• What happens in 2021?
• Big moves on the horizon
• FV lowered to S$1.05

Ownership Restructuring Completed

In Oct 2018, OUE Lippo Healthcare (OUELH) acquired 10.6% of First REIT (FREIT) from sponsor Lippo Karawaci (LK), leaving the latter with an approximately equal stake. OUELH and OUE Limited (OUE) have also acquired the manager from LK in a 40-60 split. FREIT will now have an enlarged pool of Right of First Refusal (ROFR) assets, comprising both OUELH’s and LK’s healthcare assets.

Uncertainty Over Master Leases

We attended an analyst briefing hosted by FREIT yesterday. One of the key concerns pertained to the current master leases between LK and FREIT, with the initial batch of leases due in 2021. The risk of non-renewal by LK remains possible, since the current structure results in LK collecting less from Siloam Hospitals (FREIT’s Indonesian operator) than what it pays out to FREIT.

In the event that LK should divest off its entire stake in FREIT, that possibility would loom even larger. While Siloam Hospitals could theoretically take over the leases from LK, negotiated terms could leave FREIT in a less-than-favourable position.

Equity Fund Raising a Live Possibility

FREIT is looking to rebalance its portfolio, where up to 50% of its assets will be located outside Indonesia within the next 3-5 years. Roadmapwise, we are of the opinion that FREIT could be looking to acquire a significant portion of OUELH’s ~S$300m Japanese nursing home portfolio in 2019, with another 2-3 sizeable acquisitions thereafter, in the ballpark of S$300- 400m each.

Debt, equity and divestments are avenues to fund these acquisitions. Still, excluding divestments, management would only have ~S$102.4m of debt headroom before hitting its short-term tolerance of up to 42% gearing. Thus, we cannot rule out a substantial amount of equity fund raising, possibly through a rights issuance.

We note that management is focused on making any acquisition DPU-accretive, but see challenges to that, such as FREIT’s recent unit price plunge and presumably lower yields for OUELH’s Japanese healthcare assets (~5% NPI yield assumed, vs. FREIT’s current 8.8% 9M18 annualised portfolio NPI yield).

In light of the various risks as outlined above, we increase our Beta assumption and drop our terminal growth rate by 75 bps to 0.75%. Consequently, our FV drops from S$1.34 to S$1.05.

Source: OCBC Research - 18 Dec 2018