We have seen a REIT sell-off in the recent weeks though it could be due to market jitters and potential increase in interest rates. A flurry of large acquisitions with relatively poor yields (the MBFC acquisition) may also be a cause. Honestly, I don't know haha ! Inflation will boost asset valuation in the long run. First REIT rental income is linked to Singapore's CPI rate which is a measure of inflation so any increase in inflation will be reflected with an increase in rental income to compensate it though there is a cap at 2.00%. Ultimately, First REIT has one of the lowest (if not the lowest besides LMIR) gearing among all S-REITs so loan financing issues and interest cover ratios are in very safe levels. I don't see why this REIT should trade at yields exceeding 9.5% and I guess the CEO doesn't either since he purchased 1.1 million rights share on Friday.
Besides capital structure, I think First REIT has some potential to grow in the coming years -
1) It can purchase $75 million worth of assets and its gearing will be a mere 25% which is still significantly below the regulatory limit. I think FR Management wants to increase FR AUM to $1 billion within the next 3 years which implies another round of equity financing in 3-4 years time.
2) FR Indonesian assets have a variable rental component which is linked to the hospital revenue growth. If you are bullish about Indonesia health care sector, investing in FR may be a good move since it will benefit from this particular rental component. It must be noted that this component will only impact the latest 2 acquisition from the second year of operation onwards (2012 onwards). I guess if Indonesia economy continues to improve, so too will the value of such premium health care assets.
Naturally there are risk involved as well. Indonesia has plenty of natural disasters so the assets may be at risk from earthquakes or volcanic activity. Its asset HGB lease titles are much shorter compared to Singapore's assets. While renewing the lease is extremely cheap, there might be unforeseen problems in the future as well. First REIT is very dependent on its sponsor, Lippo Karawaci, for its rental income so their fate are tied together. There are risk and there are rewards...choose well
Please share your views
(Not Vested but Interested)
Disclaimer: Please feel free to correct any error in my post. I am not liable for anything. Do your own research and analysis. I do NOT give buy or sell calls and stock tips. Buy and sell at your risk. I am not a qualified financial adviser so I do not give any advice. The postings reflects my own personal thoughts which may or may not be accurate.