First REIT - OCBC Investment 2018-07-19: Uncertainty Lurking

First REIT - OCBC Investment Research 2018-07-19: Uncertainty Lurking FIRST REAL ESTATE INV TRUST SGX:AW9U

First REIT - Uncertainty Lurking

  • No surprises in 2Q18.
  • Uncertainty over sponsor’s stake.
  • Fair Value lowered to S$1.34.

 Results within expectations

  • First REIT’s (FREIT) 2Q18 scorecard was within our expectations.
  • Gross revenue increased 5.3% y-o-y to S$28.9m, forming 24.4% of our full-year forecast. This was largely on the back of additional contribution from Siloam Hospitals Buton & Lippo Plaza Buton and Siloam Hospitals Yogyakarta, both of which were acquired in 4Q17, as well as from existing properties.
  • Finance costs jumped 0.5% y-o-y to 2.15 S-cents, forming 24.6% of our full-year forecast.

Still looking for acquisitions

  • Following our discussions with management, we believe that 2018 should still see at least one acquisition being made. Based on the pipeline of assets from First REIT’s sponsor, PT Lippo Karawaci (LK), we believe that the ticket size of any acquisition could be in the S$20-30m range.
  • We also understand that management is exploring the possibility of divesting Sarang Hospital in South Korea, which comprises 0.6% of First REIT’s portfolio value, as at 31 Dec 2017.

Cloudy outlook on sponsor ownership

  • In its 31 May press release, PT Lippo Karawaci stated that it is focused on bolstering the liquidity of the company, and is looking at executing divestments in order to improve its credit ratings. The release also outlined various plans for the next six months, including the sale of unsold inventory and the company’s Puri Mall asset.
  • While we were cautiously optimistic that levers such as the Puri Mall sale would be sufficient for PT Lippo Karawaci’s liquidity needs, there has been increasing market talk about the possibility of PT Lippo Karawaci divesting its stake in First REIT. Should a substantial divestment come to pass, there will be a number of questions that need to be answered, with the main one being the likelihood of PT Lippo Karawaci renewing its current master leases, which will start expiring from 2021.
  • The implications on First REIT’s revenue dropping from S$1.48 to S$1.34.

Joseph Ng OCBC Investment Research | https://www.iocbc.com/ 2018-07-19
SGX Stock Analyst Report BUY Maintain BUY 1.34 Down 1.480