First REIT: A new dawn September 19, 2018

PSR Recommendation: NEUTRALStatus: MaintainedTarget Price: SGD1.31
  • OUE Limited and OUE Lippo Healthcare (OUELH) collectively acquiring 100% of the shares in Bowsprit Capital Corporation Limited (Bowsprit), the Manager of First REIT (FIRT), from Lippo Karawaci (LPKR).
  • OUELH also acquiring 10.63% of FIRT units from Bridgewater International Limited (Bridgewater) (subsidiary of LPKR).
  • OUELH and LPKR will each have 10.63% stake in FIRT upon completion of transaction.
  • New ROFR pipeline from OUELH – which includes healthcare assets in Japan, China, Malaysia – in addition to existing ROFR pipeline from LPKR.
  • Cash infusion from LPKR’s divestment of stake in Bowsprit and FIRT through its holding companies, will ease its cash flow status and potentially improve receivables at FIRT.
  • Maintain Neutral with an unchanged TP of S$1.31.

What is the news?

1. OUE Limited and OUELH acquiring 60% and 40% respectively of shares in Bowsprit from LPKR, for S$39.6mn.

2. At the same time, OUELH will be acquiring 10.63% of units in FIRT from Bridgewater, via OLH Healthcare Investments Pte. Ltd. (OHI), for S$102.7mn (c.S$1.23/unit).

  • Total purchase consideration of S$144.8mn (incl fees & expenses) to be settled in cash.
  • Proposed acquisition is subject to OUELH’s shareholders’ approval and MAS’ approval, and is expected to be completed by end November 2018.

Refer to Appendix for ownership and trust structure.

The Positives

+ Expanded ROFR pipeline to access Japan, China, Malaysia. OUELH will be granting FIRT a right-of-first-refusal (ROFR) to acquire any of its healthcare assets, subject to the completion of the proposed acquisition, which could pave inroads for FIRT to access geographies it currently does not have a presence in.

+ Potential improvement in tenant concentration risk management. Moving forward, this could also reduce FIRT’s reliance on LPKR as the single biggest lessee of its properties (83% of FIRT’s GRI in FY17). The existing ROFR pipeline from LPKR will remain.

+ Potential improvement in receivables with cash infusion into core tenant LPKR. The purchase consideration of S$144.8mn (incl. fees & expenses) for the 10.63% stake in FIRT will be paid in cash to LPKR. This could have a positive spillover effect into rentals owed by LPKR. FIRT’s receivables of S$29.1mn represent more than a quarter of FY17 revenue. As per our conversation with the Manager following this latest announcement, there had not been any delays on LPKR’s end for payments past their due dates.

Outlook

Outlook has improved for FIRT’s receivables as the cash infusion into LPKR could potentially be used to pay outstanding rental owed to FIRT. This transaction only changes the ownership structure of the REIT and the Manager, and does not affect operations of the REIT. The expanded ROFR pipeline from OUELH would allow FIRT to pursue inorganic growth in other markets such as Japan, China and Malaysia. The existing ROFR from LPKR remains in place and is focused on Indonesia healthcare assets. Current gearing of 34.1% affords a debt headroom of c.S$82.9m (assuming 40% gearing) to pursue inorganic growth strategies.

Maintain NEUTRAL with unchanged TP of S$1.31

No changes made to our forecasts as this transaction does impact the REIT operationally, and it is pending approval by OUELH shareholders and the MAS. Our target price translates to a FY18e yield of 7.2% and a P/NAV of 1.12x.

APPENDIX

Figure 1: Ownership structure of Bowsprit and FIRT, pre- and post-acquisition

Source: OUE Lippo Healthcare

  1. OUE Limited acquiring 60% and OUELH acquiring 40% of Bowsprit from LPKR’s intermediate holding company, LK REIT Management Pte. Ltd. (LKRM), for S$39.6mn.
  2. OUELH acquiring 10.63% of units in FIRT from Bridgewater via OHI, for S$102.7mn.
  3. Upon completion of transaction, OUELH and LPKR will each have 10.63% stake in FIRT.

Figure 2: Trust structure of FIRT remains unchanged

Source: First REIT

  • Bowsprit remains the Manager of FIRT.
  • This transaction does not affect operations at the REIT.

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About the author

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Tara Wong
Research Analyst
Phillip Securities Research Pte Ltd

Tara covers the REITs and Property sector. Previously a consultant advising listed companies on their investor relations strategy, Tara’s transactions experience includes high-profile M&As, IPOs and privatisations.

She graduated with a Bachelor of Science (Honours) in Banking & Finance from the University of London.

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