7 January 2011
Initiating Coverage
First REIT
BUY
Leveraging on strong healthcare fundamentals
Current Price: S$0.74
Fair Value: S$0.84 Good quality assets. First REIT (FREIT) owns ten healthcare-
related properties across Indonesia and Singapore. It derives
some 86.4% of its gross revenues from Indonesia, with the
remainder coming from Singapore. We believe that FREIT is
3500 0.8
3000
STI well-positioned to capitalise on the growing demand for higher
0.7
2500
0.7
quality healthcare from the middle-class in Indonesia as well
2000
1500
Firs t REIT 0.6 as increasing eldercare needs in Singapore. With a well-defined
1000
500
0.6 acquisition strategy, FREIT has managed to complete the
0 0.5 acquisitions of two Indonesian hospitals recently which we
Apr-10
Aug-10
Dec-09
Feb-10
Jun-10
Oct-10
Dec-10
Table of Contents
Page
Section F Disclaimer 27
Source: Company
100.0%
14.1% 13.4% 13.6% 13.3% 13.6%
90.0%
80.0%
70.0%
60.0%
50.0%
85.9% 86.6% 86.4% 86.7% 86.4%
40.0%
30.0%
20.0%
10.0%
0.0%
FY07 FY08 FY09 9M10 9M09
Indonesia Singapore
11.5%
9.6%
78.9%
FREIT has also effectively eliminated any exchange rate risk and uncertainty
by securing the SGD-IDR exchange rate for its Indonesian rental income
for the full term of its master leases. This has been fixed at S$1 = Rp5,623.50
for its initial four Indonesian assets and S$1 = Rp6,600 for MRCCC and
SHLC.
2.20
1.91 1.92 1.94 1.92 1.90 1.92 1.90 1.92 1.94
2.00 1.85 1.88
1.72 1.76
1.80 1.65
1.60
1.60
1.40
DPU (S cents)
1.20
1.00
0.80
0.60
0.40
0.20
-
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10
…driven by favourable master lease terms. But we opine that the main
reason for FREIT's stable and sustainable distribution income is attributed
to its favourable master lease terms. All of FREIT's properties are leased
out under a master lease agreement, with a committed occupancy of 100%.
The master leases are on a triple net lease basis, where the tenant is
responsible for any increases in insurance, tax or operating expenditure.
Hence, this explains why FREIT's NPI margin is consistently at 99.0% and
above. All of FREIT's master leases also offer a downside revenue protection,
which provides a level of support for FREIT's unitholders. The Singapore
assets are on a 10+10 years master lease, with a fixed 2% rental step-up
every year. The Indonesian assets are on a 15+15 years master lease, with
its base rental subjected yearly to a possible increment of two times
Singapore's Consumer Price Index (CPI) increase in the preceding year.
This is subjected to a floor of 0% and a cap of 2%. In addition, there is a
variable component based on the gross revenue growth of its Indonesian
assets (summarised in Exhibit 6). We view this positively given Indonesia's
growing healthcare market and Siloam Hospital's continual efforts to enhance
the quality of its healthcare services. Siloam's hospitals have thus experienced
good revenue growth as illustrated in Exhibit 7. The earliest dates for FREIT's
renewal of its leases are 11 Apr 17 for its Singapore assets and 11 Dec 21
for its Indonesian assets.
Subsequent years
+
Variable rent component:
(0.75% of preceding year's gross revenue if the revenue growth >5% but <15%
1.25% of preceding year's gross revenue if the revenue growth ≥15% but <30%
2.00% of preceding year's gross revenue if the revenue growth >30%)
Singapore Assets
1st year of lease Base rental
Subsequent years Fixed step-up rate of 2% p.a.
Source: Company, OIR
450
400
389
350 341
300
289 287
259
250
Rp'b
230
200 208
179 195
150 169 146
109
93
100 88
72 66
50
43 47 57
38
-
2005 2006 2007 2008 2009
We believe that FREIT can benefit largely from the underserved healthcare
market in Indonesia. There is good growth potential ahead as there is
increasing emphasis placed on the provision of proper healthcare services
there. FREIT's Singapore nursing homes can also gain from the aging
population and recent government initiatives. Although there is no variable
component for FREIT's nursing home leases, but the improving prospects
for its vendors will help to improve the stability of the rental income it receives.
