How Can First Real Estate Investment Trust Grow In the Years Ahead?
First Real Estate Investment Trust (SGX: AW9U) is Singapore’s first healthcare real estate investment trust (REIT). It currently owns 20 properties — mostly healthcare-related — that are located in Indonesia, Singapore and South Korea. Most of the REIT’s assets are in Indonesia.
In this article, let’s look at how the REIT can grow in the years ahead, and reward shareholders with higher distributions. But first, let’s look at how it has done in the past.
Strong financial growth
Since 2007, First REIT’s gross revenue and net property income have each expanded by 14.7% per year. Its distributable income has also climbed at an impressive annual rate of 13.2% from S$19.3 million in 2007 to S$66.7 million in 2017.
The following charts show how First REIT’s gross revenue, net property income, distributable income and distribution per unit have grown over the years:Source: First Real Estate Investment Trust 2017 annual report
A look into the future – sponsor’s assets
First REIT’s sponsor is PT Lippo Karawaci, the largest listed property company in Indonesia by total assets and revenue. Over the years, Lippo Karawaci has been injecting its assets into First REIT. This is set to continue in the future. In First REIT’s 2018 second-quarter earnings update, the REIT’s manager said:
“BMI Research reported that healthcare spending in Indonesia amounted to Rp403.9 trillion in 2017 and projects it to rise to Rp1,224 trillion by 2027, and that healthcare spending per capita will more than double between 2017 and 2027. Against this trend, together with the growing nationwide adoption of the national health insurance scheme, private healthcare demand will continue to rise. As such, First REIT remains well-positioned for further growth, with a strong acquisition pipeline of around 40 hospitals in Indonesia from its Sponsor, PT Lippo Karawaci Tbk.”
On top of acquiring assets from its sponsor, First REIT’s manager can perform asset enhancement initiatives to spruce up existing assets. This, in turn, can allow the REIT to charge higher rents. The following summarises the potential for First REIT’s portfolio to grow:
Source: First Real Estate Investment Trust 2018 second-quarter earnings presentation
In markets other than Indonesia, First REIT is looking to expand its portfolio by acquiring nursing homes and other healthcare-related assets.
A look into the future – new assets
The REIT’s ability to enter markets that it is not operating in yet has just been given a boost.
Earlier last week, OUE Lippo Healthcare Ltd (SGX: 5WA), or OUELH for short, announced that it is looking to acquire a 10.63% stake in First REIT. OUE Lippo Healthcare also revealed its plans to buy a 40% stake in Bowsprit Capital Corporation Limited, First REIT’s manager. The remaining 60% will be acquired by OUE Lippo Healthcare’s parent company, OUE Ltd (SGX: LJ3). Upon completion of the transaction, First REIT will have the chance to set foot in new regions.
Victor Tan, chief executive of Bowsprit, explained:
“With OUELH’s existing portfolio of assets, First REIT will have opportunities to expand into new territories, including the vast and well-developed network of healthcare facilities in Japan and the rapidly growing healthcare market in China. This effectively expands the Trust’s geographical reach within Asia and its potential to deliver greater returns to Unitholders.”
OUELH develops and manages healthcare facilities in Japan and China which include medical centres, day surgery centres, hospitals, nursing homes, and retirement communities.
Upon completion of the deal, First REIT will continue to have the right of first refusal (ROFR) on its sponsor’s pipeline of hospitals in Indonesia. At the same time, the REIT will get to enjoy the ROFR on OUELH’s portfolio of healthcare and/or healthcare-related assets in China, Japan, and Southeast Asia.
The Foolish takeaway
First REIT has a strong pipeline of hospital assets that it could potentially acquire from its sponsor, Lippo Karawaci. With the tailwinds in the Indonesian healthcare space, First REIT should perform well, just like it has done in the past.
In addition, First REIT is diversifying its pipeline of assets so that it does not have to rely heavily on its sponsor for growth — a reliance on Lippo Karawaci has its own set of risks. The deal with OUELH, upon completion, might give First REIT additional growth avenues that were not easily available previously.