First REIT - Phillip Securities 2015-10-22: First Asset Enhancement Initiative with Lippo Karawaci

First REIT - Phillip Securities 2015-10-22: First Asset Enhancement Initiative with Lippo Karawaci FIRST REAL ESTATE INV TRUST FIRST REIT AW9U.SI 

First REIT - First Asset Enhancement Initiative with Lippo Karawaci

  • First REIT announced an asset swap deal with PT Lippo Karawaci Tbk (LPKR), First REIT’s sponsor, in relation to Siloam Hospital Surabaya yesterday morning. This deal marks the first asset enhancement initiative First REIT has conducted and aptly so, to the oldest hospital (established 1977) in its portfolio. 

 Asset swap deal with LPKR - Divestment of existing Siloam Hospital Surabaya to LPKR and purchase of new mixed development on the adjacent plot of land. 

  • LPKR plans to build a mixed development on the adjacent plot of land to the current Siloam Hospital Surabaya (Existing SHS), which First REIT is divesting. This mixed development will comprise the new Siloam Hospital Surabaya (New SHS), a private school, an ancillary mall, a hotel and an apartment. Upon completion, the New SHS will be sold to First REIT for a purchase consideration of S$90m. 
  • As part of the deal, First REIT will divest the Existing SHS and a plot of land adjacent to it for a minimum price of S$35.7m. Completion of the development is slated to be in 2019. 

 Attractive Divestment and Acquisition prices. 

  • The combined sale consideration of a minimum of S$35.7m for the Existing SHS and Plot B represents a premium of at least 112.5% to the original acquisition price of S$16.8m by First REIT in December 2006. 
  • This sale consideration also represents a premium of at least 7.53% to the appraised value of S$33.2m as at 31 October 2014. The acquisition of the new SHS at a price of S$90m represents a discount of 12.3% to the average of two independent valuations. 

 New SHS Master Lease increases income stability. Yield on cost lower than previous acquisitions but still at an attractive 9%.

  • Based on the assumed net rental of the new Master Lease for New SHS upon completion, yield on cost works out to be c.9%. This is lower than previous acquisitions for First REIT from 2010-2014, which saw NPI yields of close to 10%. Nonetheless, this still outperforms the yield of c.8.7% for the Existing SHS (based on assumed selling price of S$35.7m) and overall portfolio NPI yield of c.8%. 

 Steady rental income from Existing SHS throughout the development of the new SHS until acquisition is completed. 

  • Development works are not expected to cause any major disruptions to the operations of the existing SHS. 

 Increased Weighted Average Lease to Expiry (WALE) post divestment and acquisition. 

  • First REIT’s income visibility will improve post acquisition, with WALE increasing from 10.8 years to 11.3 years. A new 15-year Master Lease term for the new SHS will replace the 15-year lease for the Existing SHS which has only 6 years left to expiry in 2021. 

What do we think? 

 Positive on asset swap deal. 

  • Yield on cost of 9% is slightly lower than those on previous acquisitions from 2010 to 2014. Nonetheless, this is still better than the yield of c.8.7% on the Existing SHS (based on projected minimum selling price) and overall portfolio NPI yield of c.8%. 
  • We think this deal is yet another piece of evidence of how First REIT can leverage on the expertise of one of the largest property developer in Indonesia, as LPKR continues to develop synergistic integrated developments which include hospitals. 

 Risks hedged in deal agreement. 

  • First REIT will continue to receive rental incomes from the Existing SHS until handover of the New SHS. 
  • Additionally, LPKR has offered to pay a rate of return of 6% per annum on the progressive payments by First REIT at different completion stages of the project. First REIT’s funding costs and project development risks are minimized with these additional clauses. 

 Healthcare to remain an integral part of LPKR’s business model. 

  • LPKR’s expansion of hospital network to continue to present acquisition opportunities for First REIT. Revenue from healthcare as a percentage of total revenue has stayed pretty constant in the c.30% range for LPKR from 2006 to 2013, even as revenue grew at a CAGR of c.19% in the period. 
  • Healthcare forms an important source of recurring income for LPKR and the continued expansion of hospital networks will provide First REIT with further acquisition opportunities. LPKR currently has a total of 46 sites for new hospitals under various stages of development. 

Investment Actions 

  • We maintain our ACCUMULATE call with an unchanged DDM-derived target price of S$1.49. 
  • Our forecasts remain unchanged as we have already factored in acquisitions in our assumptions.

Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2015-10-22
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 1.49 Same 1.49