First REIT (FREIT) recently announced its proposal to acquire two Indonesian hospitals from its sponsor Lippo Karawaci (Lippo) for a total purchase consideration of S$190.4m. This would be funded largely by debt and the issuance of new units to a smaller extent to Lippo. We are positive on the acquisitions as it offers DPU accretion of 6-13% for FY13-14F, according to our estimates, while also providing stability and visibility to unitholders. We now adopt a DDM model (cost of equity: 7.7%; terminal growth rate: 1.0%) as our new valuation matrix (previously RNAV). Coupled with our higher DPU forecasts, we bump up our fair value estimate from S$1.00 to S$1.31. But we maintain our HOLD rating as we believe that the market has largely priced in the positives from these acquisitions and FREIT’s continued transition to a sizeable healthcare REIT in the region.
Recently proposed two sponsor-related acquisitions
First REIT (FREIT) recently announced that it has entered into two conditional sale and purchase agreements for the acquisition of two new hospitals from its sponsor Lippo Karawaci (Lippo). The hospitals are Siloam Hospitals Bali (SHBL) and Siloam Hospitals TB Simatupang (SHTS), with purchase considerations amounting to S$97.3m and S$93.1m, respectively. This represents a 13.3% and 12.5% discount to the average of two independent valuations for each property, respectively. The purchase of SHBL would be funded wholly by a drawdown from FREIT’s committed debt facility, while SHTS would be purchased using a combination of both debt and issuance of new units to Lippo (funding mix not finalised).
Acquisitions to provide stability and visibility to unitholders
We are positive on the acquisitions as it is expected to be accretive in nature and would enlarge FREIT’s asset base, lower its weighted average age of properties from 10.4 years to 8.6 years and increase its weighted average lease to expiry from 11.3 years to 12.0 years. The lease terms are largely similar to its two previous acquisitions made in Nov last year, and offers strong stability and visibility to unitholders (15+15 years lease tenure with downside base rental protection), in our view.
Estimated DPU accretion of 6-13%; but maintain HOLD
We raise our FY13 and FY14 DPU estimates by 5.9% and 13.2%, respectively, as we incorporate contribution from the assets in our forecasts. We assume that SHTS would be financed by S$45m of debt and S$50m of equity. This would raise FY13F gearing ratio to 34.0%, based on our estimates. Yields for FY13F and FY14F remain healthy at 6.2% and 6.8%, respectively. We also adopt a DDM model (cost of equity: 7.7%; terminal growth rate: 1.0%) as our new valuation matrix (previously RNAV). Our fair value estimate is raised from S$1.00 to S$1.31. But we maintain our HOLD rating as we believe that the market has largely priced in the positives from these acquisitions (price appreciated 6.3% since the announcement) and FREIT’s continued transition to a sizeable healthcare REIT in the region.
First REIT (FREIT) recently announced that it has entered into two conditional sale and purchase agreements for the acquisition of two new hospitals from its sponsor Lippo Karawaci (Lippo). The hospitals are Siloam Hospitals Bali (SHBL) and Siloam Hospitals TB Simatupang (SHTS), with purchase considerations amounting to S$97.3m and S$93.1m, respectively. This represents a 13.3% and 12.5% discount to the average of two independent valuations for each property, respectively. The purchase of SHBL would be funded wholly by a drawdown from FREIT’s committed debt facility, while SHTS would be purchased using a combination of both debt and issuance of new units to Lippo (funding mix not finalised).
Acquisitions to provide stability and visibility to unitholders
We are positive on the acquisitions as it is expected to be accretive in nature and would enlarge FREIT’s asset base, lower its weighted average age of properties from 10.4 years to 8.6 years and increase its weighted average lease to expiry from 11.3 years to 12.0 years. The lease terms are largely similar to its two previous acquisitions made in Nov last year, and offers strong stability and visibility to unitholders (15+15 years lease tenure with downside base rental protection), in our view.
Estimated DPU accretion of 6-13%; but maintain HOLD
We raise our FY13 and FY14 DPU estimates by 5.9% and 13.2%, respectively, as we incorporate contribution from the assets in our forecasts. We assume that SHTS would be financed by S$45m of debt and S$50m of equity. This would raise FY13F gearing ratio to 34.0%, based on our estimates. Yields for FY13F and FY14F remain healthy at 6.2% and 6.8%, respectively. We also adopt a DDM model (cost of equity: 7.7%; terminal growth rate: 1.0%) as our new valuation matrix (previously RNAV). Our fair value estimate is raised from S$1.00 to S$1.31. But we maintain our HOLD rating as we believe that the market has largely priced in the positives from these acquisitions (price appreciated 6.3% since the announcement) and FREIT’s continued transition to a sizeable healthcare REIT in the region.
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