Contribution from new assets

• 2Q13 core DPU rises 16.4% YoY
  
• Aiming to reduce floating rate exposure
  
• Unchanged HOLD rating and S$1.20 FV
  

2Q13 results within our expectations

First REIT (FREIT) reported its 2Q13 results which were within our expectations. Gross revenue surged 43.4% YoY to S$20.1m due largely to contribution from its four newly acquired properties in Indonesia (two acquired in Nov 2012 and two in May 2013). Distributable amount to unitholders rose 4.0% YoY to S$12.7m but DPU fell 4.1% to 1.85 S cents. However, if we strip out an exceptional distribution in 2Q12, FREIT’s distributable amount to unitholders and DPU would instead have increased by 26.6% and 16.4%, respectively. As FREIT had already made an advance distribution of 0.99 S cents on 26 Jun 2013 (prior to the issuance of new units for part payment of its acquisitions), only the remaining 0.86 S cents will be paid to unitholders on 29 Aug 2013. For 1H13, gross revenue rose 34.2% to S$37.6m and constituted 45.2% of our full-year projection. DPU (after stripping out the special distribution highlighted earlier) increased 12.9% to 3.59 S cents, or 45.5% of our FY13 forecast. We expect 2H13 to be stronger on a HoH basis due to a full-quarter of contribution beginning 3Q13 from the two hospitals acquired in May this year.

Plans to refinance debt a positive

Management updated us that it is in the process of refinancing ~S$92m of its floating-rate debt to a 4-year fixed-rate unsecured bank loan. The all-in cost of debt for this loan is expected to be ~3.7% and will likely be finalised by Aug this year. Upon the completion of this refinancing exercise, FREIT’s next earliest refinancing need will come in 2016 (S$166m principal amount), while ~46% of its borrowings will be based on a floating rate structure (previously 72%), based on our estimates. We are positive on this as short-term interest rates in Singapore are likely to see an increase in late 2014 or early 2015, which would affect the cost of borrowing for floating rate loans.

Targeting AEI; maintain HOLD

Meanwhile, FREIT has plans to carry out asset enhancement initiatives on three of its Indonesian properties, although details have yet to be finalised. We retain our forecasts, HOLD rating and DDM-derived fair value estimate of S$1.20 on FREIT.

NO MAJOR IMPACT FROM POSSIBLE SILOAM HOSPITALS IPO

• FREIT crucial to Lippo’s asset-light strategy
  
• EGM to be held on 29 Apr
  
• Retain HOLD and S$1.31 FV
  

Lippo Karawaci’s Siloam Hospitals unit may seek an IPO

News agency Reuters reported that Lippo Karawaci (Lippo), which is First REIT’s (FREIT) sponsor, is seeking to raise at least US$200m in an IPO of its Siloam Hospitals healthcare division1. Should this IPO materialise, we believe that proceeds would be used to fund Lippo’s aggressive healthcare expansion plans, which includes the construction of a large number of hospitals. Lippo has a target to operate 27 hospitals by 2015 (currently operates ~13), with expected total revenue of US$500m in 2015. We also expect Lippo to retain a strong majority of the controlling stake of the listed entity, given that it has earmarked its healthcare division as one of its core growth drivers.

No major impact to FREIT’s prospects

We expect FREIT to remain as an important vehicle for Lippo to implement its asset-light strategy. As the Siloam Hospitals entity would likely continue to be consolidated in Lippo’s financial statements, we believe that future hospitals will still be injected into FREIT. Moreover, FREIT has a right-of-first-refusal for the purchase of healthcare assets from its sponsor and/or any of its subsidiaries. Lippo also has a deemed interest of ~28.7% in FREIT. Hence, we believe that both parties’ interests would remain aligned. Having a separate listed entity to operate and carry out the healthcare operations of Lippo may in fact lead to a better focus and thus could be beneficial for FREIT.

To obtain unitholders’ approval at upcoming EGM

FREIT has dispatched the Circular (dated 12 Apr 2013) to its unitholders in relation to its proposed acquisition of Siloam Hospitals Bali (SHBL) and Siloam Hospitals TB Simatupang (SHTS) from Lippo. An EGM has been scheduled on 29 Apr to obtain unitholders’ approval for the aforementioned acquisitions, issuance of new units to Lippo as partial payment for SHTS and proposed whitewash resolution for a waiver of a mandatory offer from Lippo. As we expect the acquisitions to be DPU accretive and value-enhancing to unitholders, we expect unit-holders to vote in favour of the proposed conditions. Meanwhile, we retain our HOLD rating and S$1.31 fair value estimate on FREIT.

