First REIT

OCBC on 29 June 2012

We conduct a scenario analysis on possible acquisition targets by First REIT (FREIT) from its sponsor Lippo Karawaci (Lippo). This works out to an estimated DPU accretion ranging from 9-13% in FY13, assuming that two hospitals are acquired for ~S$88.9m and fully-debt funded. Meanwhile, FREIT has also secured a fresh 4-year S$168m transferable term loan facility, thus allowing the group to refinance its maturing debt and to fund its future acquisitions. FREIT’s next refinancing requirement would only come in Jan 2015 (~S$49.4m). Given the ongoing macroeconomic uncertainties, we opine that investors can find investment merits offered by FREIT’s defensive income and stability from its long-term master leases. We upgrade FREIT from hold to BUY, with a higher RNAV-derived fair value estimate of S$0.96 (previously S$0.935) as we incorporate our base case assumptions for new acquisitions in our model.

Possible FY13F DPU accretion of 9-13% from new acquisitions
We conduct a scenario analysis on possible acquisition targets by First REIT (FREIT) from its sponsor Lippo Karawaci (Lippo) and highlight the resulting estimated DPU accretion to unitholders. We believe that any new acquisitions could occur in 3Q/4Q FY12, given that FREIT is already conducting feasibility studies on a number of properties. Our analysis works out to a possible DPU accretion ranging from 9-13% in FY13 (when a full-year of contribution kicks in), assuming that two hospitals are acquired for ~S$88.9m (refer to Exhibit 1). We also see minimal dilution risk at this juncture, as any acquisitions in the foreseeable future would likely be fully-debt funded. Based on our estimates, the new acquisitions could raise FREIT’s leverage ratio (debt-to-assets) to ~25.2%, still within management’s comfortable gearing ratio range of 25-30%.

No refinancing requirements until 2015
FREIT recently announced that it has secured a 4-year S$168m transferable term loan facility (TLF). Approximately S$50m would be used to refinance its outstanding debt which matures in Jun 2012, while the remainder would be used for new acquisitions. FREIT would henceforth not have any refinancing requirements until Jan 2015 (~S$49.4m). As interest on the TLF is based on a floating rate basis, FREIT is exposed to interest rate risk. The group has thus obtained an Interest Rate Derivative Facility on this TLF for a notional amount of up to S$100m, which partly hedges its exposure to an upward increase in interest rates when utilised.

Upgrade to BUY
Volatility in the macro economy and global markets is unlikely to dissipate in the near term, given concerns over the eurozone debt crisis and economic slowdown in the U.S. and China. Hence investors looking to stay invested in equities can find merits offered by FREIT’s defensive income streams and stability from its long-term master leases, in our opinion. Upgrade FREIT from hold to BUY, with a higher RNAV-derived fair value estimate of S$0.96 (previously S$0.935) as we incorporate our base case assumptions for new acquisitions in our model.