First Reit beats Q4 forecast with $4.8m distributable income

FIRST Reit, Singapore’s first healthcare real estate investment trust (Reit), has reported distributable income of $4.8 million and a distribution per unit (DPU) of 1.76 cents for the fourth quarter ended Dec 31, 2007.

This exceeds its forecasts by 9.1 and 9.3 per cent respectively.

On a full-year basis, distributable income was $18.3 million and DPU was 6.73 cents, exceeding its forecasts by 5.6 and 5.7 per cent respectively.

Based on the closing price of 75 cents per unit on Jan 18, the full-year DPU represented a distribution yield of 9 per cent, said First Reit.

Ronnie Tan, chief executive of First Reit’s manager Bowsprit Capital Corporation, said: ‘We believe that our yield of 9 per cent remains one of the highest among the Singapore Reits (S-Reits) and this, in our opinion, is an attractive proposition.’

For the quarter, net property income was $7.2 million, 18.6 per cent above its forecast.

First Reit, which is sponsored by Lippo Karawaci, has assets in Indonesia and Singapore. A recent independent valuation put its asset value at $325.6 million, representing an increase of $17.6 million over the book value as at Sept 30, 2007.

Dr Tan said: ‘We will continue to work with our sponsor, Lippo Karawaci, in Indonesia. In addition, China will also remain a key focus in our acquisition pipeline as we believe that the healthcare needs in the country will continue to grow exponentially as income rises.’

Of the four memoranda of understanding for Chinese asset acquisitions it previously announced, Dr Tan said that it expects to conclude at least one acquisition in the second quarter of this year.

Noting that regulations have opened the way for possible consolidation in the S-Reit market, Dr Tan also said: ‘We are all for consolidation.’

The target portfolio size for First Reit is $400 million in 2008 and $500 million in 2009.

In terms of asset enhancement, Dr Tan said that it had recently submitted for regulatory approval plans for the redevelopment of its Adam Road Hospital, which has a 1.4 plot ratio. He added that First Reit could also sell units of the redeveloped hospital.

First Reit closed trading yesterday at 72 cents per unit, down two cents.

FY07 results

FY07 Results
First REIT has reported FY07 results with DPU of 6.73cps, which is 5.7% higher than IPO forecasts and in line with ML estimates. DPU growth is attributable to organic growth from the Indonesian portfolio together with income contribution from the Singapore assets which were purchased in 2007.

4 MOUs signed for China assets
During 2007 First REIT signed MOUs for 4 China assets which comprise a combined total of 1290 beds. We expect First REIT will be able to transact on at least one MOU in 1H08. We are positive on First REIT’s push to regionally diversify the existing healthcare portfolio.

Positive asset revaluation
First REIT has revalued its underlying portfolio during the period, which has resulted in a valuation uplift of S$92mn vs purchase price. The stock is now trading at a 24% discount to revalued NAV of S$0.95/share. Portfolio size now stands at S$326mn.

Maintain Buy, PO S$0.84
We maintain our Buy rating and 12 month price objective of S$0.84/share. As one of only two Singapore listed Healthcare REITs, we believe First REIT has access to a wide range of Healthcare related assets both in Singapore and regionally. We have updated our earnings estimate to reflect the FY07 results.

• Q4 net property income exceeds forecast by 18.6% with the addition of four new healthcare properties
• Full-year DPU of 6.73 Singapore cents translates to distribution yield of 9.0% – one of the highest amoung Singapore REITs
• Portfolio expansion to continue with China MOUs

High yield a reflection of riskier profile

First REIT invests in a diversified portfolio of income-producing real estate assets in Asia used primarily for healthcare and related purposes.

Riding on healthcare growth in Indonesia. First REIT’s initial portfolio comprises Siloam Hospitals Lippo Karawaci, Siloam Hospitals West Jakarta, Siloam Hospitals Surabaya and Imperial Aryaduta Hotel. The largest asset Siloam Hospitals Lippo Karawaci is located in Lippo Karawaci Township and is just 8km away from Soekarno-Hatta International Airport in Jakarta. It specialises in neuro-science and cardiology and provides annual base rental of S$11.7m.

Sponsor Lippo Karawaci has leased the four properties for 15 years with option to renew for another 15 years. The total base rent is S$24.1m, subject to annual increase equivalent to 2xCPI but capped at 2%. The rentals will be paid in S$ based on predetermined exchange rate of Rp5623.5 per S$. The variable rent is calculated based on growth in gross revenue generated at the four properties in the preceding calendar year:

a) 0.75% of gross revenue if growth is more than 5% but less than 15%;
b) 1.25% of gross revenue if growth is more than 15% but less than 30%, and;
c) 2% of gross revenue if growth is 30% or more.

Assets in Singapore provide diversification. First REIT has acquired Pacific Healthcare Nursing Homes at Bukit Merah and Senja in Apr 07, The Lentor Residence in Jun 07 and the Adam Road Hospital in Jul 07. The four healthcare facilities in Singapore have increased value of its portfolio from S$257m to S$308.8m. Rental income expanded 8.2% qoq to S$7m, reflecting contributions from the newly acquired properties. First REIT plans to redevelop Adam Road Hospital to increase net lettable area.

Acquisition growth strategy in China. First REIT signed MOUs to acquire 90-bed Wuxi New District Phoenix Hospital, 200-bed Shanghai Woman & Child Healthcare Hospital, the proposed Hengshan Urology Hospital and 500-bed Nantong Rich Hospital. First REIT will also explore potential acquisitions with Sponsor, Lippo Karawaci in Indonesia. Management is confident of raising portfolio of investment properties to S$500m before end-2009.

Sponsor Lippo Karawaci is the largest property developer listed on Jakarta Stock Exchange with market capitalisation of US$1087.5m. It owns a diversified portfolio comprising township and residential developments, commercial and retail developments and healthcare, infrastructure and hospitality properties. Lippo Karawaci has a 20.3% stake in First REIT and has granted first right of refusal over future sales of healthcare related hospitality assets.

High yield but high risk. 83.3% of First REIT’s investment properties is located in Indonesia and denominated in Indonesian Ruppiah. It adopts a natural hedge strategy by borrowing in the same currency as the underlying assets. DPU was 1.72 cents for 3Q07, representing distribution yield of 9.1%. This provides a spread of only 0.7% over Bank Indonesia intervention rate at 8.25%. First REIT trades at a discount of 13.6% to NAV/unit of S$0.88.