ENHANCING ITS PORTFOLIO VALUE

• Total purchase consideration of S$190.4m
  
• Lease terms similar to Nov 2012 Acquisitions
  
• Bump up FV to S$1.31 but maintain HOLD
  

Recently proposed two sponsor-related acquisitions

First REIT (FREIT) recently announced that it has entered into two conditional sale and purchase agreements for the acquisition of two new hospitals from its sponsor Lippo Karawaci (Lippo)1. The hospitals are Siloam Hospitals Bali (SHBL) and Siloam Hospitals TB Simatupang (SHTS), with purchase considerations amounting to S$97.3m and S$93.1m, respectively. This represents a 13.3% and 12.5% discount to the average of two independent valuations for each property, respectively. The purchase of SHBL would be funded wholly by a drawdown from FREIT’s committed debt facility, while SHTS would be purchased using a combination of both debt and issuance of new units to Lippo (funding mix not finalised).

Acquisitions to provide stability and visibility to unitholders

We are positive on the acquisitions as it is expected to be accretive in nature and would enlarge FREIT’s asset base, lower its weighted average age of properties from 10.4 years to 8.6 years and increase its weighted average lease to expiry from 11.3 years to 12.0 years. The lease terms are largely similar to its two previous acquisitions made in Nov last year, and offers strong stability and visibility to unitholders (15+15 years lease tenure with downside base rental protection), in our view.

Estimated DPU accretion of 6-13%; but maintain HOLD

We raise our FY13 and FY14 DPU estimates by 5.9% and 13.2%, respectively, as we incorporate contribution from the assets in our forecasts. We assume that SHTS would be financed by S$45m of debt and S$50m of equity. This would raise FY13F gearing ratio to 34.0%, based on our estimates. Yields for FY13F and FY14F remain healthy at 6.2% and 6.8%, respectively. We also adopt a DDM model (cost of equity: 7.7%; terminal growth rate: 1.0%) as our new valuation matrix (previously RNAV). Our fair value estimate is raised from S$1.00 to S$1.31. But we maintain our HOLD rating as we believe that the market has largely priced in the positives from these acquisitions (price appreciated 6.3% since the announcement) and FREIT’s continued transition to a sizeable healthcare REIT in the region.

ON THE LOOKOUT FOR MORE ACQUISITIONS

• FY12 yield of 6.8%
  
• Indonesia remains the bedrock for growth
  
• HOLD; but FV raised to S$1.00
  

4Q12 results within expectations

First REIT (FREIT) reported 4Q12 results which were within our expectations. Gross revenue rose 10.7% YoY to S$15.4m, driven by maiden contributions from two new properties which were acquired in Nov 2012 and higher rental income from its remaining portfolio. Distributable amount to unitholders declined 8.7% YoY to S$11.1m, but this was due to a special distribution of S$2.2m in 4Q11. Excluding this, distributable amount to unitholders would have increased by 11.3% instead. For FY12, gross revenue rose 6.7% to S$57.6m and was just 0.2% below our full-year projection. Distributable income to unitholders rose 4.8% to S$46.0m, and formed 98.8% of our FY12 forecast. DPU for FY12 was 7.26 S cents, versus 7.01 S cents in FY11, and translates into a yield of 6.8%.

An eye for inorganic growth opportunities

Following FREIT’s recent acquisitions, its gearing (debt-to-assets) ratio increased from 15.0% in 3Q12 to 25.7% in 4Q12. We believe this is a manageable level as it is still one of the lowest in the S-REITs space. Looking ahead, we expect FREIT to aggressively seek inorganic growth opportunities, which are likely to be financed by both debt (leverage on low interest rate environment) and equity (trading at 30% premium to NAV), in our view. Indonesia would remain as its key market, given the nation’s robust healthcare dynamics and visible pipeline of acquisition targets from its sponsor Lippo Karawaci. Management has identified five potential targets in areas such as Bali, East Kalimantan and East Sumatra and will assess the feasibility of each potential investment. We expect acquisition terms to be largely similar to the two assets purchased in Nov last year.

Maintain HOLD

We make some minor adjustments to our estimates and also incorporate lower discount rate assumptions for FREIT’s Indonesian assets in our model, given improving economic fundamentals in Indonesia. This lifts our fair value estimate from S$0.98 to S$1.00. But we maintain our HOLD rating as we view FREIT’s valuations as expensive, with the stock trading at 1.3x FY13F P/B, a rich premium to its peers’ average.