• No surprises in 2Q18
• Uncertainty over sponsor’s stake
• FV lowered to S$1.34

Results Within Expectations

First REIT’s (FREIT) 2Q18 scorecard was within our expectations. Gross revenue increased 5.3% YoY to S$28.9m, forming 24.4% of our full-year forecast. This was largely on the back of additional contribution from Siloam Hospitals Buton & Lippo Plaza Buton and Siloam Hospitals Yogyakarta, both of which were acquired in 4Q17, as well as from existing properties.

Finance costs jumped 28.1% YoY, but we note that this was, in part, due to the write-off of unamortised loan related costs due to refinancing of bank loans previously. 2Q18 DPU inched up 0.5% YoY to 2.15 S-cents, forming 24.6% of our full-year forecast.

Still Looking for Acquisitions

Following our discussions with management, we believe that 2018 should still see at least one acquisition being made. Based on the pipeline of assets from FREIT’s sponsor, PT Lippo Karawaci (LK), we believe that the ticket size of any acquisition could be in the S$20-30m range. We also understand that management is exploring the possibility of divesting Sarang Hospital in South Korea, which comprises 0.6% of FREIT’s portfolio value, as at 31 Dec 2017.

Cloudy Outlook on Sponsor Ownership

In its 31 May press release, LK stated that it is focused on bolstering the liquidity of the company, and is looking at executing divestments in order to improve its credit ratings. The release also outlined various plans for the next six months, including the sale of unsold inventory and the company’s Puri Mall asset.

While we were cautiously optimistic that levers such as the Puri Mall sale would be sufficient for LK’s liquidity needs, there has been increasing market talk about the possibility of LK divesting its stake in First REIT. Should a substantial divestment come to pass, there will be a number of questions that need to be answered, with the main one being the likelihood of LK renewing its current master leases, which will start expiring from 2021.

The implications on FREIT’s revenue and consequently, DPU, are slightly murky at this point. Therefore, given the uncertain outlook, we increase our Beta assumption and our cost of equity rises from 7.5% to 8.1%, resulting in our fair value estimate dropping from S$1.48 to S$1.34.

Source: OCBC Research - 19 Jul 2018