2010 Jun 07 - OCBC - First Reit

SINGAPORE Company
SINGAPORE Company Update

Report Results MITA
MITANo.
No. 010/06/2009
013/06/2010
7 January 2011
Initiating Coverage
First REIT
BUY
Leveraging on strong healthcare fundamentals
Current Price: S$0.74
Fair Value: S$0.84 Good quality assets. First REIT (FREIT) owns ten healthcare-
related properties across Indonesia and Singapore. It derives
some 86.4% of its gross revenues from Indonesia, with the
remainder coming from Singapore. We believe that FREIT is
3500 0.8
3000
STI well-positioned to capitalise on the growing demand for higher
0.7
2500
0.7
quality healthcare from the middle-class in Indonesia as well
2000
1500
Firs t REIT 0.6 as increasing eldercare needs in Singapore. With a well-defined
1000
500
0.6 acquisition strategy, FREIT has managed to complete the
0 0.5 acquisitions of two Indonesian hospitals recently which we
Apr-10
Aug-10
Dec-09
Feb-10
Jun-10
Oct-10
Dec-10
view as yield-accretive in nature.
Strong and committed sponsor. We believe that FREIT

would benefit largely from the support of its sponsor PT Lippo
Karawaci Tbk (Lippo), which is the largest listed property
company in Indonesia by total assets, revenue, net profit and
market capitalisation. Lippo accounts for 86.4% of FREIT's
Reuters Code FRET.SI
FY09 gross rental income, and we see this as a level of income
ISIN Code AW9U reliability for FREIT. Given Lippo's increasing commitment
Bloomberg Code SP towards healthcare, we opine that this augurs well for FREIT.
Issued Capital (m) 622 This is because FREIT has a right of first refusal on any assets
Mkt Cap (S$m / US$m) 460 / 355 sold by Lippo, which signifies the potential of quality hospital
Major Shareholders acquisitions out of Lippo's pipeline.
Lippo Karawaci 21.7%
Steady and sustainable income. FREIT has delivered
Free Float (%) 90.2%
consistent and stable distribution per unit (DPU) to its
Daily Vol 3-mth (‘000) 1,256
unitholders since its SGX-listing. We attribute this largely to
52 Wk Range 0.578 - 0.750 the favourable master lease terms of its assets. All the master
leases have a long tenure, 100% committed occupancy and
are on a triple net basis, which has allowed FREIT to enjoy
net property income (NPI) margins of 99.0% and above. Its
(S$ m) FY08 FY09 FY10F FY11F
leases are subjected to a yearly rental revision, which provides
Revenue 30.0 30.2 30.2 54.7 downside protection for its rental income. Moreover, FREIT
NPI 29.8 29.9 29.9 54.1 has fixed the SGD-IDR exchange rate for its rental income,
Distributions 20.8 21.0 21.0 41.3 thus eliminating any forex risk.
Distr yield (%)* 10.3 10.3 4.6 8.8
P/NAV (x) 0.8 0.8 0.9 0.9 Potential upside ahead; initiate with BUY. We believe that
*Note: FY10F's yield is due to dilution from new rights issue which traded FREIT represents a compelling investment story at current
on 31 Dec 10
valuations. This is driven by its income stability as well as the
positive prospects of Indonesia and Singapore's healthcare
sector. We are sanguine about the committed support which
Wong Teck Ching (Andy) Lippo provides and the potential assets in FREIT's pipeline.
(65) 6531 9817 We also like management's strong execution capabilities and
e-mail: AndyWong@ocbc-research.com FREIT's attractive distribution yield, which is well above the
S-REIT average. Our RNAV-derived fair value estimate of
S$0.84 yields a potential upside of 13.7% and a total return of
22.6%. As such, we initiate coverage on FREIT with a BUY
rating.
Please refer to the important disclosures at the back of this document.

