We visited five of First REIT’s assets in Jakarta – four hospitals and a hotel & country club – over 21-22nd March 2023. All four of the hospitals we visited, Siloam Hospitals Lippo Village (SHLV), Siloam Hospitals Kebon Jeruk (SHKJ), Siloam Hospitals TB Simatupang, and Mochtar Riady Comprehensive Cancer Centre (MRCCC), were part of the 13 hospitals that had leases restructured effective Jan 2021 for a lease term of 15 years. The other asset visited was Imperial Aryaduta Hotel & Country Club (IAHCC), which is a non-core asset and is being marketed for sale. It has its lease expiring in Dec 2023.

Company Background

First REIT (FIRT) is Singapore’s first healthcare REIT that focuses on investing in income-producing real estate assets that are primarily used for healthcare-related purposes. Its S$1,145.3mn portfolio consists of 32 properties comprising 15 in Indonesia (72.1% of AUM), 14 in Japan (25.1%), and 3 in Singapore (2.8%). FIRT’s sponsors are OUE Limited and OUE Lippo Healthcare Limited (OUELH). FIRT has the right-of-first-refusal (ROFR) from OUELH, and a ROFR to a pipeline of hospitals from Lippo Karawachi (LPKR), a majority shareholder of Siloam.

The Lease Structure

The restructured Master Lease Agreement (MLA) that took effect in Jan 2021 for its Indonesia hospitals (excluding Lippo Cikarang whose lease expires Dec 2025) is the higher of an annual fixed base rent escalation of 4.5% or 8% of the hospital’s Gross Operating Revenue (GOR) in the preceding financial year and is denominated in IDR.

Based on the terms of the restructured MLA, Siloam and LPKR will pay 6.5% and 1.5% of the preceding year’s GOR respectively after FY26 assuming performance-based rent is achieved. As a result, Siloam’s direct rental contribution is projected to rise from c.50% in FY22 to c.80% in the long term. This brings more assurance of future rental collections, as before the restructuring LPKR contributed most of the rent. Siloam continues to see strong operating cash flow since FY20 due to steady growth in non-COVID patient volumes, while LPKR has been in the red since FY19.

Singapore properties have a fixed base rental and a fixed annual increment of 2%. For most of the Japan properties, rental may be revised upwards every 2 to 3 years upon negotiation based on the increase in Japan’s CPI or interest rates. Most of FIRT’s properties are on triple net lease terms.

Site Visit Highlights

• Portfolio underpinned by tertiary care hospitals

Tertiary care hospitals provide highly specialised consultative care and handle more complex cases. They have higher revenue intensity per patient and margins compared to primary and secondary care hospitals. Each of FIRT’s hospital has its own “Centre of Excellence”, which focuses on selective branches of medicine such as Neuroscience, Cardiology and Oncology. The resident and practising doctors are some of the nation’s best in their respective fields, drawing patients from all the country.

The hospitals we visited had undergone or are undergoing Asset Enhancement Initiatives (AEI) to improve customer experience and facilities, at the expense of the operators themselves.

Investment Actions

No stock rating or price target provided, as we do not have coverage on FIRT.

Descriptions of the visited assets

Siloam Hospitals Lippo Village (SHLV)

This JCI-accredited 28-year-old hospital specialises in cardiology, neuroscience and orthopaedics and has a capacity of 308 beds. It is also the only private hospital in Jakarta that can do gamma knife surgery – the other being a government-owned one. It has a newly renovated reception and pharmacy area to enhance customer experience.

Siloam Hospitals Kebon Jeruk (SHKJ)

SHKJ is a 32-year-old, 250-bed facility which specialises in Cardiology, Orthopaedics and Urology. It is also JCI-accredited and is one of the hospitals in FIRT’s portfolio that is contributing performance-based rent. There are plans for renovations as the building is old.

Mochtar Riady Comprehensive Cancer Centre (MRCCC)

MRCCC is a 29-storey 13-year-old asset specialising in Emergency & Trauma, Gastroenterology and Oncology. This 334-bed hospital is equipped with state-of-the-art facilities and technologies to offer the most comprehensive cancer treatments and is strategically located in prime district in Central Jakarta.

Siloam Hospitals TB Simatupang (SHTBS)

A 10-year-old 16-storey hospital with the capacity of 269 beds. It is famous for its wellness centre and specialises in Cardiology, Neuroscience and Oncology.

Imperial Aryaduta Hotel & Country Club (IAHCC)

IAHCC comprises a 7-storey hotel building and 6 blocks of cabana houses with a 2-story country club. It is a 4-star hotel and has 191 hotel guest rooms. IAHCC enjoys an average occupancy of 80% with room rates back to pre-Covid levels. As IAHCC is a non-core asset, it is being marketed for sale.

Comments

The biggest concern for FIRT is whether LPKR can continue to pay the rental but with its percentage of rental contribution going down from c.88% before the restructuring of the master leases to c.50% in FY22, to less than 20% in the long run due to the new MLA, FIRT’s risk profile has improved.

First REIT’s 2.0 growth strategy to increase its portfolio in developed markets to >50% AUM by 2027 is in motion, as seen from its 14 nursing homes acquisition in Japan in FY22, bringing its current weightage to more than a quarter. We are optimistic for more acquisitions in Japan, where capitalization rates remain stable and interest rates are low.

First REIT has also been benefitting from the strong Singapore Dollar as some Indonesian patients at its hospitals, who used to travel to Singapore for medical tourism, decided to seek treatment locally as it becomes more costly in Singapore. Other potential customers could be from the South East Asia region, where they look to other alternatives instead of Singapore to seek treatment due to affordability reasons.

As most rental revenue from Indonesia is collected in IDR after the restructured MLA, First REIT is more susceptible to currency risk. However, the 4.5% annual rental escalation for its Indonesia hospitals helps to mitigate this risk.

First REIT is currently trading at 0.85x P/NAV with a dividend yield of 10.1%.

Source: Phillip Capital Research - 17 Apr 2023