Month: October 2012
FirstREIT – OCBC
ENTRENCHING ITS INDONESIAN FOOTPRINT
- Total purchase consideration of S$142.9m
- Slight disappointment in lease terms
- Raise FV to S$0.98 but maintain HOLD
Plan for new acquisitions from sponsor
First REIT (FREIT) recently announced that it has entered into two conditional sale and purchase agreements with its sponsor Lippo Karawaci (Lippo). This entails the proposed acquisition of Siloam Hospitals Manado & Hotel Aryaduta Manado (MD) which are located in the same building in North Sulawesi, and Siloam Hospitals Makassar (SHMK) in the South Sulawesi Province. The purchase consideration for MD is ~S$83.6m, while that of SHMK is ~S$59.3m. The purchase of MD would be funded by a combination of debt and a private placement exercise (proportion not finalised), while SHMK would be financed wholly by a drawdown from its committed debt facility.
Lease terms largely similar to existing Indonesian portfolio
Similar to its existing Indonesian asset portfolio, these two proposed acquisitions are structured on a triple net master lease for 15 years (option to renew for a further 15 years thereafter) with 100% committed occupancy and downside base rental protection. Exchange rate risk for FREIT is also eliminated as the base rental is structured in SGD while the variable rental component is based on a fixed SGD/IDR rate (1 SGD = IDR 7,000) throughout the entire lease term. This provides greater stability and visibility to FREIT’s unitholders. However, the initial base rental yield of 9.7-10.0% for the two assets is a tad below our expectations. The base rental component for the leases would also be stagnant for the first three years of the lease, with rental escalation only possible in the fourth year.
Valuations still rich, reiterate HOLD
We had previously assumed new acquisitions in our 29 Jun 2012 report. Hence we finetune our assumptions in accordance with the updated asset details and also roll forward our valuations to FY13. This is partially mitigated by an enlarged unit base from its impending private placement exercise. Our RNAV-derived fair value estimate increases from S$0.96 to S$0.98. But we maintain HOLD on FREIT as valuations still appear rich, in our view, with the stock trading at 1.3x FY13F P/B.
FCT – OCBC
EXCELLENT GROWTH PROFILE
- Increased interest in Hektar REIT
- Expecting better distribution
- Operationally strong
Acquisition of Hektar REIT units
Frasers Centrepoint Trust (FCT) announced last Friday that it had increased its interest in Hektar REIT from 99.4m units (31.06%) to 124.9m units (31.17%). The rise in unitholding was pursuant to the provisional allotment of rights units to FCT under the one-for-four rights issue and allocation of excess rights units by Hektar REIT. As a reference, Hektar REIT had proposed the acquisitions of two retail mall properties, Landmark Central Property (LCP) and Central Square Property (CSP) for a total of RM181.0m, and the equity fund raising was done to partially fund the acquisitions.
Likely improvement in DPU by Hektar REIT
We are positive of this development as it presents FCT with greater opportunity to participate in the burgeoning retail market in Malaysia. Both malls are strategically located in areas with strong traffic catchment and offer good growth potential. According to Hektar REIT, the occupancy of LCP is likely to increase from 76.7% to 99.0% upon the commencement of tenancy by The Store on 15 Oct, while an intended refurbishment of CSP post acquisition is expected to enhance its rental rates. Hence, while the acquisitions are not expected to have any immediate material effect on FCT’s distributable income, we expect FCT to benefit from Hektar REIT’s repositioning and upgrading plans, and in turn an improvement in DPU going forward. As a note,
the NPI of both properties comprised ~18.9% of Hektar REIT’s FY11 NPI of RM58.3m, based on latest available figures. This is relatively sizeable in our view.
Maintain BUY
We also like FCT for its pure suburban exposure, strong execution and sturdy financial position. We believe FCT will continue to gain from strong rental uplift at Causeway Point and incremental income from Bedok Point. Operationally, FCT is expected to show improvement in portfolio occupancy and track positive rental reversions. We now factor in FCT’s increased interest in Hektar REIT and roll over our valuations to FY13, hence raising our fair value from S$1.89 to S$1.97. Maintain BUY.
FirstREIT – AmFraser
Favorable Yield Likely To Sustain
Investment Highlights
- An attractive and sustainable yield. Underpinned by the defensiveness of the healthcare sector and its long‐term lease structure, we are confident about the sustainability of First REIT’s FY2012 forward dividend yield of 7.38%. First REIT’s lease terms range from 10‐15 years, which factors in step‐up escalation rates, thus providing long‐term visibility in its income stream. Moreover, we note that First REIT’s lease agreements for its Indonesian properties include a variable component that is a function of turnover growth, thereby allowing it to capture upside potential in favourable market conditions.
- Poised to leverage on demographic shifts. With its assets based in Indonesia, Singapore and South Korea, First REIT is in a strong position to leverage on the growing healthcare needs of a burgeoning population in Indonesia as well as an ageing population in Singapore and South Korea. Demonstrating the surging demand for nursing home services in Singapore, the government plans to build 10 new nursing homes between 2012 and 2016.
- Boasts financial firepower to support its acquisition appetite. First REIT recently entered into conditional agreements for the acquisition of Siloam Hospitals Manado & Hotel Aryaduta Manado, which is an integrated hospital and hotel, and Siloam Hospitals Makassar for S$142.9mil. Assuming that the acquisition of the former is to be financed by a debt‐to‐equity ratio of 30%, First REIT’s asset leverage ratio will increase to 24.0%, which is still much lower than the regulatory limit. With a right‐of‐first refusal to seven hospitals under its sponsor, First REIT has a healthy pipeline of assets to bolster its growth plans.
- A steady generation of operating cash flows. First REIT has consistently generated sufficient operating cash flows to cover its distribution payments over the past fiscal years. Given its sturdy fundamentals and the quality of its earnings, this should support the sustainability of its yield .
- Forex exposure mitigated. First REIT’s rental income from its Indonesian assets are based on a fixed SGD‐IDR exchange rate of IDR/SGD5,623.50 over the entire lease term, providing greater visibility over its earnings stream.
Key Risks
- First REIT’s overreliance on the Indonesian market and its two master lessees Pacific Healthcare as well as Siloam Hospitals (a subsidiary of Lippo Karawaci) for rental income are key risks. However, we are not particularly concerned about the latter given the master lessees’ reputation and Lippo Karawaci’s vested interest as a shareholder and sponsor.