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NRA Capital Pte Ltd

Written by: jinshu

Monday 23 Nov 2015

First REIT - Company update

Second acquisition of 2015 provides visibility over 2016 DPU growth

Following the announcement to redevelop Siloam Hospitals Surabaya (SHS) on 22 October, First REIT announced the acquisition of Siloam Hospitals Kupang and Lippo Plaza Kupang in East Nusa Tenggara, Indonesia. These assets are expected to provide net property income yield of 9.1% (S$6.89m) over valuation of S$75.42m. In comparison, First REIT has a net property income yield of 8.4% per annum (or S$73.9m over 9M15) on its portfolio of S$1.17 billion.


Background of assets being acquired. Siloam Hospitals Kupang (SHK) is the most modern and well-equipped facility in the whole East Nusa Tenggara province, which has a population of about 5 million people. The hospital has a maximum capacity of 405 beds and total gross floor area of 21,593 sq. m. in a four-storey hospital building. It commenced operations in December 2014 and is a Centre of Excellence for Emergency & Trauma, Mother and Child medicine.  

Lippo Plaza Kupang (LPK) is a three-storey shopping mall with a rooftop cinema and carpark and total gross floor area of 33,775 sq. m. that commenced operations in March 2015. Both properties LPK and SHK sit on the same parcel of land No. 14/Kel. Fatululi, and a covered linkway is being constructed to connect both buildings by June 2016.

In the case of this acquisition, existing local government land regulations do not allow for the subdivision of SHK and LPK into two separate land titles. Hence, First REIT has to acquire the whole property comprising of both SHK and LPK. Nonetheless, over 50% of revenue is generated by SHK and healthcare related tenancies of LPK. 


Sitemap of SHK and LPK

Kupang is the provincial capital of East Nusa Tenggara with an estimated population of about 350,000 people. It is the biggest city and port in the province.

Source: First REIT, Wikipedia, NRA Capital


Rental Structure and Consideration

Source: First REIT, NRA Capital


Merits of Acquisition

  • Provide growth visibility for 2016. SHK and LPK will provide First REIT with base rental of S$3.84m and S$3.1m respectively, summing up to rental revenue of S$6.94m per annum. Net property income has been estimated to be about S$6.89m, or S$1.72m/quarter, i.e. 6.9% growth over 3Q15 net property income of S$25.0m.
  • FY16 DPU to grow by at least 3%. The net increase in distributable income is estimated to be about S$3.3m or 5.3% (based on estimated FY15 distributable income of S$61.9m), after deducting interest, taxes and other costs, if the transaction is completed within 2015. Factoring in 11.5m new units to be issued at S$1.30 as part of the consideration, FY16 distribution per unit (DPU) is expected to grow by about 3.5% to 8.59 cents assuming 0.3% organic growth. 


Financial Estimates

Source: First REIT, NRA Capital


  • Weighted average lease to expiry to increase from 10.8 years to 11.5 years as at 31 December 2014. First REIT will in turn enter into master lease agreements of 15 years with the option to renew for another 15 years with the respective property operators on the completion of the acquisition. Currently, First REIT’s existing properties are under master leases of 10 to 15 years. As such, the weighted average lease to expiry will be extended after the completion of the acquisition.
  • Weighted average age of portfolio to decrease from 10.1 years to 8.3 years as at 31 December 2014. Among First REIT’s existing properties, the youngest was established in 2013, with about five properties out of 18 established in the 1990s.    


Financial capacity allows SHK & LKP and SHS projects. We do not see financing as a major impediment in this transaction. First REIT will have incremental borrowing capacity of up to S$149.1m once the gearing limit for REITs is raised to 45% in 2016. The funding of the S$90m SHS project will take place over the next two to three years in line with milestone payments. The first progress payment of S$18m will be partially funded by S$8.2m from the sale of part of the SHS land back to the developer. 

Currently trading at attractive yield. We noted that First REIT now trades at S$1.18. At such a price, the estimated FY15 and FY16 DPU will provide investors with an attractive yield of 7.03% and 7.28% respectively.  


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