First Real Estate Investment Trust
Exciting Plans Ahead
• Intrinsic Value S$1.485
• Prev Closing Price S$1.225
First Real Estate Investment Trust (First REIT) posted another healthy set of results with revenue rising 43.4% and distributable income rising 26.6% YoY to S$20.1m and S$12.7m respectively. The increase is mainly backed by 1) maiden contribution from Siloam Hospitals Bali and Siloam Hospitals TB Simatupang, which were acquired around mid-May 2013, and 2) Siloam Hospitals Manado and Hotel Aryaduta Manado and Siloam Hospitals Makassar which were purchased in November 2012. Revenue for the next two quarters is likely to be even better as the prior two assets can contribute full quarter earnings.
Management has skewed towards fixed-rate loan structure in view of current uncertain interest rate environment and is looking to refinance some of its maturing floating loans with fixed rate borrowings. They also highlighted several acquisition prospects and we remain hopeful that the company can bag some of these assets over the next few months. We are more thrilled towards their AEI proposal where they will swap part of their land for new hospital buildings. This will allow First REIT to yield additional rental income without any cost increase, leading to higher DPU. However, this suggestion is still at its preliminary stage. We are much impressed with this proposal and are upping the terminal growth rate to 1.5%. Maintain Invest with an intrinsic value of S$1.485.
Results Summary: NPI grew about 41.7% YoY to S$19.7m, largely in line with revenue while PBT rose 28.6% YoY to S$14.2m mainly due to higher finance costs. There was a revaluation gain of S$27.8m due to the two acquisitions in May 2013 and hence, PAT jumped more than 300% to S$39m. Investment properties grew to more than S$1bn due to the recent acquisitions while borrowings increased to S$357.8m, representing a debt/asset ratio of 33.4%. Operating cash flow remained stable at S$16.8m.
Capital Management – Shifting towards Fixed-Rate Structure: First REIT is looking to unwind some of its maturing loans (S$42m due 2013 and S$50m due 2015) and refinancing them with four-year fixed rate unsecured loans. The all-in cost of borrowing is projected to be around 3.7% and First REIT will have more than half of its borrowings in fixed-rate. The loan is likely to take place over the next three months. The other floating loan (S$166m due 2016) has a swap facility and the company can choose to exercise it if necessary – though we reckon that the additional cost may not make the swap worthwhile. Also, First REIT is not going to get a credit rating, suggesting that the gearing ratio will not exceed 35% for the time being.
Growth Prospect – Acquisition: Lippo Karawaci has approximately 13 hospitals under the Siloam Group, of which nine are acquired by First REIT. There are another 14 hospitals in the pipeline and these developments indicate loads of acquisition opportunities for First REIT. We remain hopeful that First REIT can acquire some of these assets over the next few months.
Growth Prospect – AEI: What got us excited during the results briefing was the possibility of AEI in some of First REIT’s assets. Three assets were mentioned namely Siloam Hospitals Surabaya (SHS), Siloam Hospitals Kebon Jeruk (SHKJ) and Imperial Aryaduta Hotel & Country Club (IAHCC). The general guidelines for AEI in these assets are as such: 1) The AEIs should have minimal impact on the existing operations and First REIT’s revenue should not be affected, 2) First REIT will swop part of the land for a new hospital building (the development fees will be paid by the sponsor) and the transacted land will be redeveloped into a mixed commercial building. Management also commented that 1) For them to give up any land, they will need to get back something of a higher value, 2) the yield on cost of development has to be justifiable and 3) they will only proceed if the existing operator agrees to take up the additional space. Though the three assets have utilization rate of about 70-75%, management commented that they will need to execute the development now as the construction will be carried out in phases so as to minimize the impact on current operations.
We like this strategic move as it can bring about additional rental income without any cost increase and the entire development (together with the commercial building) will be beneficial to the local community. However, it is still in the preliminary stage and it may take a few years for the whole concept to be developed. That said, we believe management is consistently exploring methods to increase shareholders’ return.
Forecast and Valuation: We are lowering our FY13/14 forecasts slightly as the acquisition pace is slightly slower than projected. However, we are upping our terminal growth to 1.5% to take into account the prospect of the AEI projects. Maintain Invest with an intrinsic value of S$1.485.
Publish date: 31/07/13