• In-line scorecard
• Reasons to be concerned
• FV lowered to S$0.97

Receivables Have Dropped

QoQ First REIT’s (FREIT) 4Q18 results were in-line with our expectations. Gross revenue grew 2.7% YoY to S$29.3m, supported by contributions from Siloam Hospitals Buton & Lippo Plaza Buton, Siloam Hospitals Yogyakarta and existing properties. Finance costs jumped by 21.1% YoY to S$5.9m, largely on the back of higher loan costs and the full quarter interest expenses for the loan drawn down to finance the acquisition of Siloam Hospitals Yogyakarta in 4Q17.

FREIT booked S$5.4m of net fair value losses on investment properties, as the valuers employed a higher discount rate in their DCF valuations to account for depreciation in the IDR.

Receivables have increased 24.7% YoY to S$32.4m, but have (encouragingly) dropped 34.3% QoQ as Lippo Karawaci (LK), one of FREIT’s two sponsors, has caught up on their payments. 4Q18 DPU came in flat YoY at 2.15 S-cents, bringing FY18 DPU to 8.60 S-cents, Which Comprises 98.9% of Our Fullyear Forecast.

Murky Outlook

We believe that the concerns outlined in our Dec’18 report remain valid. In a recent press release, LK outlined that it is looking to raise in excess of IDR 6tr in net cash from the divestment of its remaining stake in FREIT, among other asset divestment projects. The market is likely to still be waiting for the conclusion of this, and also for clarity on the implications this would have on master leases as they start expiring from 2021.

Shareholders would also have to contend with the possibility of an equity raise, though management has mentioned the importance of keeping acquisitions DPU-accretive. On the specific concern that extended/new contracts would require FREIT to receive rental in IDR (without SGD equivalency), management has cited that there could be ways to mitigate potential downside risk.

This could include pegging the annual base rental escalation of Indonesian assets to Indonesia’s CPI, which has been higher than Singapore’s CPI over the last 5 years. As we roll forward our valuations, we reduce our assumption for Singapore’s 2018 CPI, and increase our market risk premium assumption. Thus, our fair value drops from S$1.05 to S$0.97.

Source: OCBC Research - 18 Jan 2019