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First REIT: 1Q 2012 DPU 1.93c and a higher fair value?

Saturday, April 21, 2012

First REIT has declared a DPU of 1.93c. The unit price of First REIT has been rising steadily. It is clear that Mr. Market is willing to pay a gradually higher price for the REIT's units which leads me to wonder if we could see First REIT's distribution yield compressing to 6% which would bring it closer to PLife REIT's distribution yield which is currently under 6%. This could see the REIT's unit price going to $1.06.



When calculating distribution yield, I would rather use a DPU of 1.6c per quarter instead of 1.93c. Why? When we look at the numbers, we would see that the net property income (NPI) has improved 6% while distributable income has improved some 22%. This is because First REIT is still paying out its gains from divesting its Adam Road property. If we remove this component, the DPU should hover at 1.6c or so.


In fact, year on year, if we look at the distributions from operation, it has actually declined a marginal 1.4%. Total comprehensive income, even after the removal of the one off gain from the divestment of its Adam Road property, saw a reduction of some 7%; this is due to higher income tax expense. So, one would not be wrong to wonder if its estimated post rights DPU of about 1.6c per quarter in future could be maintained, everything else remaining equal.

When the REIT acquired its first property in South Korea, freehold Sarang Hospital, many were optimistic. However, the acquistion increased the REIT's gross revenue by 6.3% while increasing its operating expenses by 51.1%. Expectations for a higher DPU due to the acquisition has yet to be met.

Some might say that the underperformance is to be expected since being the REIT's only facility in South Korea, there is no economies of scale per se. In fact, I wondered about this when the acquisition was announced last year.

See the relevant blog post: here (First REIT: Yield accretive purchase in South Korea).



Although S-REITs distribute a minimum of 90% of their income to unitholders unlike companies which pay dividends from their earnings, it might still be of interest to some to note that First REIT's earnings per unit has declined year on year from 2.13c to 1.51c. This takes into consideration its rights issue, of course.

With its NAV per unit at 79.99c, the REIT is now trading at a 15% premium to NAV.

What remains largely in the REIT's favour is its very low gearing level and if it were to gear up to 40% to make yield accretive purchases in locations where it could benefit from economies of scale, we could see its DPU bump up by more than 20%.

At current prices, I would hold and not add to my long position.

See financial statement: here.

Related post:
First REIT: To sell or not to sell?

16 comments:

Unknown said...

Thanks AK71 for your update/analysis! Had bought First REIT after coming across this REIT in your blog.. Had bought some for passive income and very happy with the returns (and the capital gains) :)

BR,
Kevin

AK71 said...

Hi Kevin,

I am happy that your investment in First REIT has been rewarding.

Please reward me by visiting my sponsors. ;p

Ray said...

Great post. Thanks AK

Ah John said...

AK, thanks for the analysis, especially the earning break down!
As my understanding, FIRST REIT has the bargain power to increase leasing price year by year, part of contract, right?

goldmansion said...

Hi AK,
What is your take on REITs paying out management fees in units. For example First REIT 1,161,970 units ($1,008,000).
Personally, would you prefer a straight forward cash payout or units if you are a long term investor?
Thank You.

goldmansion

AK71 said...

Hi Ray,

I cannot remember if you are vested in First REIT.

I am happy if this blog post has been useful to you in any way. :)

AK71 said...

Hi Ah John,

Yes, I believe that rental escalations are built into the tenancies but we have to remember that distributable income is a function of more than just revenue. :)

AK71 said...

Hi goldmansion,

Some REITs give unitholders the option to receive income distributions in the form of units too. I know AIMS AMP Capital Industrial REIT is making unitholders such an offer this time round and Cambridge Industrial Trust has done it before as well.

If the managers should receive their fees in units, it would be similar to such an exercise. Instead of taking money from the REIT, they take the equivalent value in units and if the unit price should appreciate, they would make more. If the unit price should depreciate, they would make less. It is in their own interest, therefore, that the REIT's unit price stays resilient.

I know there is an argument proferred by some that having more units in the market dilutes the interest of existing unitholders. This argument has an academic interest for me and nothing more.

Existing unitholders could choose to reinvest their income received as well by buying from the open market if they so desire. It is a choice that we are free to make.

INVS 2.0 said...

Hi Ak71,

I am watching First REIT now. Its unit price has declined gradually since crossing above $0.90. But still a far cry to the days of $0.70 - $0.80 a few months back.

AK71 said...

Hi INVS 2.0,

My portfolio of S-REITs is behaving very well. A source of great comfort in uncertain times. ;)

K said...

Hi AK,

Can you enlighten me how do you derive the DPU to be at 1.6c or so when remove the sale of Adam Road Property.

Regards

AK71 said...

Hi K,

The breakdown is found in the quarterly financial report.

Refer to the end of page 3. There is "distribution from other gain" which was absent from a corresponding quarter a year ago. That accounted for some 17% of "distribution amount to unitholders". If we take 17% away from 1.93c, we get 1.6c. :)

K said...

Hi AK, Thanks for your response.

So in this case, For their ARFY11, in the "distribution from other gain" pg 38, we should remove 9.9% off the total DPU of 7.01c to obtain 6.31c realistically?

AK71 said...

Hi K,

As an estimate, that comes close enough, I believe. :)

K said...

Hi AK,

I noticed the Earnings Per Unit (EPU) dropped from 9.10c to 5.04c (Dec 2015 vs Dec 2016). Is this a concern? Isnt DPU coming from EPU?

Thanks.

AK71 said...

Hi K,

REITs do not pay dividends from earnings, they distribute income from cashflow.

I mentioned it recently again in this blog:
Retail REITs and Starhill Global REIT.

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