First REIT - SAC Capital 2022-02-24: Ready To Move On

FIRST REAL ESTATE INV TRUST (SGX:AW9U)

First REIT - Ready To Move On

First REIT (SGX:AW9U) is a Singapore healthcare REIT which focuses on investing in healthcare and healthcare-related real estate assets in Asia. First REIT currently owns a portfolio of 19 properties, including 16 properties in Indonesia (12 hospitals, 2 integrated hospitals & malls, 1 integrated hospital & hotel and 1 hotel & country club) as well as 3 nursing homes in Singapore. First REIT’s Indonesia healthcare properties are operated by Indonesia largest hospital chain PT Siloam International Hospitals Tbk, a subsidiary of the REIT’s sponsor PT Lippo Karawaci Tbk.

First REIT’s sponsors include the aforementioned Indonesia-listed property developer PT Lippo Karawaci Tbk and Singapore-listed healthcare company OUE Lippo Healthcare (SGX:5WA), the healthcare subsidiary of Singapore-listed real estate company OUE Limited (SGX:LJ3).
First REIT has right-of-first-refusal agreements with both sponsors which include ROFR to the pipeline of hospitals across Indonesia operated by Siloam as well as ROFR from the healthcare network of OUE Lippo Healthcare across Pan-Asia. In Dec 2021, First REIT entered into a sale and purchase agreement to acquire a portfolio 12 Nursing Homes in Japan from OUE Lippo Healthcare.

14 of First REIT’s Indonesian properties underwent a restructuring of their MLA. The new terms saw Siloam direct rental contribution increase from 1.5% to 46.6% and is estimated to rise to 81.3% in the long run. Having Siloam as a counterparty provides more assurance against future defaults.
Siloam, as a healthcare operator, has more stable earnings and has remained profitable over the past two FY. As opposed, existing counterparty property developer Lippo Karawaci is more cyclical and has been in the red since FY18. With straight-line accounting applied to the base rental escalation of 4.5%, we expect topline to remain relatively constant. The performance-based rent (8% of GOR) term could be a potential growth driver in the future.

The Japan portfolio is expected to provide higher income and cashflow stability to First REIT. Of the purchase price of S$168m, S$16.2m will be offset via intercompany loan, S$20.3m will be paid in cash and S$131.5m (@S$0.305 per unit) will be in consideration units issued to OUE. The consideration units will form ~20% of the enlarged share base. Correspondingly, OUE’s shareholding will increase to ~39%.
Aside from the purchase price, First REIT will inherit ~S$128m debt, however cost of debt is expected to fall slightly possibly owing to lower interest rate JPY debt. The Japan portfolio is expected to contribute ~15% of future rental income and provide a slight uplift on DPU. We expect the acquisition to be completed by 1H22.

First REIT’s gearing is at 33.6% (end FY21). Post Japan acquisition, gearing is estimated to rise to ~36.4% on a pro forma basis. This leaves ample debt room (~S$350m at 50% leverage limit) for First REIT to pursue acquisition targets.
Moreover, First REIT can potentially take advantage of lower interest JPY debt to finance future growth.
In FY22, First REIT is also due to receive exceptional income of ~S$30.6m in settlement amount over termination of development work in Surabaya.

We expect First REIT's DPU to remain fairly constant over our forecasted period. Our DDM-derived target price for First REIT is S$0.32 (COE 12.5%).
Exchange rate risk exists as 80% of revenue will be denominated in IDR. A 10bps drop in S$/IDR is likely to cause a 10bps drop in DPU. First REIT currently does not hedge the exchange rate risk, but the Japan acquisition is expected to provide some natural hedge against IDR.
While First REIT is trading at a dividend yield of 8.6%, real yield is actually closer to 2.1% amidst the rising risk-free rate.
See

Lam Wang Kwan SAC Capital Research | https://www.saccapital.com.sg/ 2022-02-24

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