Phillip Securities Research 2015-07-22: First REIT - Growth Story Intact – Higher debt ceiling a boost. Maintain ACCUMULATE.

Growth Story Intact – Higher debt ceiling a boost

  • DPU of 2.07c for 2Q15, up 3.5% y-y. 
  • 1H15 distributable income and DPU at 48.5% and 48% of our FY15 estimates respectively. 
  • Future acquisitions from sponsor’s strong pipeline of hospitals (46 hospitals, at various stages of development) to drive DPU growth. 
  • Lifting of debt ceiling from 35% to 45% (under new MAS ruling) a boost. 
  • Maintain “ACCUMULATE”, with DDM valuation target price of S$1.55. 

First REIT (FIRT) reported their 2Q15 results on Monday evening. We attended the analyst briefing yesterday afternoon and these are the some key takeaways. 

 Fundamental growth drivers in Indonesian healthcare sector intact – 

  • Management remains confident of the drivers for demand in the Indonesian healthcare sector. 
  • Underlying occupancy at FIRT’s portfolio of hospitals (which are at varying stages of maturity) range from high 60% to 80%. 

 Management actively looking out for possibilities of new acquisitions from sponsor’s pipeline – 

  • Management is always actively on the lookout for DPU accretive acquisitions from sponsor’s strong pipeline of 46 hospitals. 
  • Potential AEI works to Siloam Surabaya, which would double the gross floor area of the current hospital, would also be a kicker to DPU growth once completed. 

 Distribution Reinvestment Plan (DRP) participation rate ranges from 23% to 35%. 

  • The DRP programme is now into its 7th quarter and participation rate ranges from 23% to 35%. 
  • First REIT’s sponsor, PT Lippo Karawaci Tbk (LPKR) has always subscribed for the maximum allocation that they are allowed to take up. 

What do we think 

  • We remain optimistic on the growth drivers for FIRT, primarily driven by the increased demand in healthcare services in Indonesia and LPKR’s aggressive expansion of its hospital networks. 
  • LPKR’s pipeline of hospitals has expanded to 46 and we are optimistic about potential upcoming acquisitions as LPKR recycles capital for future developments. 
  • Historical yields on acquisitions over the past 4 years are around 10% and provide a healthy spread, nett of tax, over the all-in average cost of debt, currently at ~4%. 
  • The new MAS regulated debt ceiling of 45% for all S-REITs (previously 60% for rated S-REITs and 35% for those without credit rating) effectively raises First REIT’s from 35% to 45%. 
  • The expanded debt headroom increases FIRT’s options for acquisition funding and would enhance the accretive-ness of acquisitions, should cheaper debt options (over equity funding) be employed. 

Investment Action 

  • We remain bullish and maintain our “ACCUMULATE” call on First REIT, with an unchanged DDM-derived target price of SS$1.55 from our original initiation back in April. 

(Dehong Tan)