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First REIT: Acquisitions in Manado and Makasar. (Amended)

Saturday, September 22, 2012

First REIT is acquiring two properties from its sponsor, PT Lippo Karawaci Tbk.

The two are Siloam Hospitals Manado & Hotel Aryaduta Manado at S$83.6 million, and Siloam Hospitals Makassar at S$59.3 million. The prices are at a discount of 10.78% and 9.81% to valuations, respectively.

The purchases will be funded through debt and a private placement.

Some pro forma numbers:

Total asset size:
S$782.2m or an increase of 26.4%.

NAV/unit: 84c.

Annual DPU: 7.45c. 6.77c.

Read press release: here.

What really interests me is the DPU here. An annual value of 7.45c 6.77c will approximate 1.86c 1.692c per quarter.

Regular readers will remember that I said a safer way to value First REIT was to use a quarterly DPU of 1.6c as it would remove the special distributions resulting from the sale of the REIT's Adam Road property. This is especially so if the management should be tardy in moving to improve the REIT's income.

Well, the special distributions have run out but the proposed acquisitions will take in S$14.1m in annual net rental income which is equivalent to a quarter of the REIT's annual revenue from its current portfolio. Therefore, the proposed acquisitions will keep the REIT's DPU more or less unchanged which would, in turn, lend support to its much higher unit price today. Now, I wonder if this is enough to lend support to its much higher unit price today.

At last session's closing price of $1.03 a unit, we will be looking at a pro forma distribution yield of 7.233% 6.573%. This is probably still attractive enough for many in the current low interest rate environment.

Related post:
First REIT: 2Q 2012 DPU unchanged.


K-Enterprises said...

Hi AK71,

So is it worthwhile to average up on any investment in FirstREIT at the current prices since interest rates are bound to be kept low till 2015. And is it still a value proposition at current prices.


AK71 said...

Hi Kelvin,

This question gets progressively more difficult to answer as yield gets compressed.

When REITs have good numbers and when distribution yields are in double digits or high single digit, it would be easier.

Now, I am somewhat hesitant.

Your call. ;)

Howyuan said...

The thing is, why private placement?

Sabana is doing something weird too.

AK71 said...

Hi Howyuan,

When the REIT had a rights issue for its last acquisition, people questioned why they had to have one as its gearing level was so low. It was to pave the way for more acquisitions down the road (and it gave existing unitholders an opportunity to buy more units in the REIT on the cheap ;p ).

Now, with its gearing level again relatively low, does it need a share placement to raise funds? I think not. However, it could be taking advantage of its very high unit price now to do a placement. A low unit price would make placements very expensive while a high unit price makes them cheaper. So, the management could be opportunistic here.

Keeping gearing level relatively low is a good idea as the REIT has to grow its asset base by another 50% to exceed $1 billion in value. That is the target.

As for Sabana REIT, I just blogged about the weird thing you mentioned. ;)

K-Enterprises said...

Hi Bro,

Do you mind if I ask you whether an average price of $0.88 paid for FirstREIT is okay?


AK71 said...

Hi Kelvin,

You might be making some people green with envy. ;p

Whether it is OK depends on you. Are you happy with the distribution yield at that price? If you are happy, it is OK, isn't it? Or is it?

Well, you might want to have in mind a distribution yield which is no longer attractive to you for the REIT. This is important because it will tell you when you might want to divest. ;)

Poh Soon said...

I thought that You should not use 7.45 cts to calculate as it included payout from selling off Adam road property. The correct estimated quarterly payout should be 3.38/2=1.69cts?

Tan said...

Hi AK,

I think the annual DPU, you should look at 6.77cents which exclude the divestment gain from Adam Road. This translated to ~6.6% Yield.


AK71 said...

Hi Poh Soon and Gregg,

This is an advantage of running a blog. If I should make mistakes, there is a chance readers might tell me.

You are both right! Thanks for the correction. :)

For the records, this was an honest mistake. No ulterior motive to prop up the price of the REIT. Honest. ;p

Yihhtan said...

Hi AK,

I think the market took the news quite postitively this morning.


Yihhtan said...

Hi AK,

I think the market took the news on the positive side. It is up this morning at 1.045.


AK71 said...

Hi YHTan,

That is good news for existing unitholders. It seems that Mr. Market is receptive to a distribution yield of 6+% from First REIT. :)

AK71 said...

First REIT’s plan to acquire two Indonesian properties from its sponsor is positive, AmFraser says, adding it improves portfolio diversification on location and medical specialities as well as enhancing the weighted-average-lease-expiry profile to 11.7 years from 10.8 years.

“The acquisitions would strengthen First REIT’s reach in Indonesia, a market we perceive to be highly attractive on the back of strong underlying demographics and the government’s aim of improving healthcare access to the public.”

With the acquisitions to be funded via a mix of committed debt and cash from a private placement exercise, AmFraser expects First REIT’s aggregate leverage to remain below 30% vs the regulatory limit of 35%, providing comfortable headroom to support future acquisitions.

Dow Jones & Co, Inc
Monday, 24 September 2012

SnOOpy168 said...

My guess is that as compared to Rights issue, private placements could mean less hassle and quicker to get the cash in the bank accounts. Yes, we will miss out on the chance of possibly acquiring additional units @ a discount vs the closing market price.

But I think again, if FR calls for a rights issue at say x% discount , will I participate ? Or I will be attracted to participate and whack hard on excess rights, if the discount is a 1?% ?

My yield expectation was around 8% but seems that this will be a difficult wish these days.

Never experience this scenario before and unsure of how to react.

AK71 said...

Hi SnOOpy168,

Private placement definitely has the advantage of expediency when compared to a rights issue.

As for looking for an 8% yield, the REIT that comes the closest now is Sabana REIT.

Personally, I am not adding to my portfolio of S-REITs at current prices. As many people have turned bullish on S-REITs of late and pushed the prices up, I have the feeling that the risk permium has gone up in tandem.

My portfolio of S-REITs still generates a consistent and meaningful flow of passive income. This is its primary purpose and any price appreciation is a bonus.

SnOOpy168 said...

Yes AK71. I agree with you that the market is bullish on S-Reits and esp when I had seen several thesis from the analyst on this topic. Still missed those good old prices, but as you have reminded - have that reserve funds ready to add units, when the market is under corrections.

I am looking forward to the day that my investments are 100% recouped. The good feeling of doing much about nothing and the $$ just roll in.

AK71 said...

Hi SnOOpy168,

It is always nice to be a first mover who is proven right over time although we might suffer some cynism and skepticism in the early days.

I have various investments which are basically free of cost through a combination of capital appreciation and dividends collected. So, the day you are looking forward to is a distinct possibility. All in good time. :)

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