First REIT
Table of Contents
Page
Section A Company Profile 3
Section B Investment Highlights 5
Section C Industry Trends and Outlook 11
Section D SWOT Analysis 17
Section E Peer Comparison and Valuation 20
Section F Disclaimer 27
Page 2 7 January 2011

First REIT
Section A: Company Profile
First REIT (FREIT) is a Singapore-based REIT which seeks to invest in a

diversified portfolio of income-producing real estate and/or real estate related
assets in Asia that are primarily used for healthcare and/or healthcare-
related purposes. FREIT's current portfolio consists of five hospitals and
one hotel/country club in Indonesia, as well as three nursing homes and
one cancer centre in Singapore. The total appraised value of FREIT's portfolio
stands at approximately S$612.8m as at 31 Dec 10. FREIT was listed on
the Singapore Exchange on 16 Dec 06.
FREIT's sponsor is PT Lippo Karawaci Tbk (Lippo), Indonesia's largest

broad-based property company listed on the Jakarta and Surabaya stock
exchanges, with a market cap of approximately Rp16.0t. FREIT's manager
is Singapore-based Bowsprit Capital (Bowsprit), which is 80% owned by a
wholly-owned subsidiary of Lippo, hence making Bowsprit an indirect
subsidiary of Lippo.
Exhibit 1: FREIT's trust structure
Source: Company

First REIT
Indonesian assets as key driver. FREIT's gross revenue is mainly driven

by its Indonesian properties, which forms approximately 86.4% of its total
revenue (Exhibit 1). In terms of asset type, hospitals contributed 78.9% of
total revenue (Exhibit 2). This should come as no surprise given that FREIT's
sponsor Lippo is one of the leading private hospital operators in Indonesia
via its Siloam Hospital division, which is the current master lessee of FREIT's
three Indonesian hospitals. Given that FREIT has recently completed the
acquisitions of two new hospitals in Indonesia, which will be leased to
Lippo's Siloam, we expect Indonesia to continue to form an integral part of
FREIT's revenue moving forward.
Exhibit 2: Breakdown of FREIT's gross revenue by country
100.0%
14.1% 13.4% 13.6% 13.3% 13.6%
90.0%
80.0%
70.0%
60.0%
50.0%
85.9% 86.6% 86.4% 86.7% 86.4%
40.0%
30.0%
20.0%
10.0%
0.0%
FY07 FY08 FY09 9M10 9M09
Indonesia Singapore
Source: Company, OIR
Exhibit 3: Breakdown of FREIT's FY09 gross revenue by property type
11.5%
9.6%
78.9%
Hospitals Nursing homes Hotel/Country club

First REIT
Section B: Investment Highlights
Good quality assets… FREIT's portfolio comprises of good quality assets

that are well-positioned to capitalise on the growing demand for higher
quality healthcare from the middle- class in Indonesia as well as increasing
eldercare needs in Singapore. Its Indonesian hospitals are strategically
located with a large catchment of potential patients. They are operated by
Siloam Hospitals, which is a premier private hospital provider of high quality
healthcare services in Indonesia. Its current flagship hospital, Siloam
Hospitals Lippo Village (SHLV), is conveniently situated in the exclusive
township of Lippo Karawaci in the Tangerang region and is also the first
hospital in Indonesia to be granted the Joint Commission International (JCI)
accreditation. JCI is a renowned international accreditation body that
assesses whether a healthcare organisation has met a certain level of
quality standard. On the other hand, FREIT's nursing homes in Singapore
are equipped with the facilities and trained healthcare professionals to
provide convalescent and rehabilitative care for its residents.
…backed by yield accretive acquisitions. With a well-defined acquisition

strategy, FREIT has managed to complete the acquisitions of two Indonesian
hospitals on 31 Dec 10. The first is Mochtar Riady Comprehensive Cancer
Centre (MRCCC), which was purchased at a discount of 19.7% to its average
valuation of S$212.3m. The other hospital is Siloam Hospitals Lippo
Cikarang (SHLC), with a purchase consideration of S$35.0m, implying a
discount of 13.8% to its average valuation. The acquisitions were funded
by a 5-for-4 rights issue and debt. Despite the dilution for existing
unitholders, we view the acquisitions positively given their accretive nature.
We estimate that the net property income (NPI) yield of MRCCC and SHLC
as a result of these acquisitions to be 10.8% and 10.7% respectively,
which is higher than the existing portfolio's NPI yield of 8.8% (as at FY09).
FREIT's distribution yield for FY11, when the new assets are expected to
contribute, is projected to be 8.8%. This is greater than the current
distribution yield of 8.1% as reported during its 3Q10 results. Hence we
view these acquisitions as being yield accretive.

