First REIT: Continues to deliver despite rising interest rate environment July 19, 2018

PSR Recommendation: NEUTRALStatus: MaintainedTarget Price: SGD1.31
  • NPI and DPU were in line with our forecast. All-in finance costs stable at 4%.
  • 3% YoY boost in Gross Revenue and NPI driven by two acquisitions made in 4Q17.
  • Refinanced S$100mn fixed rate notes due May 2018 with six-month term loan facility.
  • Maintain Neutral with an unchanged TP of S$1.31.

The Positives

+ All-in finance costs of 4% has been stable, despite the rising interest rate environment. Despite having just 60.7% of its debt on fixed rates (sector average: c.77%), all-in finance costs remain stable at 4%. Funding cost for the short-term loan facility secured in May would still be under 4%, if it were to be extended.

The Negatives

Debt maturity profile remains unchanged QoQ, despite a refinancing done. FIRT had refinanced its S$100mn fixed rate notes due 22 May 2018 with a S$100mn term loan facility with a tenure of 6 months, extendable by a further 6 months. However this is a short-term solution and the Manager is evaluating various longer-term solutions.

28.1% YoY higher finance costs. This was due to the write-off of unamortised loan costs following the refinancing of debt maturing in 1Q18 via the S$400mn syndicated financing facilities secured in January 2018. The total quantum of write-off is approximately S$2.5mn, of which S$0.7mn has been recorded this quarter. This is a non-cash expense that will be recorded for the next three to four quarters.

Receivables collection could potentially worsen, unless underlying issue of Sponsor-tenant’s cash flow is fully resolved. While receivables were lowered by S$2.3mn, the current outstanding amount of S$29.1mn represent more than a quarter of FY17 revenue. The Manager has however clarified that there had not been any delays for payments past their due dates. For context, Lippo Karawaci (LPKR), FIRT’s Sponsor and the contributor of c.83% of FIRT’s gross rental income in FY17, had been issued a credit downgrade by Fitch in February 2018 on the back of a significantly reduced cash flow access.

Outlook

Current gearing of 34.1% affords a debt headroom of c.S$82.9m (assuming 40% gearing) to pursue inorganic growth via LPKR’s pipeline of 40 hospitals – two of which are ripe for injection this year.

Maintain NEUTRAL with unchanged TP of S$1.31

While the credit risk from LPKR is our key concern, we recognise the effort to maintain borrowing costs and time the market for more attractive longer-term funding opportunities. Positive price movements for the stock could come about if there is a material improvement in LPKR’s creditworthiness. Our target price translates to a FY18e yield of 6.7% and a P/NAV of 1.21x.

Figures 1 and 2: FIRT currently trades at the upper range of its post-GFC average valuation boundaries

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About the author

Profile photo of Tara Wong

Tara Wong
Investment 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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