SINGAPORE (Dec 13): OCBC Investment Research is maintaining its “hold” call on First REIT with a lower fair value of $1.05 from $1.34 previously, after factoring in various risks pertaining to the REIT’s master leases and portfolio balancing.  

To recap, OUE Lippo Healthcare (OUE LH) recently acquired a 10.6% stake in First REIT from its sponsor, Lippo Karawaci (LK), as well as acquired the REIT manager from LK in a 40-60 split between OUE LH and OUE Limited.

This means First REIT will now have an enlarged pool of Right of First Refusal (ROFR) assets comprising both OUE LH and LK’s healthcare assets.

In a Thursday report, analyst Joseph Ng highlights one of the key concerns going forward being the current master leases between LK and First REIT, with the initial batch of leases due in 2021. This comes post a recent analyst briefing hosted by the REIT on Wednesday.

“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 First REIT. 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 First REIT in a less-than-favourable position,” explains Ng.

See: Lippo Karawaci says Fitch credit downgrade 'regretted'; fund-raising progressing smoothly

Furthermore, First REIT is currently looking to rebalance its portfolio such that up to 50% of its assets will be located beyond Indonesia within the next 3-5 years.

The analyst therefore believes the REIT could be acquiring a significant portion of OUE LH’s $300 million nursing home portfolio in Japan by 2019, with 2-3 sizeable acquisitions within the ballpark range of $300-400 million each.

The way Ng’s sees it,  First REIT’s management would only have about $102.4 million of debt headroom before hitting its short-term tolerance of up 42% gearing – which in turn suggests a substantial amount of equity fund raising, possibly through a rights issuance, required to proceed with the trust’s portfolio rebalancing plans.

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

Units of First REIT were down by 2 cents at $1.02, or 8.2% FY18F distribution yield, before the midday trading break.