First REIT
Exhibit 4: MRCCC and SHLC
Source: Siloam Hospitals website

First REIT
Increased income stability and enlarged asset base. As a result of the

new acquisitions, FREIT will experience greater rental income stability.
This is due to the long 15+15 years master lease agreement for the two
new hospitals, which is similar to its existing Indonesian properties, offering
downside revenue protection. Hence, its weighted average lease expiry
(WALE) has increased from 10.6 years to 12.4 years. FREIT has also
highlighted that the increased size of its asset base will enhance its profile
and competitive positioning and reduce the weighted average age of the
properties (WAAP) by approximately 32.7% to 12.1 years as at 30 Sep
10.
Steady and sustainable income… FREIT has delivered consistent and

stable distribution per unit (DPU) to its unitholders since its listing in Dec
06 (Exhibit 5). One reason is due to the strong operators running its
Indonesian assets, which provides FREIT with a revenue sharing opportunity
if certain conditions are fulfilled. As highlighted earlier, FREIT's Indonesian
hospitals are run by Lippo's Siloam Hospitals division, which has
successfully grown its market position over the years. Lippo also runs the
Imperial Aryaduta Hotel and Country Club (IAHCC), which is located opposite
to SHLV. Management has highlighted that a medical block could possibly
be set up at IAHCC in the future to complement SHLV. Two of FREIT's
nursing homes are operated by units of Pacific Healthcare Holdings [NOT
RATED], which is an integrated healthcare provider offering a comprehensive
range of services. The third nursing home, The Lentor Residence, is leased
and operated by First Lentor Residence Pte Ltd while the Pacific Cancer
Centre is operated by Health Promise Pte Ltd.
FREIT has also effectively eliminated any exchange rate risk and uncertainty
by securing the SGD-IDR exchange rate for its Indonesian rental income
for the full term of its master leases. This has been fixed at S$1 = Rp5,623.50
for its initial four Indonesian assets and S$1 = Rp6,600 for MRCCC and
SHLC.

First REIT
Exhibit 5: Quarterly DPU breakdown, 1Q07 - 3Q10
2.20
1.91 1.92 1.94 1.92 1.90 1.92 1.90 1.92 1.94
2.00 1.85 1.88
1.72 1.76
1.80 1.65
1.60
1.60
1.40
DPU (S cents)
1.20
1.00
0.80
0.60
0.40
0.20
-
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10
…driven by favourable master lease terms. But we opine that the main
reason for FREIT's stable and sustainable distribution income is attributed
to its favourable master lease terms. All of FREIT's properties are leased
out under a master lease agreement, with a committed occupancy of 100%.
The master leases are on a triple net lease basis, where the tenant is
responsible for any increases in insurance, tax or operating expenditure.
Hence, this explains why FREIT's NPI margin is consistently at 99.0% and
above. All of FREIT's master leases also offer a downside revenue protection,
which provides a level of support for FREIT's unitholders. The Singapore
assets are on a 10+10 years master lease, with a fixed 2% rental step-up
every year. The Indonesian assets are on a 15+15 years master lease, with
its base rental subjected yearly to a possible increment of two times
Singapore's Consumer Price Index (CPI) increase in the preceding year.
This is subjected to a floor of 0% and a cap of 2%. In addition, there is a
variable component based on the gross revenue growth of its Indonesian
assets (summarised in Exhibit 6). We view this positively given Indonesia's
growing healthcare market and Siloam Hospital's continual efforts to enhance
the quality of its healthcare services. Siloam's hospitals have thus experienced
good revenue growth as illustrated in Exhibit 7. The earliest dates for FREIT's
renewal of its leases are 11 Apr 17 for its Singapore assets and 11 Dec 21
for its Indonesian assets.

First REIT
Exhibit 6: Master lease summary

Indonesian Assets
1st year of lease Base rental
Previous base rental x (1 + 2 x Singapore's CPI % increase in the preceding year)
Floor of 0% and cap of 2%
Subsequent years
+
Variable rent component:
(0.75% of preceding year's gross revenue if the revenue growth >5% but <15%
1.25% of preceding year's gross revenue if the revenue growth ≥15% but <30%
2.00% of preceding year's gross revenue if the revenue growth >30%)
Singapore Assets
1st year of lease Base rental
Subsequent years Fixed step-up rate of 2% p.a.
Exhibit 7: Gross operating revenues of Siloam Hospitals
450
400
389
350 341
300
289 287
259
250
Rp'b
230
200 208
179 195
150 169 146
109
93
100 88
72 66
50
43 47 57
38
-
2005 2006 2007 2008 2009
Siloam Hospitals Lippo Village Siloam Hospitals Kebon Jeruk

