Hi Ah John,

I think it is quite easy to see First REIT trading 0.5c lower than its last traded price. It is some way from its immediate support, technically.

I am not stopping anyone from buying more at 79.5c or even 80c. Price could go higher. Who knows?
;)

AhJohn said...

:) "I buy when I see value." This is still difficult for me ... Trying to value it ...

Gregg said...

Hi AK

Why there is no depreciation cost in their statement? I only see operating expenses ....is it because they lease the property? They bought Sarang hospital, I thought we should see the depreciation,isn't it?

Appreciate if you can enlighten me...

AK71 said...

Hi Ah John,

Basically, you are trying to find an investment that will not lose money, an investment that will preserve your capital and afford small gains. On top of that, it has to be safe. Tall order. ;)

Of course, the idea of safety is a relative one. Leaving your money in a fixed deposit with DBS or UOB is probably quite safe in nominal terms. Buying preference shares could be less "safe" but could give you better returns.

In times of high inflation, more so we have to make our money work harder to preserve our wealth, if not grow it. We have to take calculated risks. :)

AK71 said...

Hi Ah John,

Despite what practitioners of FA might say, value is something subjective, as far as I am concerned.

To some, they might only see value in First REIT if its distribution yield should hit 10%, perhaps factoring in an "Indonesian discount". To others, they might see value in First REIT even though its distribution yield is lower at 8%, citing its low gearing as a reason. Ceteris paribus.

This is why when people ask me if a REIT is a buy at a certain price, I will tell them that if they are happy with X% distribution yield and the rest of the REIT's numbers, then, it is a buy for them. It is very subjective.

Similary, some might choose not to be vested in S-REITs at the moment, thinking them expensive for whatever reasons they might have. Then, avoid.

I don't believe in being overly bullish or overly bearish. I believe in being pragmatic; knowing that I do not have perfect knowledge, I hedge. :)

AK71 said...

Hi Gregg,

Sarang Hospital is a freehold property, iirc.

Anyway, how a business entity takes in depreciation would depend on the system of accounting used.

I must say I do not know how First REIT does it. You might want to direct the question to the management.

Perhaps, some reader knows the answer.

Anonymous said...

Value is super subjective or else we won't have a market since no one will sell something which is more valuable or buy something which is less valuable etc.

REITs classify their assets as investment properties. As a result, the value of the properties are determined by valuers annually and the changes in valuation are recorded in the P&L statement. I think you only need to use depreciation if you classify the properties as Property Plant Equipment (like hotel stocks). In that case, the properties are stated at cost price and depreciated annually. Stamford Land is a good example - they had a MOU to sell 3 hotels substantially above book value. Don't think they revalued the properties for more than a decade. Ppl with accounting background could correct me if I am wrong.

Back to FR, this is a well managed REIT and one of the few which I actually see the CEO buying shares !

AK, at what price would you sell ?

Nick

Vested

AK71 said...

Hi Nick,

I have a core investment in the REIT which I am unlikely to sell for a very long time. How long? Could be for as long as I live. The core investment with very high distribution yield is for keeps, generating regular passive income.

I have a trading position which I bought in recent weeks at 70+c. These units, I have the intention of selling if price should test higher resistance levels. Beyond 80c, I see resistance at 81c, 82.5c and 84c.

I remember you said you would like to sell at 80c. Price has hit 80.5c so far. Congratulations. :)

Calvin said...

Hi Ak,

Like you, I am quite pleased with the dividend bumper. Great investment for the long run.

Rgds,
Calvin
http://www.investinpassiveincome.com

AK71 said...

Hi Calvin,

Indeed. :)

Gregg said...

Hi AK,

OCBC report:
http://www.remisiers.org/cms_images/research/Research-Oct24-Oct28_2011/First_REIT-111024-OIR.pdf

Buy Rating by OCBC with target price 0.840.

Gregg

AK71 said...

Hi Gregg,

Thanks for sharing this. :)

Technically, 84c, if it were to happen, would be a retest of a strong resistance.

Gregg said...

Hi AK

Managed to get their CFO reply.

1) The higher expenses that resulted shrink in net property income compare to Q2 was actually due to exchange loss on USD loan that used to finance the acquisition of Sarang hospital.
2) First Reit still keeping $6.4~6.5mil (divestment gain) after distributing some portion to unitholder in Q3. They did not rule out that this amount of money might be used to finance next acquisition
3) First Reit is negotiating with the bank to roll over the $48mil debt which due in June 2012.
4) First Reit is still negotiating with parent company on the injection of new hospital but it is not that aggressive due to current market condition.At the same time First Reit also discussing with bank in the event that they need loan to finance the acquisition.

AK71 said...

Hi Gregg,

Thanks for sharing the very valuable information. Much obliged. :)

Gregg said...

HI Ak,

Forget to add in one more point:
The maintenance cost is under tenant and was covered in the lease contract.

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