235 72.0
230
230 227
225 71.0
225 222
70.8
219
220 70.4 70.0
216 70.1
No of m illions
No. of years
214
215 69.7
211 69.0
210 208 69.2
205 68.8
205 68.3 68.0
67.9
200
67.4 67.0
195
190 66.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
2,500 6.0
2,349
2,245
5.1
5.0
2,000 1,923 4.8
4.2
4.4
4.0
1,643
1,500
1,304
US$
3.4
%
3.0
1,000
2.0
500
1.0
0 0.0
2005 2006 2007 2008 2009
GDP per capita (LHS) GDP per capita grow th rate (RHS)
5.0
4.5 4.4
4.5 4.4
4.2
4.3 4.3
4.0 4.1 4.1 4.1
3.7
3.5 3.5 3.7
2.2
2.0
2.0
1.9
1.5
1.0
0.5
0.0
2005 2006 2007
2008 44.4%
2007 44.1%
2006 34.1%
2005 34.4%
2004 38.2%
2003 38.6%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
Healthy gearing ratio Higher cost of debt due to perceived weakness of Indonesian assets
Opportunities Threats
Potential acquisitions from sponsor pipeline Political risk
Yield accretive asset enhancement initiatives Change in regulation and government polices
Increased competition from private hospitals
Booming medical toursim overseas
Source: OIR
FREIT also leases out its assets with favourable master lease terms such
as the revenue sharing component just highlighted. This underpins FREIT's
income stability as the master leases have long tenures; a downside revenue
protection; and possibility for annual base rental escalation. Please refer
to the 'Investment highlights' section for a full elaboration of FREIT's
strengths.
FREIT is currently undertaking AEI works on its Pacific Cancer Centre and
is awaiting regulatory approval before embarking on an extension block at
its Lentor Residence nursing home. The former is a proposed modern three-
storey cancer centre with a GFA of 27,405 sq (from 13,412 sf), equipped
with facilities such as a Radiotherapy and Imaging Centre. This AEI is
expected to be completed around mid-2011, with a new 10+10 year lease
term to be signed. We estimate that the NPI yield of this AEI to be
approximately 8.4% as a result of an increase in base rental. As for the
Lentor Residence extension, we estimate its NPI yield to be 7.7%. Both
yields are higher than FREIT's 7.4% Singapore portfolio NPI yield, but lower
than the overall portfolio NPI yield of 8.8%. We believe this is justifiable as
FREIT's indonesian assets tend to command a higher yield premium to
compensate for their associated risks as compared to its Singapore assets.
Moreover the Pacific Cancer Centre AEI would be fully funded by debt while
the Lentor Residence by internal resources, with the yields being higher
than its cost of debt (approximately 3.8%). Management also explained
that the lower initial yield was viable due to the 2% annual rental escalation
stipulated in the leases.
FREIT might also face the possibility of refinancing risks as its gross
borrowings of S$56.8m (as at 30 Sep 10) all mature on Jun 2012. We also
foresee this figure to increase to approximately $70m as it draw downs its
term loan facility to finance the S$18.6m AEI of Pacific Cancer Centre. A
new term loan facility of up to S$50m has also been undertaken for the
acquisition of MRCCC, which is due in 2015. While we think that a more
spaced out debt-maturity profile would be ideal, we believe that FREIT's
healthy gearing ratio would provide sufficient headroom for their refinancing
needs.
Any non-renewable of land titles upon expiry would also pose a major
problem for FREIT. This is especially so for some of its Indonesian
properties, which sits on different land titles. Both its Pacific Healthcare
Nursing Homes also have a relatively short leasehold of 30 years, which
will expire in 2032-2033. However, given the increasing emphasis placed
on healthcare in Indonesia and nursing homes in Singapore, we believe
this would boost FREIT's chances of renewing its land titles upon expiry.
Management has guided that they managed to renew two such land titles
in Indonesia at minimal cost in 2009. Three of their Indonesian assets
(SHLV, IAHCC and SHLC) are also located inside Lippo's township, which
makes it easier to get renewal approval when due, in our opinion.