Siloam Hospitals Surabaya Siloam Hospitals Lippo Cikarang
Source: Lippo Annual Report 2009

First REIT
Established and committed sponsor. We believe that FREIT would benefit

largely from the support of its sponsor Lippo, especially since it has the
right of first refusal on any assets sold by Lippo. Lippo recorded revenue
and net income of Rp2.6t and Rp388b respectively in FY09, highlighting its
strong financial position. This signifies the income resilience of FREIT given
that Lippo accounts for 86.4% of its FY09 gross rental income. Given Lippo's
increasing commitment towards healthcare, we believe this bodes well for
FREIT as it will be able to leverage on Lippo's expertise in this area. Lippo
plans to add around 20 hospitals to its assets within the next five years.
More notably, Lippo recently acquired two private hospitals in Jambi and
Balikpapan for US$18m and S$26m respectively. We view these two new
hospitals as potential acquisition targets by FREIT in the future, which
should provide a catalyst for its future growth.

First REIT
Section C: Industry Trends and Outlook
We believe that FREIT can benefit largely from the underserved healthcare
market in Indonesia. There is good growth potential ahead as there is
increasing emphasis placed on the provision of proper healthcare services
there. FREIT's Singapore nursing homes can also gain from the aging
population and recent government initiatives. Although there is no variable
component for FREIT's nursing home leases, but the improving prospects
for its vendors will help to improve the stability of the rental income it receives.
Rising population and life expectancy. Indonesia's population has grown

at a compound annual grow rate (CAGR) of 1.3% from 2000 to 2009 to
230m people, which makes it the fourth most populous country after China,
India and US. Coupled with the increasing life expectancy of its population,
this means that there is a huge market to be captured due to greater
healthcare needs.
Exhibit 8: Population growth and life expectancy of Indonesia
235 72.0
230
230 227
225 71.0
225 222
70.8
219
220 70.4 70.0
216 70.1
No of m illions
No. of years
214
215 69.7
211 69.0
210 208 69.2
205 68.8
205 68.3 68.0
67.9
200
67.4 67.0
195
190 66.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Population size (LHS) Life expectancy at birth (RHS)
Source: World Bank

First REIT
Increasing affluence to drive demand for high quality healthcare.

The emerging markets have rebounded strongly after the recent financial
crisis and Indonesia is no exception. The Jakarta Composite Index has
posted an impressive 46.1% return in 2010. Indonesians have also
experienced growing affluence as seen by the 15.9% CAGR in its GDP per
capita to US$2.35k from 2005 to 2009 (Exhibit 9). This has seen the
emergence of the middle class with greater spending power. Hence demand
for higher quality healthcare services will undoubtedly increase as standards
of living improve and affordability becomes less of an issue.
Exhibit 9: Rising affluence of Indonesians
2,500 6.0
2,349
2,245
5.1
5.0
2,000 1,923 4.8
4.2
4.4
4.0
1,643
1,500
1,304
US$
3.4
%
3.0
1,000
2.0
500
1.0
0 0.0
2005 2006 2007 2008 2009
GDP per capita (LHS) GDP per capita grow th rate (RHS)
Source: World Bank

First REIT
Underserved healthcare market has good growth potential… Although

there will be a foreseeable increase in demand for higher quality healthcare,
we believe that the Indonesian healthcare market is still underserved.
Indonesia's health expenditure as a percentage of its GDP stands at only
around 2.2% in 2007, which is much lower than its regional peers (Exhibit
10). Moreover, World Health Organisation's (WHO) World Health Statistics
2010 highlighted that there were only six hospitals per 10,000 people and
1 physician per 10,000 people in Indonesia. Hence Lippo entered the
healthcare business because it felt that it could address the issues of the
shortage of high quality hospitals and growing needs of Indonesians seeking
superior medical care. Backed by the growing brand awareness of its Siloam
Hospitals, we believe that the potential for growth is extensive in this
underserved market. Lippo is also exploring the possibility of providing
healthcare to the masses moving forward. Although gross margins are lower
for this segment, but we believe FREIT will be able to gain from this as its
variable rent is subjected to topline increases.
Exhibit 10: Health expenditure as a percentage of GDP
5.0
4.5 4.4
4.5 4.4
4.2
4.3 4.3
4.0 4.1 4.1 4.1
3.7
3.5 3.5 3.7
3.0 3.3 3.1

