First REIT has bought a hospital in South Korea. This has a nett property income (NPI) yield of 9% and is a yield accretive purchase. The purchase is most likely going to increase the distribution per unit (DPU) for unitholders since it will be fully funded by debt, increasing its gearing level from 13.8% to 16.4%. Expectations of a higher DPU could account for the recent strength of the REIT's unit price as it closed at 80.5c/unit in the last session.
I generally like the numbers and I also like the fact that the debt is to be a US$ denominated bank loan. Expecting the US$ to continue weakening against Asian currencies in time, I believe this to be a good idea. However, it remains to be seen if the management would be able to manage this single property so far away from S.E. Asia efficiently.
For example, the recent divestment of its single property in Japan by AIMS AMP Capital Industrial REIT was a prudent move as it could not benefit from any economies of scale having only one property in Japan and it chose to concentrate on its operations in Singapore instead. Could First REIT's latest acquisition be a bad idea in a hasty effort to expand the REIT's portfolio to the targetted $1b value? Time will tell.
Going back to dollars and cents, how much would the DPU be, post acquisition? Based on 9% NPI yield and the purchase price of S$16m, very roughly, I estimate an annual income contribution of $1.4m. The REIT currently has an annual NPI of about $60m. So, by proportion, we could see >2% increase in DPU. The current DPU of the REIT is about 6.4c per annum. Not much to rave about but nice to have.
My investment in First REIT remains a relatively large one and it is likely to remain that way in the near future.
See presentation slides
here.
See announcement
here.