Retail
CapitaMall Trust* CT SP 1.98 SGD 6,305 64.5% Quarter 2.36 4.8% 9.50 10.00 4.8 5.1 36.5 1.52 1.30
Frasers Centerpoint Trust* FCT SP 1.53 SGD 1,174 52.6% Quarter 2.16 5.7% 8.20 8.90 5.4 5.8 30.3 1.29 1.19
Starhill Global REIT* SGREIT SP 0.635 SGD 1,234 70.9% Quarter 1.00 6.3% 3.90 4.10 6.1 6.5 30.6 0.90 0.70
CapitaRetail China Trust CRCT SP 1.25 SGD 782 58.7% Semi-Anl 2.08 6.7% 8.30 8.30 6.6 6.6 34.3 1.08 1.16
Fortune REIT (in HK$) FRT SP 3.96 HKD 6,609 70.2% Semi-Anl 5.76 5.8% 24.50 25.50 6.2 6.4 21.5 5.67 0.70
Lippo-Mapletree Indonesia* LMRT SP 0.57 SGD 617 50.2% Quarter 1.09 7.7% 4.70 4.20 8.2 7.4 10.8 0.79 0.72
Retail Average 16,721 6.2% 6.2 6.3 27.3 1.88 0.96
Healthcare
Parkway Life REIT PREIT SP 1.74 SGD 1,052 52.8% Quarter 2.25 5.2% 8.70 9.70 5.0 5.6 35.1 1.38 1.26
Healthcare Average 1,052 5.2% 5.0 5.6 35.1 1.38 1.26
Hospitality
Ascott Residence Trust* ART SP 1.260 SGD 1395.9 51.9% Semi-Anl 1.85 5.9% 7.50 7.90 6.0 6.3 31.3 1.22 1.03
CDL Hospitality REIT CDREIT SP 2.070 SGD 1982.5 67.2% Semi-Anl 2.54 4.9% 10.20 11.90 4.9 5.7 21.0 1.46 1.42
Hospitality Average 3,378 5.4% 5.4 6.0 26.2 1.34 1.23
Industrial
Ascendas REIT* AREIT SP 2.17 SGD 4,067 79.3% Quarter 3.30 6.1% 13.70 14.00 6.3 6.5 34.1 1.57 1.38
Cambridge Industrial Trust CREIT SP 0.545 SGD 576 91.1% Quarter 1.19 8.7% 4.90 4.90 9.0 9.0 38.1 0.58 0.95
AIMS AMP Capital Indus REIT AAREIT SP 0.225 SGD 447 76.6% Quarter 0.40 7.1% 1.90 2.10 8.4 9.3 28.8 0.31 0.73
Mapletree Industrial Trust MINT SP 1.07 SGD 1,565 68.4% Not Yet 3.10 NM 3.10 7.46 6.6 7.0 38.5 0.86 1.24
Mapletree Logistics Trust* MLT SP 0.955 SGD 2,317 48.2% Quarter 1.78 6.5% 6.10 6.30 6.4 6.6 39.4 0.86 1.11
Cache Logistics Trust CACHE SP 0.965 SGD 612 72.7% Irreg 1.94 8.1% 6.70 8.20 6.9 8.5 22.7 0.92 1.05
Sabana Shariah Comp. Indus REIT SSREIT SP 0.98 SGD 620 84.0% None 0.00 NM 8.63 8.67 8.8 8.8 26.9 0.99 0.99
Ascendas India Trust AIT SP 0.925 SGD 708 63.5% Semi-Anl 1.70 7.4% 6.90 7.80 7.5 8.4 17.9 0.83 1.11
Industrial Average 10,912 7.3% 7.5 8.0 30.8 0.86 1.07
Residential
Saizen REIT SZREIT SP 0.165 SGD 185 88.6% Semi-Anl NA NA NA NA NA NA 35.5 0.40 0.41
Residential Average 185 NA NA NA 35.5 0.40 0.41
First REIT FIRT SP 0.74 SGD 460 90.2% Quarter 1.94 10.5% 3.38 6.55 4.6 8.8 16.3 0.80 0.93
* Under OIR coverage
OIR estimates for FREIT, consensus estimates used for the rest. Note that FY10 figures for FREIT are due to dilution of new rights issue
Source: OIR estimates, Bloomberg consensus
1
Recall that FREIT completed a 5-for-4 renounceable rights issue to fund the acquisitions
of MRCCC and SHLC. Hence a total of 345.7m new units were issued which rank pari
passu in all respects with the existing units.
