First REIT has been on a remarkable journey of financial resurgence, showcasing a balance of growth and stability in its financial performance, actively executing its “2.0 Growth Strategy”.
Since the quarter ended March 2021, the REIT has seen a steady improvement in its rental income in local currency terms, thanks to its master lease agreements in Indonesia which factor in rent escalations. However, in recent quarters, that has been offset by the strong Singapore dollar (SGD) against the Indonesian rupiah (IDR) and the Japanese yen (JPY).
The REIT’s growth strategy spans four strategic pillars in a bid to capture opportunities in the healthcare sector and deliver sustainable long-term growth for its stakeholders.
Under its strategy, First REIT aims to diversify its portfolio into developed markets to reduce concentration risks in terms of its geographical markets and tenants. It is also looking to reshape its portfolio for capital-efficient growth by recycling capital from some of its assets, in particular, its non-core, non-healthcare or mature properties. Under its third pillar, the REIT is seeking to strengthen its capital structure to remain resilient by diversifying its funding sources. Finally, the REIT aims to ride on megatrends such as environmental, social and governance (ESG) initiatives, ageing population demographics and other growth drivers.
Since its “2.0 Growth Strategy” announcement, the REIT has made good on its efforts to transform itself. For instance, the REIT announced that it will make its maiden foray into the Japanese nursing home market on the same day as its strategy announcement on Dec 8, 2021.
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In March 2022, First REIT completed the acquisition of 12 nursing homes in Japan from its sponsor OUE Healthcare for JPY24.2 billion ($302.5 million). In September 2022, First REIT completed the acquisition of another two nursing homes in Japan from third parties for JPY2.6 billion ($26.3 million). The 14 homes are fully master-leased to tenants which are independent local nursing home operators. Before that, the REIT, which was listed on the Singapore Exchange (SGX) in 2006, only had healthcare assets — mainly hospitals — in Indonesia.
However, the REIT is still heavily weighted towards developing countries with 15 properties in Indonesia which make up around 73.9% of its total assets under management (AUM) based on carrying values as at June 30. Of its 15 properties, 11 are hospitals, three are integrated properties with hospitals and the last one is the Imperial Aryaduta Hotel & Country Club.
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The REIT also has a presence in Singapore with three nursing homes that make up 2.8% of its AUM. Its Japanese portfolio, which now comprises 14 nursing homes as at June 30, makes up 23.3% of the REIT’s AUM.
In its results statement for 1HFY2023 ended June, Victor Tan, executive director and CEO of the REIT manager, said that it aims to grow its developed markets portfolio to over half of the trust’s AUM by FY2027.
In an interview with The Edge Singapore on Aug 1, Tan noted that while the REIT’s portfolio is mostly in Indonesia at the moment, he is confident that it will have a “good mix of assets” in both developing and developed nations in time to come, with a potential ratio of 70:30 or 60:40 towards developed markets.
“That will give us a very unique position in the sense that developing countries will give us a growth story and better yield albeit with higher risks while developed markets will give us stable returns albeit with slightly lower yields,” he adds.
Going to the land Down Under
At this moment, the REIT is exploring to enter the Australian market.
“The Australian healthcare market is a very mature market,” notes Tan. “We also like the market because it can influence the pricing of healthcare services, unlike certain markets that are more highly regulated and controlled by the government. That’s the part where we’ll be a bit more concerned,” says Tan.
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“Australia is definitely one of the key markets that can drive our growth in time to come,” he adds.
However, he notes that it is still “early days” for the REIT to go into Australia considering the high interest rate environment, which makes it “challenging” for it to acquire any property that will be yield-accretive.
China is also another market that the REIT may consider in the future, especially since it is a “big market that [the REIT] cannot ignore”.
Meanwhile, Tan is focused on ensuring that the REIT is in a good position to acquire these assets when the time is right. One of the ways to do so is to recycle capital by divesting its non-core, mature assets, in line with one of the pillars under the REIT’s “2.0 Growth Strategy”.
One of the assets the REIT manager is looking to divest is the Imperial Aryaduta Hotel & Country Club. Established in 1994, the hotel and country club in Jakarta, Indonesia, comprises a seven-storey hotel building, a two-storey country club and six blocks of cabana houses. The hotel and country club spans across a land area of 54,410 sqm (585,664 sq ft) and a gross floor area (GFA) of 17,926 sqm.
Divesting some of its mature hospitals within its Indonesian portfolio is also a possible strategy for the REIT manager.
“PT Siloam International Hospitals [which operates the trust’s healthcare properties in Indonesia] has been doing well post-Covid, with record performances every quarter. They have mentioned in their analyst briefings that they may want to strategically buy back more of its leased properties. We are open to divesting some hospitals too, and at the right price,” reveals Tan.
“We won’t rule out rebalancing our Japan portfolio as well,” he adds.
Giving back
Apart from ensuring sustainable distributions to its unitholders, First REIT is also in a unique position to contribute positively to society while pursuing its financial objectives.
With assets dedicated to healthcare and healthcare-related purposes, the REIT stands at the crossroads of doing good while doing well. The social aspect of First REIT’s assets has expanded financing options for the REIT, says Tan.
In April 2022, First REIT priced $100 million five-year guaranteed healthcare social bonds at 3.25%, which was the first of its kind in Singapore. The bonds were created in conjunction with the REIT’s inaugural social finance framework (SFF) and are guaranteed by CGIF, a trust fund of the Asian Development Bank (ADB). In September 2022, the REIT also secured a JPY1.66 billion ($16.9 million) social loan from Japan’s Shinsei Bank.
“It is just as well that with the assets we have, we meet the social needs of the population. Without our healthcare assets, we wouldn’t be able to get access to these bonds,” says Tan. “If you look at another REIT that owns a different class of assets, they may not meet the needs that the bondholders are looking for as well.”
This commitment to sustainability is also seen through its capital expenditures. This year, First REIT has committed to environmentally-friendly capital expenditure for two hospitals in Indonesia, seven nursing homes in Hokkaido, Japan, and one nursing home in Bukit Merah, Singapore. The capital expenditure ranges from the installation of energy-efficient air handling units to LED emergency lights and even the modernisation of lifts.
First REIT’s initiatives not only resonate with ethical and sustainable practices but also resound deeply with the communities it serves. The beneficiaries of these endeavours are not limited to the REIT itself but extend to the residents of nursing homes and patients in the hospitals within its portfolio.
In August, the REIT manager conducted a Japanese art and craft workshop for the residents and users of The Lentor Residence, an elderly residential facility in Singapore. The REIT also plans to visit the nursing homes in its Japan portfolio to engage the residents in cultural exchanges.
First REIT’s pivot to ride megatrends underscores its forward-thinking approach to investment. By aligning its growth trajectory with prevailing megatrends, such as the increasing demand for healthcare services and the growing emphasis on sustainable practices, the REIT solidifies its relevance and resilience.
This strategic alignment is a testament to the REIT’s agility and adaptability, positioning it for sustainable long-term growth in the dynamic real estate market.
