First REIT: First acquisition of 2017 at attractive rental yield of 10% July 24, 2017

PSR Recommendation: NEUTRALStatus: MaintainedTarget Price: 1.32
  • Proposed acquisition of Siloam Hospitals Buton and adjacent Lippo Plaza Buton from sponsor at S$28.2mn, a 1.2% discount to average of two independent valuations.
  • Combined base rental yield on cost of 10%.
  • Master lease tenure of 15 years (option to renew a further 15y); rental escalation pegged to Singapore CPI.
  • Maintain NEUTRAL with unchanged target price of S$1.32.

What do we think?

Accretive acquisition with base rental yield at comfortable spread over average cost of debt.  Expected to be fully funded by debt and internal cash, base rental yield of 10% offers a comfortable spread over First REIT (FIRT)’s average cost of debt of 4.1%. Assuming acquisition is funded by debt-equity ratio of 40-60, average cost of capital works out to be c.5.1% (using coupon for S$60mn perpetual securities issued June 2016 as proxy to cost of equity).

Terms of acquisition similar to previous acquisitions. Rental tenure (15y+15y) and base rent escalations (pegged to Singapore CPI) are similar to previous acquisitions. Base rents are subject to escalations only after an initial five-year period. Post-acquisition, weighted average lease expiry increases to 10.3 years (from 10.0) and weighted average age of properties decreases to 9.5 years (from 10.1)/

Maintain NEUTRAL with unchanged target price of S$1.32

We maintain our NEUTRAL recommendation with an unchanged target price. We have already incorporated acquisitions into our forecasts, based on average historical acquisition quantum sizes. As such, our DPU forecasts remain unchanged with this acquisition news. Our target price represents a forward yield of 6.5% and FY17e P/NAV of 1.22.

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About the author

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Tan Dehong
Investment Analyst
Phillip Securities Research Pte Ltd

Dehong covers primarily the REITs and property developer sector. He has close to 7 years experience in equities related dealing and research roles.

He graduated with a Masters of Science in Applied Finance from SMU and Bachelors of Accountancy from NTU.

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