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.
Industrial REITs – OCBC
STILL HOT ON PORTFOLIO MANAGEMENT ACTIVITIES
- Healthy debt maturity profile
- Increased investment activity
- Subsector yield remains attractive
Active capital management
Industrial landlords continue to be very engaged in their capital management activities. For 3Q to-date, we note that two industrial REITs, namely AIMS AMP Capital Industrial REIT and Mapletree Industrial REIT, had announced the issuance of fixed-rate notes, while Sabana REIT had entered into a financing agreement for S$258.6m additional Commodity Murabaha facilities. Based on our understanding, the proceeds from these issuances will be used to refinance part of their existing borrowings. This is in line with our view that the industrial REIT subsector’s debt maturity profile will remain healthy, with limited refinancing risks in the near term.
Pickup in acquisition activity
We also observe that there was a pickup in investment activity during the period. The most active REIT was Cambridge Industrial Trust, which announced the proposed acquisitions of Teban Gardens Crescent, 30 Marsiling Industrial Estate Road 8, and 11 Woodlands Walk for an aggregate consideration of S$97.3m. With just days to the close of 3Q, we estimate that the total subsector acquisition value for 3Q will be at S$182.9m. This significantly exceeds the S$66.0m acquisition size clocked in 2Q, albeit still lower than the S$678.2m value registered in 1Q. We are currently maintaining our view that the subsector acquisition activity is likely to be skewed more towards smaller REITs. We also believe that further acquisitions in the industrial space may possibly involve a combination of debt and equity, given that the subsector aggregate leverage is set to increase after funding committed acquisitions. In addition, some REITs (e.g. Ascendas REIT and Mapletree Logistics Trust) have also turned to capital recycling via divestments to enhance their portfolio returns, in line with our expectations.
Maintain OVERWEIGHT
We are retaining our OVERWEIGHT view on the industrial REIT subsector due to its high yields (7.0-7.1% for FY12-13F) and growth potential. Cache Logistics Trust remains our preferred pick, given its robust portfolio, healthy financial position and attractive forward DPU yield of 7.1%.
K-REIT – CIMB
Clocking K-angaroo miles
A 50:50 debt-equity funded acquisition of a Perth office development could be accretive though mainly through cheap S$ debt. Accretion is offset by a resultant higher gearing. The longer lease provides visibility but could limit upside from a buoyant Perth office market.
We tweak our DPUs by -0.3/+0.8%, fine-tuning our assumptions and assuming a 50:50 debt-equity funded acquisition. Our DDM target prices rises slightly because of these changes and the rollover of our target price. Downgrade to Neutral from Outperform given the limited upside.
What Happened
K-REIT has entered into a conditional agreement with Mirvac Projects to acquire a 50% interest in a new office tower development (slated for completion in 2H15) in Perth, Australia. Total consideration is estimated at A$165.0m (S$211.2m, 7.15% cap rate), paid through an initial 50% in Mar 13 and five further progressive tranches from Dec 13. The first tranche will be funded by debt. Management has yet to decide on the funding mode for the remaining tranches. Regular income at an effective rate of 7.0% will be paid throughout the construction phase. Development risk will largely be taken on by Mirvac. 98% of the NLA is pre-committed to the government of Western Australia.
What We Think
We are net-neutral on the deal as the accretion is offset by higher gearing. The capital value of S$1,274 psf appears a tad above recent market transactions, arguably for a relatively newer asset. Cap rates were fairly in line with some recent premium grade office transactions. While we like the visibility from a 25+25 year lease and 3-5% annual rental step-ups, the long lease could also result in limited upside for K-REIT in the buoyant Perth office market. A higher asset leverage of an estimated 45% after the first 50% payment could imply a need for equity fundraising for the remaining tranches. We estimate that a 50:50 debt-equity transaction could still be accretive though this is aided mainly by cheap S$ debt.
What You Should Do
K-REIT has outperformed the STI by 25% since we upgraded it to Outperform in Apr. With limited further upside and equity fundraising needs (as gearing creeps up) expected to limit accretion from a potential acquisition of MBFC Phase 2, we downgrade K-REIT from Outperform to Neutral.