3.2
2.5
%
2.2
2.0
2.0
1.9
1.5
1.0
0.5
0.0
2005 2006 2007
Indonesia Singapore Malaysia China Thailand India
Source: World Bank

First REIT
Exhibit 11: Percentage of population with outpatient treatment
2008 44.4%
2007 44.1%
2006 34.1%
2005 34.4%
2004 38.2%
2003 38.6%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
Source: Badan Pusat Statistik (Statistics Indonesia)
…although thriving medical tourism poses challenges. While rising

affluence of Indonesians does signify stronger demand for higher quality
healthcare, there will likely be spillover effects to overseas countries. This
applies mainly to people of the upper income bracket, who are willing to
incur higher expenses in exchange for healthcare treatment that is of higher
standard and sophistication in nature. According to industry data, medical
tourism in Asia is expected to be worth some US$4b by the year 2012. We
understand that the majority of Indonesians that seek medical treatment
overseas choose Singapore as their destination given its reputation as a
medical hub. Most of the remaining people seek their treatment in Malaysia.
Exhibit 12 highlights the growing medical tourism business in regional
countries, which will undoubtedly pose challenges to Indonesia's healthcare
sector.

First REIT
Exhibit 12: Medical tourism statistics
Source: Frost & Sullivan
Aging population of Singapore. Singapore is fast becoming an aging

population (Exhibit 13) and with many living longer than before, this implies
an impending increase in palliative care services needs. Hence this augurs
well for nursing homes in Singapore as the availability of healthcare
professionals and facilities will help to cater to the convalescent needs of
the aged.
Exhibit 13: Aging population of Singapore
Source: Singapore Department of Statistics

First REIT
Government initiatives on nursing homes. It was recently reported that

two new nursing homes will be built in housing estates in the heartland of
Singapore, while four existing ones will be relocated to upgraded premises
in such areas. This highlights the increasing emphasis placed by the
government on nursing home care, which bodes well for FREIT. Staff will
also have their skills upgraded and we believe this would have positive
spillover effects for private nursing home operators. Singapore's Ministry of
Health (MOH) also highlighted that it hopes to increase the number of nursing
home beds from 9,300 to 14,000 by 2012. Hence FREIT could possibly
carry out asset enhancement initiatives (AEI) to capture a bigger share of
this market and increase its rental income in the future.
Health outlook. Given the positive trends highlighted as well as Lippo's

aggressive plans to cater to the rising demand for higher quality healthcare
services, we foresee FREIT's growth prospects to continue to be driven by
Indonesian hospitals as well as possible yield accretive AEI of existing
properties. We also believe that there is the possibility of acquisitions in
other parts of the region such as Malaysia and Australia should the right
opportunities come along.

First REIT
Section D: SWOT Analysis
Exhibit 14: SWOT analysis

Strengths Weaknesses
Extensive reach to middle-class Indonesians Concentration risk
Strong sponsor support Lack of quality doctors
Healthy gearing ratio Higher cost of debt due to perceived weakness of Indonesian assets
Long master leases with favourable terms
Good distribution yields - among the highest for S-REITs
Opportunities Threats
Potential acquisitions from sponsor pipeline Political risk
Yield accretive asset enhancement initiatives Change in regulation and government polices
Increased competition from private hospitals
Booming medical toursim overseas
Possible refinancing risks

Non-renewable of land titles upon expiry
Source: OIR
Strengths. FREIT's hospitals in Indonesia are able to benefit greatly from

the growing demand for higher quality healthcare services there.This is via
the revenue sharing component of its master leases with Lippo's Siloam
Hospitals, which also highlights the strong sponsor support which FREIT
receives. Siloam Hospitals recorded a 21% rise in revenue to Rp896b in
FY09. We see potential for further growth given Siloam's investment in the
latest equipment and technology and extensive reach to the growing middle-
class population. All of Siloam's hospitals also have an established Centre
of Excellence, which seeks to enhance their patients' experience.
FREIT also leases out its assets with favourable master lease terms such
as the revenue sharing component just highlighted. This underpins FREIT's
income stability as the master leases have long tenures; a downside revenue
protection; and possibility for annual base rental escalation. Please refer
to the 'Investment highlights' section for a full elaboration of FREIT's
strengths.
Weaknesses. We view concentration risk as the biggest weakness of

FREIT. This comes in the form of its strong dependence on its sponsor
Lippo for the bulk of its rental income as well as the geographical risk of its
assets. Lippo contributed approximately 86.7% of FREIT's gross revenue
as at 9M10. We foresee this figure to rise to 91.8% (taking into account
the deferred rental income from Pacific Cancer Centre) in FY11. However
Lippo is currently the largest listed property company in Indonesia by total
assets, revenues, net profit and market capitalisation. Lippo is also placing
an increasing emphasis on its healthcare segment which will improve the
operational expertise of its hospitals. As the major shareholder of FREIT,
we believe that its interests are aligned with other unitholders. This would
provide a level of support for FREIT's income.

