FirstREIT – OCBC

Leveraging on strong healthcare fundamentals

Good quality assets. First REIT (FREIT) owns ten healthcarerelated properties across Indonesia and Singapore. It derives some 86.4% of its gross revenues from Indonesia, with the remainder coming from Singapore. We believe that FREIT is well-positioned to capitalise on the growing demand for higher quality healthcare from the middle-class in Indonesia as well as increasing eldercare needs in Singapore. With a well-defined acquisition strategy, FREIT has managed to complete the acquisitions of two Indonesian hospitals recently which we view as yield-accretive in nature.

Strong and committed sponsor. We believe that FREIT would benefit largely from the support of its sponsor PT Lippo Karawaci Tbk (Lippo), which is the largest listed property company in Indonesia by total assets, revenue, net profit and market capitalisation. Lippo accounts for 86.4% of FREIT’s FY09 gross rental income, and we see this as a level of income reliability for FREIT. Given Lippo’s increasing commitment towards healthcare, we opine that this augurs well for FREIT. This is because FREIT has a right of first refusal on any assets sold by Lippo, which signifies the potential of quality hospital acquisitions out of Lippo’s pipeline.

Steady and sustainable income. FREIT has delivered consistent and stable distribution per unit (DPU) to its unitholders since its SGX-listing. We attribute this largely to the favourable master lease terms of its assets. All the master leases have a long tenure, 100% committed occupancy and are on a triple net basis, which has allowed FREIT to enjoy net property income (NPI) margins of 99.0% and above. Its leases are subjected to a yearly rental revision, which provides downside protection for its rental income. Moreover, FREIT has fixed the SGD-IDR exchange rate for its rental income, thus eliminating any forex risk.

Potential upside ahead; initiate with BUY. We believe that FREIT represents a compelling investment story at current valuations. This is driven by its income stability as well as the positive prospects of Indonesia and Singapore’s healthcare sector. We are sanguine about the committed support which Lippo provides and the potential assets in FREIT’s pipeline. We also like management’s strong execution capabilities and FREIT’s attractive distribution yield, which is well above the S-REIT average. Our RNAV-derived fair value estimate of S$0.84 yields a potential upside of 13.7% and a total return of 22.6%. As such, we initiate coverage on FREIT with a BUY rating.