First REIT: Stable as expected – but positives are priced in April 18, 2017

PSR Recommendation: NEUTRALStatus: DowngradedTarget Price: 1.32
  • Accretive acquisition in Labuan Bojo in December 2016 boosted 1Q17 DPU by 1.4%.
  • 1Q17 Gross revenue, Net Property Income and DPU made up 23.6%, 24.6% and 24.9% of our FY17e forecasts.
  • Continue to expect DPU boost from earmarked acquisition targets.
  • Downgrade to NEUTRAL on run-up in stock price with unchanged target price (S$1.32).

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What’s in the news and What do we think

  • Accretive acquisition boosted 1Q DPU. Continue to expect acquisitions from Sponsor’s strong pipeline this year to boost DPU. First REIT (FIRT)’s accretive acquisition of Siloam Hospital Labuan Bojo in 2016 boosted 1Q17 DPU. Supported by parent Lippo Karawaci’s (LPKR) expanding Siloam Hospital network in Indonesia, FIRT has acquired at least 1 Siloam hospital every year (mostly from LPKR) since 2010. With the exception of 2011 when they acquired Sarang Hospital in Korea, total acquisition value per year ranged from S$20mn in 2016 to S$206mn in 2010. We expect similar acquisitions in Indonesia to continue this year.  Possible acquisition targets earmarked by management include Siloam Hospitals Bau-Bau and Bogor with a total approximate valuation of S$100mn. We have pencilled in an acquisition deal size of S$100mn by end 2017 in our forecasts.
  • 2% (or S$142.5mn) debt due in November-December 2017. Interest costs not expected to spike. With rising interest rates, investors could be concerned about higher interest costs for the S$142.5mn debt due for re-financing by 4Q17. Management guided that they have started negotiations for refinancing and initial indications point to flat to slightly higher interest rates for the expiring loans. We have forecasted an average cost of debt of 4.3% for 2017 to be conservative, vs c.4% for FY16.
  • Uptick in CPI at turn of the year to boost rental increments of Indonesian hospitals. The uptick in Singapore CPI numbers since the start of 2017 improves the prospects of annual rental escalations at the end of the year for FIRT’s Indonesian hospitals. (Annual rental increment is pegged to 2x Singapore CPI y-o-y growth, subject to floor of 0% and cap of 2%.) MAS expects Singapore’s 2017 CPI to come in at around 1%.

Our target price incorporates a forecasted 2% annual rental escalation for FIRT’s Indonesian properties for 2018 and 2019. This translates to a forecasted Singapore CPI growth numbers of >1% for 2017 and 2018. We expect improving global economic prospects and MAS’ decision last week to maintain a neutral policy stance for an “extended period” to provide a support for inflation numbers.

Figure 1: Singapore CPI growth turned positive in Nov 2016 after 24 consecutive months of deflation

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Investment Action

At 6.3%, FIRT trades at a higher yield and lower P/B than fellow healthcare REIT Parkway Life REIT.

On the back of the 6% appreciation in share price from S$1.265 since the start of 2017, FIRT’s current price is c.1% above our target price. We downgrade our call from “ACCUMULATE” to “”NEUTRAL”, maintaining our DDM-derived target price of S$1.32.

First REIT Historical Dividend Yield and Price/NAV

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Peer Comparison Table

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About the author

Profile photo of Tan Dehong

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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