Should You Invest In First REIT [Fundamental Analysis]

In this article, we'll be conducting a fundamental analysis of First REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having a high degree of capital preservation ability.

Information Is Accurate Up To April 24

Business Description

First REIT is a Healthcare REIT that was listed in 2006 and owns 32 healthcare properties with the majority of its revenue being derived in Indonesia.

What I Like About First REIT:

Before the 2020 tenancy event, the performance of the REIT and management had been notable in terms of their consistency in delivering stable distribution per unit.
Clear strategic direction: To move into the developed markets with a target allocation of 50% of AUM by 2027 and also liquidate non-core or mature assets (Hospitality & Retail) for capital recycling to focus on healthcare properties.
Overall portfolio’s WALE is high and the master lease agreement often comes with built-in rent increments (at least 4.5% in Indonesia)

What I Do Not Like About First REIT:

High tenancy concentration risk of which the main tenant had shown signs of weakness (nearly defaulted) in 2020. As such, investors will have to pay special attention to the tenant's health to avoid a repeat.
First REIT borrowing comprises onshore and offshore loans denominated in SGD and JPY which may expose the portfolio to higher FX volatility impacts and currency risk.
High foreign exchange rate exposure to the Indonesia Rupee which, historically, has been performing very poorly against the Singapore Dollar.

Updates From Recent Performance (FY 2023)

General Comments:

On the progress to move into the developed markets, 25.5% of First REITs AUM are now located in developed markets.
Rental Income (-2.4%) and Net Property Income (-3%) experienced a decline as a result of the impact of currency depreciation as well as higher financing costs.

Positive Headwinds:

No refinancing risk until May 2026 of which by then, interest rates would have come back down to a reasonable level which reduces the risk of further increasing the overall cost of borrowing.

Negative Headwinds:

Further strengthening of the Singapore Dollar against the Indonesian Rupiah and Japanese Yen may erode distribution per unit despite improving top-line performances.

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- Work In Progress -

Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).

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