First REIT FY 2011 Results Analysis

First REIT announced its FY 2011 results on 26th January 2012.

The gross revenue increased 78.4% from $30.3 million in FY2010 to $54.0 million in FY2011. The distributable amount more than doubled at 105.8% from the previous year. This is due to the divestment gains from Adam Road property and first-time contributions from two new hospitals in Indonesia (Mochtar Riady Comprehensive Cancer Centre and Siloam Hospitals Lippo Cikarang acquired in December 2010) and one new hospital in South Korea (Sarang Hospital acquired in August 2011). The latest distribution per unit (DPU) is 7.01 cents and this gives a yield of 9.1% (using today’s closing price of $0.77). If we strip away part of the one-time gain of $8.7 million from the divestment of Adam Road property that was distributed in Q3FY2011 and is to be distributed in Q4FY2011, the DPU drops to 6.33 cents and the yield becomes 8.2%. The DPU for this year is actually kind of stagnant comparing with previous years. The current Net Asset Value (NAV) is 80.5 cents compared to 78.08 cents in 2010.

The total gearing very conservative at 16% (compared to the regulatory limit of 35%) . First REIT has headroom to take on more debt for any future acquisitions. Moody’s recently upgraded Indonesia to investment grade status. First REIT stands a strong chance of getting a strong investment rating too, if applied for. This will allow First REIT to secure better financing rates and allow borrowing more than the 35% cap. However, the management had assured that they do not intend to take on debt too aggressively.

The potential catalysts in the future are:

• Potential acquisitions from the sponsor, PT Lippo Karawaci Tbk. The sponsor has 3 new hospitals (Siloam Hospitals Jambi, Siloam Hospitals Balikpapan and Siloam Hospitals Makassar) under the Siloam network that First REIT can acquire in the near future. The sponsor also intends to quadruple the Siloam hospital division to 25 hospitals in five years. 5 new hospitals are being built currently and they are Siloam General Hospital, Siloam Hospitals Bali, Siloam Hospitals Manado, Siloam Hospitals Palembang and Siloam Hospitals TB Simatupang (information from Lippo Karawaci’s Investor Presentation 9MFY2011).
• Asset enhancement for The Lentor Residence, which is slated for completion in the second half of 2012. This justifies the increase in rent from the fixed annual rent step-up of 2% on its Singapore properties. The Singapore Government has plans to cope with aging population and if the Government were to dish out any incentives for operators of nursing homes, First REIT will benefit.
• Mochtar Riady Comprehensive Cancer Centre is not running at full capacity (running at around 40-50% of full capacity). If it were to run at full capacity, the variable rental component will rise and there will be potentially higher service revenue when the hospital gains more exposure.  This means more distributable income to unitholders.
• First REIT says it will continue to hunt for quality and yield-accretive healthcare-related assets in Asia and has target to raise asset base to S$1 billion in the next two to three years. With conservative gearing and prudent management, the NAV is set to rise in the future.