First REIT
Geographical risks exist due to the concentration of FREIT's assets in

Indonesia. Its indonesian assets made up 86.4% of its gross revenue and
84.0% of the total capital value of its portfolio in FY09. Hence FREIT is
susceptible to negative events such as natural disasters, pandemics and
terrorist attacks etc.
Opportunities. We believe that FREIT's growth opportunities will be driven

by its strong executional capabilities to acquire quality assets, coupled
with its AEI. FREIT's goal is to increase its portfolio size to S$1b in two to
three years’ time. We opine that this target is likely to be achieved mainly
through the acquisition of yield accretive hospitals from Lippo, although
mangement has highlighted that they are also open to acquiring quality
assets that are non-sponsor related. This is due to Lippo's aggressive
healthcare expansion plans, which presents a pipeline of hospitals that
could possibly be injected into FREIT. Nursing homes in Singapore could
also be a possibility, in our opinion, underpinned by Singapore's fast aging
population. FREIT's current debt-to-assets leverage of 16.3% (our FY10F
estimate) also offers sufficient debt headroom to its regulatory limit of 35%,
which provides the financial flexibility to undertake any future acquisitions.
FREIT is currently undertaking AEI works on its Pacific Cancer Centre and
is awaiting regulatory approval before embarking on an extension block at
its Lentor Residence nursing home. The former is a proposed modern three-
storey cancer centre with a GFA of 27,405 sq (from 13,412 sf), equipped
with facilities such as a Radiotherapy and Imaging Centre. This AEI is
expected to be completed around mid-2011, with a new 10+10 year lease
term to be signed. We estimate that the NPI yield of this AEI to be
approximately 8.4% as a result of an increase in base rental. As for the
Lentor Residence extension, we estimate its NPI yield to be 7.7%. Both
yields are higher than FREIT's 7.4% Singapore portfolio NPI yield, but lower
than the overall portfolio NPI yield of 8.8%. We believe this is justifiable as
FREIT's indonesian assets tend to command a higher yield premium to
compensate for their associated risks as compared to its Singapore assets.
Moreover the Pacific Cancer Centre AEI would be fully funded by debt while
the Lentor Residence by internal resources, with the yields being higher
than its cost of debt (approximately 3.8%). Management also explained
that the lower initial yield was viable due to the 2% annual rental escalation
stipulated in the leases.
Threats. We see increasing competition from private hospitals in Indonesia

and the booming medical tourism trade as key threats to FREIT as this
might adversely affect the variable rental revenues which it receives. While
SHLV was the first hospital in Indonesia to receive the JCI accreditation,
we note that two more hospitals have recently achieved this feat (Santosa
Hospital on 13 Nov 10 and Eka Hospital on 11 Dec 10). This implies that
there is an increasing focus by other private hospitals to tap on the increasing
healthcare needs of Indonesians. A large number of rich indonesians also
tend to seek their medical treatment overseas due to the higher standards
of treatment available and this rising trend would pose a challenge to Siloam
Hospitals.

First REIT
FREIT might also face the possibility of refinancing risks as its gross
borrowings of S$56.8m (as at 30 Sep 10) all mature on Jun 2012. We also
foresee this figure to increase to approximately $70m as it draw downs its
term loan facility to finance the S$18.6m AEI of Pacific Cancer Centre. A
new term loan facility of up to S$50m has also been undertaken for the
acquisition of MRCCC, which is due in 2015. While we think that a more
spaced out debt-maturity profile would be ideal, we believe that FREIT's
healthy gearing ratio would provide sufficient headroom for their refinancing
needs.
Any non-renewable of land titles upon expiry would also pose a major
problem for FREIT. This is especially so for some of its Indonesian
properties, which sits on different land titles. Both its Pacific Healthcare
Nursing Homes also have a relatively short leasehold of 30 years, which
will expire in 2032-2033. However, given the increasing emphasis placed
on healthcare in Indonesia and nursing homes in Singapore, we believe
this would boost FREIT's chances of renewing its land titles upon expiry.
Management has guided that they managed to renew two such land titles
in Indonesia at minimal cost in 2009. Three of their Indonesian assets
(SHLV, IAHCC and SHLC) are also located inside Lippo's township, which
makes it easier to get renewal approval when due, in our opinion.

