First REIT (SGX: AW9U)'s DPU Tumbled 46% Due To The Rental Relief Package



First REIT (SGX: AW9U) has recently announced its first-half 2020 financial results. It is trading at 7.8% dividend yield based on its last traded of $0.59 on 18 Aug.


Key Highlights:


  • Distribution per unit (DPU) and Dividend Yield (7.8%)

  • Price to book ratio (0.6)

  • Gearing (34.9%)

  • Interest coverage ratio (3.3x)

  • Growth catalyst


Background of First REIT


First REIT is a healthcare REIT that manages 20 healthcare properties (hospitals and nursing homes) in Indonesia, Singapore, and South Korea.


First REIT is managed by First REIT Management Limited, which is 60% owned by OUE Limited and 40% owned by OUE Lippo Healthcare Limited. First REIT enjoys the right-of-first refusal to the pipeline of hospitals in Indonesia by both PT Lippo Karawaci Tbk and OUE Lippo Healthcare Limited.


1. Distribution per unit and dividend yield


Net property income tumbled 33.4% to $37.5m. This was mainly due to 2-month rental relief extended to all tenants to navigate through this Covid-19 period. Thus, its DPU was down by 46.5%.


Based on its latest price, the REIT is currently trading at about 7.8% dividend yield. Historically, the REIT has been paying very consistent DPU, with steady growth over the years. However, the recent Covid-19 pandemic and the proposal from its major to review the rental support scheme have impacted both its DPU and price performance.


2. Price to book ratio


Over the past 8 years, First REIT has been trading at an average price to book ratio of 1.16. The recent price correction has brought down the ratio to 0.6, which the lowest level we have ever seen. The current level indicates a 50% discount based on its historical valuation.


3. Gearing


Portfolio leverage remains conservative at 34.9%, with a weighted debt maturity of 1.5 years. The management is currently negotiating with banks to refinance its $195m of term loan that is going to due in Q1 next year.


4. Interest coverage ratio


First REIT has a low interest coverage ratio of 3.3 times, which is slightly below our preference of 4 times. Besides, the REIT maintains a moderately high interest cost of 4.1%.


5. Growth Catalyst


The ongoing Covid-19 has impacted its hospitals in Indonesia, the manager will continue to monitor the situation and consider if any further rental relief is required. Its healthcare portfolio is on an average lease of 7 years. The manager is currently in discussions to renew the master leases for four hospitals which will expire in 2H21. These four hospitals will account for 22% of its total gross floor area.


First REIT's sponsor, PT Lippo Karawaci, lessee of most of its properties in Indonesia has initiated a discussion to restructure the rental scheme in view of the economic impact by the pandemic. The news has brought down its share price recently. The manager will study any reasonable and commercially viable proposal with its sponsor, to land on an agreement which is beneficial in the long-term for the unitholders.



Summary


First REIT is trading at a "cheap" price as compared to its historical valuation. However, in view of the negative impact of the pandemic, potential extension of the rental relief package and the review of the rental agreement with its sponsor, its short to mid term DPU is likely to be impacted. We will continue to monitor the ongoing situation.


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