We visited four of First REIT’s assets in Jakarta – three hospitals and a hotel-country club asset – on the 26th of September 2019. Three of the assets we visited, Siloam Hospitals Lippo Village (SHLV), Siloam Hospitals Kebon Jeruk (SHKJ) and Imperial Aryaduta Hotel & Country Club (IAHCC) have leases expiring in December 2021 (figure 2 and 3), the second earliest lease expiry in the portfolio. These three assets contribute 23.3% to FY18 revenue and are leased out to subsidiaries of Sponsor, PT Lippo Karawaci (LPKR). The last asset visited was Mochtar Riady Comprehensive Cancer Centre (MRCCC) which has a December 2025 lease expiry.
First REIT’s (FIRT) S$1,345mn portfolio consists of 20 properties located in Indonesia (96.8%), Singapore (2.6%) and South Korea (0.6%). The assets are predominantly hospitals (78.6%), nursing homes (2.6%) and integrated developments (hospitals with adjoining retail/hotel facilities) (18.8%). LPKR and OUE Lippo Healthcare (OUELH) are co-sponsors of FIRT and hold 18.52% and 8.9% of the REIT, providing FIRT with two ROFR pipeline.
The Lease Structure
All of FIRT’s assets are leased out on master lease terms; the operations and hence profitability of the hospital depends on the hotel operators. 82% of the master leases are with LPKR, initiated before the listing of the hospital operator division as PT Siloam International Hospitals Tbk (Siloam) in September 2013 on the Indonesian Stock Exchange. LPKR owns 51% of Siloam and provides income support by way of subsidising c.80% of the rental for the hospitals. The rent paid to FIRT is denominated in SGD, leaving FIRT unaffected by currency movements between IDR and SGD. With LPKR lease expiring in August and December 2021 and Siloam’s operations on stable footing, LPKR could potentially step out of lease renewal talks, leaving negotiations directly between Siloam and FIRT. Given the c.80% rental gap, there is a risk that expiring leases will be re-negotiated with a lower quantum and/or on IDR-denominated terms.
Site Visit Highlights
Tertiary care hospitals provide highly specialised consultative care and handle more complex cases. They have higher revenue intensity per patient and margins compared to primary and secondary care hospitals. Each of FIRT’s hospital has its own “Centre of Excellence” (Figure 1), which focuses on selective branches of medicine such as Neuroscience, Cardiology and Oncology. The resident and practising doctors are some of the nation’s best in their respective fields, drawing patients from all the country.
No stock rating or price target provided, as we do not have coverage on FIRT.
Descriptions of the visited assets
Siloam Hospitals Lippo Village (SHLV)
This 24-year old, 10-storey asset accounts for 12.7% of FY18 revenue and is located beside a community hospital. These two hospitals are the only hospitals in the Lippo Village Township. SHLV specialises in cardiology, neuroscience and orthopaedics and has a capacity of 274 beds.
Siloam Hospitals Kebon Jeruk (SHKJ)
SHKJ is a 28-year-old, 215-bed facility which contributed 7.2% of revenue in FY18. SHKJ is the oldest hospital asset in FIRT’s portfolio and specialises in Cardiology, Orthopaedics and Urology (Figure 11).
Mochtar Riady Comprehensive Cancer Centre (MRCCC)
MRCCC is a 29-storey nine-year-old asset specialising in Emergency & Trauma, Gastroenterology and Oncology with an extensive list of specialist doctors (Figure 15). The 334 bed hospital contributed 18.4% to FY18’s revenue. MRCCC handles end-to-end cancer diagnosis and treatment (Figure 16 and 17).
Imperial Aryaduta Hotel & Country Club (IAHCC)
IAHCC comprises a seven-storey hotel building and six blocks of terrace-styled villas. The 4-star 190 bed hotel and country club have undergone some minor AEI (lift upgrade) and room refreshments (Figure 18 and 19). IAHCC enjoys 80% occupancy and derives 65% of revenue from room sales and 35% from F&B operations, contributing 3.4% to FY18 revenue.
FIRT’s share price has fallen 10.1% in the last 12 months due to the downgrading of credit rating of Sponsor KPKR which caused FIRT’s total receivables to balloon 24.7% from S$26mn to S$32mn as of FY18. Since LPKR’s rights issue, the amount outstanding from LKRC stands at S$6mn. FIRT’s dividend yield (Figure 4) and P/NAV (Figure 5) is currently at the +1 standard deviation (s.d.) and -1 s.d. level respectively.
The main overhang on the share price remains the renewal of the master lease with LPKR. The lease renegotiation is further complicated by the lack of established market rents. Based on the reported figures in Siloam’s FY18 annual report, rental expense accounts for 30% of Siloam’s EBITDA, leaving a net profit of IDR26.4bn (S$2.6mn). The rental paid to LPKR for FY18 was IDR125.5bn (S$12.2mn), which constitutes 20% of the rent paid to FIRT. While we believe the properties in FIRT’s portfolio are of good quality and comparable to medical hubs globally, we are doubtful that Siloam would be able to afford renewing the leases at 30% of the rent and still remain profitable.
We understand from the management that the REIT has commenced discussions with LPKR and lease negotiations are expected to be completed 12 months before the lease expiry.