Fortis acquires First Reit property for $33m

SOME seven months after bowing out of the take-over battle for Parkway Holdings, Indian billionaires Malvinder and Shivinder Singh are re-entering Singapore’s healthcare scene with the $33 million acquisition of an upcoming cancer hospital from First Real Estate Investment Trust (First Reit).

The purchase – to be funded by internal resources and completed by March – is being made via Fortis Global Healthcare, which is owned by the Singh family.

The hospital under development at No 19 Adam Road is a proposed three-storey Cancer Centre. The sale will provide First REIT with a net cash gain of about $8.3 million (after subtracting divestment fees, related costs and repayment of loans).

‘The sale proceeds will provide First Reit with greater financial flexibility to pursue other possible attractive acquisition opportunities and/or to repay debt,’ First Reit’s manager Bowsprit Capital Corporation said in an announcement to the Singapore Exchange. It will also reduce First Reit’s gearing from 17.6 per cent to 14.2 per cent.

At $33 million, the sale is 17 per cent above the property’s latest valuation of $28.2 million as at Dec 28 last year by CB Richard Ellis and 52.1 per cent higher than its cost of $21.7 million as at Dec 31 last year.

Speaking to BT yesterday, Fortis Global’s CEO Vishal Bali said that the company is creating verticals around different specialities in line with its vision to be an integrated healthcare provider.

According to Mr Bali, Fortis Global plans to tweak the existing design of the facility and the hospital is likely to come on-stream in the second or third quarter of next year.

‘We are also looking at future expansion in Singapore,’ Mr Bali went on to say, but declined to comment on whether Fortis Global is in talks with any other local companies at present.

This latest acquisition comes on the heels of two other purchases by Fortis Global in the last five months – that of Hong-Kong based primary healthcare service provider Quality HealthCare in November last year as well as the acquisition of a significant stake in Australia’s largest dentistry network, Dental Corporation, in January this year.

‘We will continue to look for opportunities to further expand our presence in the region,’ said Malvinder Singh, Fortis Global’s executive chairman, in an announcement yesterday.

The Singh family also owns a majority stake in India-based hospital operator Fortis Healthcare, which was embroiled in a corporate tussle last year with Malaysia’s sovereign wealth fund, Khazanah Nasional, over local healthcare provider Parkway. The Indian group eventually rescinded its offer after Khazanah trumped Fortis’ $3.2 billion general offer with a $3.5 billion general offer of its own.

Stability in times of risk aversion

Providing stability amidst uncertain times. We believe that First REIT’s (FREIT) stability makes it an attractive investment thesis amidst such times of uncertainty. Growth is driven largely by Indonesia’s private healthcare sector, which is relatively inelastic in demand. Recall that FREIT performed decently in its recent FY10 results. Gross revenue increased 4.4% to S$31.49m (including deferred rental income); while distributable income rose 1.8% to S$21.35m. Looking ahead, we expect growth via both organic and inorganic means, since FREIT has a target to raise its asset base to S$1b in the next two to three years. Inorganic growth is likely to come from the acquisitions of hospitals from its sponsor Lippo Karawaci (Lippo).

Sponsor’s growth to spur FREIT’s earnings momentum. Lippo reported a good set of results last week. Revenue and net profit rose 21.8% and 35.4% to Rp3.13t and Rp525.3b respectively for FY10. We believe that the improving financial strength of Lippo will provide stronger support and stability for FREIT, given that Lippo contributed 86.7% of FREIT’s gross rental income as at 31 Dec 10. In particular, Lippo’s healthcare segment for FY10 experienced a healthy 15.8% growth to Rp1.04t (33.2% of total revenue), underpinned by rising demand for better quality healthcare services in Indonesia. FREIT is likely to be a key beneficiary of this trend, since the master leases for its Indonesian hospitals have a variable rental component to capture the upside in topline growth. Indonesia’s growing healthcare needs is likely to continue to lend support to Lippo, and hence FREIT’s growth momentum moving forward.

Higher emphasis on Singapore’s nursing homes. Singapore’s Ministry of Health has highlighted that there will be increasing emphasis placed on nursing homes in Singapore. The long waiting times and rising affluence of Singaporeans could entice more people to take up private nursing home services. While rental income from FREIT’s nursing homes is fixed at a 2% annual increase, the possible increase in profitability of the operators would help to boost their ability to fulfil their obligations to FREIT.

