Real Estate, General Equities

Will Tan

Equity Bottom-Up

<div class="content-highlight"><p><a href="https://www.smartkarma.com/entities/15848" target="_blank" data-smartkarma-citation="entities:15848:1">First Real Estate Investment Trust (FIRT SP)</a> (“First REIT”) is a healthcare REIT listed in Singapore, with a portfolio of mainly Indonesia hospitals operated by sponsor subsidiary, <a href="https://www.smartkarma.com/entities/878" target="_blank" data-smartkarma-citation="entities:878:1">Siloam International Hospital (SILO IJ)</a> (“Siloam”). Sponsor is <a href="https://www.smartkarma.com/entities/3121" target="_blank" data-smartkarma-citation="entities:3121:1">Lippo Karawaci Tbk Pt (LPKR IJ)</a> (“Lippo”), one of the largest diversified listed property developers in Indonesia. First REIT is the first healthcare listed REIT in Singapore, with a portfolio of 18 properties and asset portfolio size of S$1.27 billion mainly comprises of Indonesia hospitals. All in all, First REIT is an Indonesia healthcare REIT “packaged” in Singapore dollar terms with Indonesia hospitals under triple net master leases pegged to SGD.</p></div><ul><li>We commend Siloam’s outreach to provide public health care to all Indonesians through the public-private partnership (PPP) model and BPJS. While sector outlook is positive with private healthcare on the rise, we believe the key beneficiaries are Lippo monetizing assets from divestment to First REIT and Siloam benefitting from growth in the private hospital market. Sponsor has monetized the full value of the hospitals created by the master leases throughout the underlying land lease tenure while underlying risks have been transferred to First REIT.</li></ul><ul class=""><li>There are significant concentration risks latent in First REIT portfolio with Sponsor as the main master lessee. i) There is no guarantee by Lippo to renew the master leases or ii) there could be downside risk from re-negotiation of master lease terms with the Sponsor should underlying hospital profitability be not sustainable. There could be significant downside risks to First REIT’s portfolio value and unit price overhang when master lease expiries approach. Siloam is stepping in as joint master lessee for recent acquisitions of Siloam Hospitals Labuan Bajo and Siloam Hospitals Buton. Moving forward Lippo is likely to step out with Siloam as sole master lessee for the hospital assets in our view, and we see this move as diluting support from Sponsor for First REIT.</li></ul><ul><li>Upside from yield accretive 3<sup>rd</sup> party acquisitions should be limited with First REIT manager’s tepid track record of 3<sup>rd</sup> party acquisitions to continue. We also see eroding yield accretion from Sponsor acquisitions, as Sponsor seeks better divestment price to improve its own financial position.</li></ul><p>We derive a value of S$1.24 per unit based on DDM (7.9% cost of equity and 1.0% long-term DPU growth rate) and see downside to current unit price of S$1.35 per unit. Despite reasonable trading yield at 6.5%, we view First REIT’s unit price trading at 1.3x P/B as already demanding, coupled with downside risk to First REIT portfolio valuation and book value. We recognize that this is a very early call, advising caution in the long term for investors seeking yield.</p>

First Real Estate Investment Trust (FIRT SP) (“First REIT”) is a healthcare REIT listed in Singapore, with a portfolio of mainly Indonesia hospitals operated by sponsor subsidiary, Siloam International Hospital (SILO IJ) (“Siloam”). Sponsor is Lippo Karawaci Tbk Pt (LPKR IJ) (“Lippo”), one of the largest diversified listed property developers in Indonesia. First REIT is the first healthcare listed REIT in Singapore, with a portfolio of 18 properties and asset portfolio size of S$1.27 billion mainly comprises of Indonesia hospitals. All in all, First REIT is an Indonesia healthcare REIT “packaged” in Singapore dollar terms with Indonesia hospitals under triple net master leases pegged to SGD.We commend Siloam’s outreach to provide public health care to all Indonesians through the public-private partnership (PPP) model and BPJS. While sector outlook is positive with private healthcare on the rise, we believe the key beneficiaries are Lippo monetizing assets from divestment to First REIT and Siloam benefitting from growth in the private hospital market. Sponsor has monetized the full value of the hospitals created by the master leases throughout the underlying land lease tenure while underlying risks have been transferred to First REIT.There are significant concentration risks latent in First REIT portfolio with Sponsor as the main master lessee. i) There is no guarantee by Lippo to renew the master leases or ii) there could be downside risk from re-negotiation of master lease terms with the Sponsor should underlying hospital profitability be not sustainable. There could be significant downside risks to First REIT’s portfolio value and unit price overhang when master lease expiries approach. Siloam is stepping in as joint master lessee for recent acquisitions of Siloam Hospitals Labuan Bajo and Siloam Hospitals Buton. Moving forward Lippo is likely to step out with Siloam as sole master lessee for the hospital assets in our view, and we see this move as diluting support from Sponsor for First REIT.Upside from yield accretive 3rd party acquisitions should be limited with First REIT manager’s tepid track record of 3rd party acquisitions to continue. We also see eroding yield accretion from Sponsor acquisitions, as Sponsor seeks better divestment price to improve its own financial position.We derive a value of S$1.24 per unit based on DDM (7.9% cost of equity and 1.0% long-term DPU growth rate) and see downside to current unit price of S$1.35 per unit. Despite reasonable trading yield at 6.5%, we view First REIT’s unit price trading at 1.3x P/B as already demanding, coupled with downside risk to First REIT portfolio valuation and book value. We recognize that this is a very early call, advising caution in the long term for investors seeking yield.

First REIT: Yield Embedded with Latent Risks in the Long-Term Horizon