10.0%
8.8%
9.0%
8.0%
7.0% 6.3%
6.0% 5.6%
5.0%
4.0%
2.6% 2.7%
3.0%
2.0%
1.0%
0.0%
STI dividend yield 10 yr Sing Govt Parkw aylife REIT S-REIT average First REIT
Bond
Our recent trip to visit some of FREIT's Indonesian properties also affirmed
our opinion on the quality of FREIT's assets. The Siloam hospitals were
well-furnished and equipped with modern equipment and technology. Siloam
is also able to benefit largely from economies of scale since the medical
Source: OIR
150.0%
140.0%
130.0%
120.0%
110.0%
100.0%
90.0%
80.0%
70.0%
60.0%
50.0% 31/12/2009
31/01/2010
28/02/2010
31/03/2010
30/04/2010
31/05/2010
30/06/2010
31/07/2010
31/08/2010
30/09/2010
31/10/2010
30/11/2010
First REIT STI Index FTSE ST REIT Index Parkw aylife REIT
Source: Bloomberg
60,000 54,661
50,000
40,000
30,162 30,215 41,276
29,964
S$'000
28,290
30,000
20,000
20,831 20,964
19,277 21,042
10,000
0
FY07 FY08 FY09 FY10F FY11F
Note: FY10F and FY11F's gross revenue estimates exclude deferred income by Pacific Cancer
Centre
Source: Company, OIR estimates
RNAV 530,433
No of Units in issue at end of period 630,373,997
RNAV per share (S$) 0.84
Source: OIR
Gross revenue 30.0 30.2 30.2 54.7 Investment properties 324.9 340.9 612.8 617.3
Property operating expenses -0.2 -0.3 -0.3 -0.6 Total non-current assets 324.9 340.9 612.8 617.3
Net property income 29.8 29.9 29.9 54.1 Cash and cash equivalents 12.4 11.5 14.4 8.9
Fees -3.1 -2.9 -3.0 -5.4 Total current assets 14.6 13.7 16.7 13.0
Net interest expense -1.6 -1.9 -3.8 -3.8 Total assets 339.5 354.7 629.5 630.3
Other expenses -0.6 -0.3 -0.5 -0.5 Current liabilities ex debt 10.6 10.2 10.3 11.8
Total return before tax 23.8 38.7 89.0 44.3 Debt 50.8 52.3 102.3 102.3
Income tax expense -0.8 -2.7 -17.8 -8.9 Total liabilities 84.4 83.6 133.7 135.2
Total return after tax 23.0 36.0 71.2 35.5 Total unitholders' funds 255.1 271.0 495.8 495.1
Total distribution to unitholders 20.8 21.0 21.0 41.3 Total equity and liabilities 339.5 354.7 629.5 630.3
CASH FLOW
Year Ended 31 Dec (S$m) FY08 FY09 FY10F FY11F KEY RATES & RATIOS* FY08 FY09 FY10F FY11F
Net cash from operations 20.6 22.7 10.5 44.1 DPU (S cents) 7.6 7.6 3.4 6.5
Increase in invt properties 0.0 -2.0 -205.5 -4.5 NAV per share (S$) 0.9 1.0 0.8 0.8
Net cash from investing 0.3 -2.0 -205.5 -4.4 Distr yield (%) 10.3 10.3 4.6 8.8
Proceeds from unitholders 0.0 0.0 172.8 0.0 P/CF (x) 9.8 9.0 44.1 10.6
Increase in borrowings 0.0 1.3 50.0 0.0 P/NAV (x) 0.8 0.8 0.9 0.9
Interest paid -1.8 -1.9 -3.9 -3.9 NPI margin (%) 99.3 99.0 99.0 99.0
Net cash from financing -22.1 -25.6 197.9 -45.2 Distr to revenue (%) 69.5 69.5 69.6 75.5
Net cash flow -1.2 -4.9 2.9 -5.5 Total debt/total assets (x) 15.0 14.7 16.3 16.2
Cash at beginning of year 13.6 12.4 11.5 14.4 ROE (%) 9.0 13.3 14.4 7.2
Cash at end of year 12.4 11.5 14.4 8.9 ROA (%) 6.8 10.1 11.3 5.6
SHAREHOLDING DECLARATION:
The analyst/analysts who wrote this report holds NIL shares in the above security.
Co.Reg.no.: 198301152E
For OCBC Investment Research Pte Ltd
Carmen Lee
Published by OCBC Investment Research Pte Ltd Head of Research