1. Can you tell us what First REIT’s “2.0 Growth Strategy” is?
First REIT’s 2.0 Growth Strategy consists of four strategic pillars, with the aim of balancing portfolio growth and stability to create long-term sustainable value and distributions to all our unitholders. They are:
• Reduce concentration risk by increasing portfolio allocation in developed markets to more than 50% over the next three to five years.
• Reshape portfolio for capital efficient growth through recycling of non-core, non-healthcare or mature assets.
• Strengthen capital structure through diversification of funding sources to remain resilient.
• Pivot to ride on relevant megatrends such as Environmental, Social and Governance (ESG) and ageing population demographics to boost growth.
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2. Could First REIT’s distribution to unitholders be impacted by the ongoing roll-out of First REIT’s 2.0 Growth Strategy?
First REIT’s 2.0 Growth Strategy prioritises the sustainability of our distributions to our unitholders. 0.64 With a balanced portfolio and stable growth, we look forward to continuing our commitment to delivering consistent distributions to our unitholders.
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3. How has First REIT’s portfolio changed in the past three years?
First REIT has stabilised and rejuvenated its portfolio with an improvement in risk profile and an addition of quality assets in a new geographical market.
From Jan 1, 2021, First REIT restructured the Master Lease Agreements (MLA) for 14 hospitals in Indonesia and added a new annual rental escalation formula that will be the higher of base rent escalation of 4.5% annually, or performance-based rent of 8.0% of the hospital’s gross operating revenue in the preceding financial year.
In March, First REIT made its maiden entry in Japan with the acquisition of 12 freehold Japan nursing homes from our sponsor OUE Lippo Healthcare. They are operated by three independent local Japanese operators with a combined track record of around 60 years.
Located in the prefectures of Hokkaido, Nara, Kyoto, and Nagano, these nursing homes come with 30- year MLAs that expire in 2043. Annual rent could be revised every two to three years upon negotiation, based on the increase in Japan’s consumer price index and interest rates.
As part of our capital recycling strategy, First REIT has divested Siloam Hospitals Surabaya which has been held within First REIT’s portfolio since its initial public offering.
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4. How would increasing your portfolio exposure to developed markets like Japan benefit unitholders?
Before entering Japan, more than 90% of our portfolio was in a single market and operated by a single operator. Diversifying into developed markets will inject stability through the reduction of geographical and tenant concentration risks, enhance our overall risk profile and bring sustainable returns. Furthermore, currency volatility risk in our portfolio will be reduced as we expand into developed markets and receive rental revenue in local currency.
5. What does First REIT consider when evaluating potential acquisitions?
First REIT is guided by our 2.0 Growth Strategy in order to eventually achieve a balanced portfolio of growth and stability, with more than 50% of its quality assets in developed markets.
Furthermore, the REIT manager will evaluate each transaction structure and cost of funding to ensure that the transaction we enter into will enhance value to our unitholders. First REIT’s manager will also conduct due diligence and feasibility studies along with a wide array of industry experts including valuers, developers and healthcare operators.
6. What are the idiosyncrasies of being a healthcare REIT?
Healthcare REITs own, operate, manage, acquire, and develop healthcare and healthcare-related assets. These assets include hospitals, nursing homes, medical offices, pharmaceutical storage, outpatient facilities, and even life science innovation and research properties.
Most healthcare REITs lease their facilities to tenants such as healthcare systems, primarily under a triple net lease structure that covers maintenance, taxes and insurance. This prevents the REIT from facing inflation-related expenses and ensures a predictable rental income stream.
In addition, healthcare REITs will have to consider the demographics, social trends and government support in their target markets. For example, Japan’s rapidly greying population and government support in promoting nursing homes supported our decision to enter the market.
The location of properties is also an important consideration. For example, hospitals should be centrally located in a community with a large population, whereas nursing homes should reside in a serene environment with ease of accessibility.
7. What are the highlights of First REIT’s 1HFY2022 ended June financial performance?
DPU was up 1.5% to 1.32 Singapore cents, attributable to First REIT’s strategic initiatives which stabilised the trust. Rental and other Income increased 38.2% to $53.8 million mainly due to new income contribution from the Japan acquisitions. The restructuring of MLAs in Indonesia also ensured stable rental income growth from the bulk of First REIT’s portfolio. Net property and other income rose 40.2% to $52.7 million, comprising 88.1% from Indonesia, 8.4% from Japan and 3.5% from Singapore.
8. What are some key risks facing First REIT and how do you plan to manage them?
Like many other businesses, First REIT faces challenges from rising interest rates and exchange rate volatility amid global geopolitical uncertainties.
First REIT will conduct regular reviews to ensure an optimal mix of fixed and floating rate borrowings, while actively looking at the possibility of hedging with financial derivatives to tackle escalating exchange rate volatility.
After our Japan expansion, we have included lower-cost yen borrowings to reduce the cost of debt to 3.7% in 1HFY2022 from 4.2% in FY2021.
9. Can you explain the social framework that First REIT launched?
In line with Growth Strategy 2.0 to strengthen capital structure and ride megatrends, First REIT initiated a Social Finance Framework (SFF) in March which forms the foundation for a new mode of financing tied to attaining sustainable social goals.
This framework provides a platform for the issuance of loans and bonds granted upon the attainment of social benefit outcomes that are aligned with the Social Bond Principles (2021) and Social Loan Principles (2021), as well as fulfilment of the United Nations Sustainable Development Goal of “Good health and well-being”.
SFF provides guidance on the use of proceeds, the process for project evaluation and selection, management of proceeds, reporting and external review.
In alignment with the SFF, First REIT successfully issued in April a $100 million 3.25% guaranteed bonds due 2027. The bonds are rated AA by Standard & Poor’s and guaranteed by Credit Guarantee and Investment Facility, a trust fund of the Asian Development Bank.
10. Why should investors invest in First REIT now?
We believe that our 2.0 Growth Strategy will drive an increasingly diversified portfolio with reduced concentration risks as the trust looks to expand into developed markets. Beyond Japan, we are also exploring other developed markets including Australia, the UK, Europe and US.
We expect stable long-term growth from healthcare assets in Indonesia as demand for quality healthcare services will continue to be supported by the long-term rise of household incomes, particularly among middle-class Indonesians. More than four-fifths of First REIT’s portfolio in Indonesia are on an annual rental escalation of at least 4.5% annually.
We observed growing stable income from nursing homes in Japan and Singapore, which are among the fastest-ageing high-income nations globally, on the back of operational excellence.
Aside from the growth drivers which we identified, First REIT also had consistent quarterly distributions with a payout ratio of 100% sustained by a healthy financial position and strategically growing portfolio.
Finally, we believe that our sponsors’ strong healthcare and real estate network will provide a robust pipeline of assets from third parties within and outside of Asia to support future growth.
Candace Li is an analyst with Singapore Exchange
