First REIT - Phillip Securities Research 2016-01-21: More clarity on Sponsor and Acquisition Pipeline

FIRST REIT FIRST REAL ESTATE INV TRUST AW9U.SI

First REIT - More clarity on Sponsor and Acquisition Pipeline

First REIT announced their FY15 results on Tuesday evening.
With bulk of their Indonesian hospital leases on long term leases (15y+15y), and a fixed formula for rental reversion pegged to CPI, there was little room for results to veer out of expectations.
We present some of the key numbers and what transpired at the results luncheon yesterday afternoon.

Management was quick to offer their thoughts and allay investors’ fears on the recent news quoting Lippo Group CEO James Riady as potentially moving their two SG listed REITS to Indonesia (First REIT and Lippo Malls).
Share price has come down c.9.5% since the news broke, though part of this drop should be attributed to the recent market weakness.
Management pointed out the various hurdles and obstacles towards such a move. These include Lippo having to launch a takeover offer at a premium to be able to take over 90% of outstanding shares for a delisting.
Banking covenants included in the current loans also mean current outstanding SGD denominated loans have to be repaid in full and new funding sources would have to be taken on, most likely in IDR terms which would be at a much higher funding cost.
Lastly, the Indonesian REIT market is nowhere as developed as Singapore’s, and in a market where investors would likely demand higher returns due to higher risk free rates, it would be harder for the REIT to find yield/DPU accretive targets.
In totality, management expressed their skepticism on such an outcome happening.

While we previously expressed concern on the slower rate of acquisitions, management has reiterated that their acquisition plans from sponsor Lippo Karawaci remain on track for 2016.
This is despite concerns in recent news articles highlighting Lippo Karawaci’s delays in selling assets to their SG-listed REITs. Amongst the potential targets for acquisitions are Siloam Hospitals Yogyakarta, Labuan Bojo, and Bau-Bau.
Management pointed out that the scale of acquisition could be in the range of SGD75-100m, close to previous years’ acquisition scale.
Management intends to keep gearing below 40%, and utilize a combination of funds from debt and DRP to fund the acquisitions.

Management further clarified that whilst the sponsor has 20 hospitals under the Siloam hospitals network and 46 in the pipeline, there are some which are still under construction, such as Siloam Medan and Bandung.
There are also hospitals with teething issues that require ironing out before acquisition by First REIT is possible, such as convincing minority shareholders of the hospitals (a lot of whom are doctors working in these hospitals).
Nonetheless, in the near term for 2016, management has already earmarked possible targets.
In the midst of the current market turmoil and economic uncertainty, we think First REIT’s stable locked-in long term income, with little exposure to forex risk in the resilient healthcare industry, provides investors with earnings visibility and little earnings downside risk.
Economic uncertainty has also pushed back expectations for the next few rate hikes by the Fed which would be positive for the S-REIT sector as well, in the form of a slower rise in risk free rates (which compresses the S-REIT yield spreads) and slower increases in borrowing costs.
We maintain our BUY call on First REIT for its stable resilient income and better clarity on acquisition plans for 2016.
Our DDM-derived target price remains unchanged at S$1.38, with no change to our input parameters.

Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2016-01-21

Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 1.38 Same 1.38