Reiterate BUY. We believe that FREIT has showcased its resilience and defensiveness during the current market downturn. Its share price has declined 2.6% (+5.0% YTD) since China announced its interest rate hikes on 8 Feb 11, which is milder than the broader market’s 3.4% decline (-3.4% YTD) and also the S-REIT universe’s 3.4% fall (-2.2% YTD). The prospective yield of 8.6% (our FY11F estimate) further enhances FREIT’s attractiveness, in our view. Reiterate BUY and fair value estimate of S$0.82.

4QFY10 results within expectations

4QFY10 results within expectations. First REIT (FREIT) reported its 4QFY10 results which were within expectations. Gross revenue declined 0.2% YoY but increased 0.2% QoQ to S$7.65m; net property income decreased 0.3% YoY but increased 0.5% QoQ to S$7.56m; while distributable income increased 2.8% YoY and 1.6% QoQ to S$5.43m. FY10 gross revenue increased 0.4% to S$30.27m, which was 0.2% above our estimates; it would have increased 4.4% to S$31.49m if we include the deferred rental income from Pacific Cancer Centre’s asset enhancement initiative. Net property income grew 0.1% to S$29.88m, which formed 99.9% of our estimates. Distributable income for the same period rose 1.8% to S$21.35m and was 1.4% higher than our forecast.

New acquisitions to start contributing in FY11. FREIT’s growth was largely driven by higher rental income from its Indonesian properties, thanks in part to the variable rental component in its master leases. FREIT’s Indonesian properties formed 86.7% of its gross revenues (including the deferred income from Pacific Cancer Centre) for FY10 and we expect Indonesia to play an even more pivotal role in FREIT’s development. We opine that FREIT’s two new Indonesian hospital acquisitions in Dec 2010 will drive its earnings momentum moving forward, underpinned by the expanding healthcare market in Indonesia. We predict that FREIT’s gross revenue and distributable income will jump by 80.6% and 88.0% to S$54.66m and S$40.12m respectively in FY11 as contributions from the two hospitals kicks in.

Outlook. Management believes that the healthcare market in Asia, particularly Indonesia, is underserved and has good growth potential. As such, FREIT will continue to be on the lookout for new yield-accretive healthcare properties. This is likely to come from its sponsor Lippo Karawaci (Lippo), in our opinion, as FREIT has a first right of refusal to Lippo’s healthcare assets. We also expect any new acquisitions to be funded by debt, given FREIT’s healthy gearing ratio of 16.6% (our FY11F estimate), which implies ample debt headroom of S$183.8m before hitting the regulatory limit of 35%.

Maintain BUY. We believe that FREIT’s current valuations are still compelling, boosted by its attractive yield (estimated yield of 8.3% in FY11F). Future growth will be supported by its stable master lease terms, which has downside revenue protection and built-in step-up rental features. We continue to like FREIT’s strong sponsor support as well as management’s execution capabilities. Maintain BUY with a revised RNAVderived fair value estimate of S$0.82 (total returns of 15.5%) as we incorporate the latest figures into our assumptions.

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.

ANNOUNCEMENT

EXTENSION OF HGB TITLE FOR MOCHTAR RIADY COMPREHENSIVE CANCER CENTRE

Further to:

(1) the announcement dated 9 November 2010 in which Bowsprit Capital Corporation Limited, in its capacity as manager of First Real Estate Investment Trust (“First REIT” and as manager of First REIT, the “Manager“), proposed the acquisition by First REIT of Mochtar Riady Comprehensive Cancer Centre (“MRCCC” and the proposed acquisition of MRCCC, the “MRCCC Acquisition“) subject to, among others, the condition precedent that the in-principle approval for the renewal of the “Right to Build” (Hak Guna Bangunan or “HGB“1) title in relation to MRCCC be obtained from Badan Pertanahan Nasional (or the National Land Office of Indonesia);

(2) the circular dated 10 November 2010 issued to unitholders of First REIT (“Unitholders“) to seek Unitholders’ approval for, among others, the MRCCC Acquisition; and

(3) the approval by Unitholders of the MRCCC Acquisition at First REIT’s Extraordinary General Meeting on 29 November 2010,

the Manager is pleased to announce that the National Land Office of Indonesia has extended the HGB title in relation to MRCCC (which was scheduled to expire on 27 August 2015) for a period of 20 years subject to, among others, the payment of a nominal premium and certain other standard conditions, and therefore the condition precedent described above has been satisfied. The amount of premium payable is approximately 193.2 million Indonesian Rupiah (approximately S$28,006.252) and is payable by the vendor of MRCCC.