First REIT: New acquisition to end FY16 November 9, 2016 474

PSR Recommendation: ACCUMULATE Status: Maintained
Target Price: 1.32
  • Acquisition of Siloam Hospital Labuan Bojo (SHLB) for c.S$20m from Sponsor PT. Lippo Karawaci Tbk at 2.6% discount to average of two independent valuations of SHLB.
  • NPI yield on cost of 9.25% from Master Lease is comparable with previous acquisitions.
  • New clause caps the maximum increase in base rent for every five-year period.
  • Acquisition comes after recent news of Lippo Karawaci applying to list a Real Estate Investment Fund (REIF) in Indonesia.
  • Maintain ACCUMULATE with unchanged target price of S$1.32.


What’s in the news?

  • Acquisition of Siloam Hospitals Labuan Bojo (SHLB) for c.S$20m from Sponsor PT. Lippo Karawaci Tbk at 2.6% discount to average of two independent valuations. SHLB is a three-storey stand-alone building that houses a Centre of Excellence for Emergency Medicine, Internal Medicine and Neuroscience. SHLB has a maximum capacity of 153 beds and commenced operations in January 2016.

On completion of the acquisition, SHLB will be leased back to Lippo Karawaci and Siloam Hospitals on a Master Lease for a lease term of 15 years (with an option to renew for a further 15 years thereafter). Initial base rent represents a yield on cost of 9.25%. Rental escalation will begin after the first five years, with the escalation pegged to the Singapore Consumer Price Index (CPI), subject to a floor of 0% and cap of 2% yearly.


Figure 1: Impact of Acquisition on First REIT


Source: Company


What do we think?

  • NPI yield on cost is comparable with previous acquisitions.

We note that the base rental income yield on cost of 9.25% is comparable to previous First REIT acquisitions from Lippo Karawaci. Previous two acquisitions in Kupang and Yogyakarta had yields of 9.91% and 9.4%. Nonetheless, we think at 9.25%, the rental yield still offers a good spread over FIRT’s blended cost of capital. Average cost of debt is 4% and trailing yield is c.6.5%. Earlier this year, FIRT issued perpetual securities at 5.68% per annum for the first five years, which helped lower its “cost of equity” vs its trailing yield.


  • New clause in Master Lease agreements. Maximum increase in base rent for every five-year period capped at 5%.

Unlike previous acquisitions such as the Siloam Hospitals in Kupang, Sriwijaya and Yogyakarta, SHLB’s base rent will only be subject to annual escalations (pegged to Singapore’s CPI) after an initial period of five years. Previous acquisitions had an initial period of only three years. Furthermore, for each five-year period after the initial five, the rental increase will be capped at 5% for each such five-year period. Previous acquisitions were not subject to such caps.

The cap of 5% for every five-year period puts a lid on rental growth should Singapore’s CPI come in strong in the relevant five years. Maximum attainable growth over a five year period is 10.4% (Assuming maximum growth of 2% per year). Nonetheless we think this cap is not crippling and investors should not be unduly worried.


  • Acquisition comes after recent news of Lippo Karawaci applying to list a Real Estate Investment Fund (REIF) in Indonesia.

This acquisition comes after FIRT’s Sponsor Lippo Karawaci reportedly filed to set up a Real Estate Investment Fund (Reif) in Indonesia in September this year. Conservatively valued at S$228m, this fund will hold four office buildings and a distribution centre in Java.  We think this SHLB acquisition from the Sponsor re-iterates the Sponsor’s commitment to FIRT as a capital recycling vehicle in Singapore for its Indonesian hospitals as the Sponsor aggressively scales up its presence in the healthcare sector.

As previously mentioned in our report, increased financing costs, country risks and FIRT’s fragmented shareholding structure remain some of the obstacles and challenges should the Sponsor intend to shift its REIT listings to Indonesia, if that is still a concern for investors. Higher distribution yields required in Indonesia in view of the high risk free rates would also mean Lippo Karawaci having to pay more in rents for an Indonesian listing than the yields on cost in the 9-10% range for its divestments to FIRT.


Investment Action

FIRT is riding on the Sponsor’s expansion of hospital networks in Indonesia amidst the growth in healthcare demand and need for a capital recycling vehicle. We have factored in yearly acquisitions in our valuations based on FIRT’s historical track record. We maintain our ACCUMULATE (on weakness) call for First REIT with an unchanged DDM-derived target price of S$1.32.


Figure 2: Location of Siloam Hospital Labuan Bojo


Source: Google Maps

Figure 3: Historical Dividend Yield and Price/NAV



Figure 4: Peer Comparison Table



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About the author

Profile photo of Tan Dehong

Tan Dehong
Research 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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