First REIT
Section E: Peer Comparison and Valuation
Exhibit 15: Peer comparison

Reliased
Latest (Implied)
Market Equity Announc Annualised Cons Cons FY-1 FY-2 Book value
Bloomberg Last Cap Free Qtr DPU Yield FY-1 DPU FY-2 DPU Yield Yield Leverage per unit Price-to-
Ticker Price Curr (in $m) Float Dist Freq (in cents) (%) (in cents) (in cents) (%) (%) ratio (%) (in S$) book (x)
Office
Frasers Commercial Trust* FCOT SP 0.17 SGD 528 74.5% Semi-Anl 0.31 7.3% 1.00 1.10 5.9 6.5 38.3 0.39 0.44
CapitaCommercial Trust* CCT SP 1.53 SGD 4,320 67.9% Semi-Anl 1.99 5.2% 7.50 7.20 4.9 4.7 31.0 1.42 1.08
K-REIT Asia KREIT SP 1.44 SGD 1,953 24.3% Semi-Anl 1.69 4.7% 6.60 7.40 4.6 5.1 14.9 1.47 0.98
Suntec REIT* SUN SP 1.53 SGD 3,374 89.6% Quarter 1.68 5.9% 9.60 9.30 6.3 6.1 32.9 1.83 0.84
Indiabulls Properties Investment Trust IPIT SP 0.27 SGD 979 14.8% None 0.05 0.7% NA NA NA NA 13.3 0.52 0.52
Treasury China Trust TCT SP 1.87 SGD 479 65.6% Irreg 2.50 5.4% 5.00 10.00 2.7 5.3 33.3 3.91 0.48
Office Average 11,632 4.9% 4.9 5.5 27.3 1.59 0.72
Retail
CapitaMall Trust* CT SP 1.98 SGD 6,305 64.5% Quarter 2.36 4.8% 9.50 10.00 4.8 5.1 36.5 1.52 1.30
Frasers Centerpoint Trust* FCT SP 1.53 SGD 1,174 52.6% Quarter 2.16 5.7% 8.20 8.90 5.4 5.8 30.3 1.29 1.19
Starhill Global REIT* SGREIT SP 0.635 SGD 1,234 70.9% Quarter 1.00 6.3% 3.90 4.10 6.1 6.5 30.6 0.90 0.70
CapitaRetail China Trust CRCT SP 1.25 SGD 782 58.7% Semi-Anl 2.08 6.7% 8.30 8.30 6.6 6.6 34.3 1.08 1.16
Fortune REIT (in HK$) FRT SP 3.96 HKD 6,609 70.2% Semi-Anl 5.76 5.8% 24.50 25.50 6.2 6.4 21.5 5.67 0.70
Lippo-Mapletree Indonesia* LMRT SP 0.57 SGD 617 50.2% Quarter 1.09 7.7% 4.70 4.20 8.2 7.4 10.8 0.79 0.72
Retail Average 16,721 6.2% 6.2 6.3 27.3 1.88 0.96
Healthcare
Parkway Life REIT PREIT SP 1.74 SGD 1,052 52.8% Quarter 2.25 5.2% 8.70 9.70 5.0 5.6 35.1 1.38 1.26
Healthcare Average 1,052 5.2% 5.0 5.6 35.1 1.38 1.26
Hospitality
Ascott Residence Trust* ART SP 1.260 SGD 1395.9 51.9% Semi-Anl 1.85 5.9% 7.50 7.90 6.0 6.3 31.3 1.22 1.03
CDL Hospitality REIT CDREIT SP 2.070 SGD 1982.5 67.2% Semi-Anl 2.54 4.9% 10.20 11.90 4.9 5.7 21.0 1.46 1.42
Hospitality Average 3,378 5.4% 5.4 6.0 26.2 1.34 1.23
Industrial
Ascendas REIT* AREIT SP 2.17 SGD 4,067 79.3% Quarter 3.30 6.1% 13.70 14.00 6.3 6.5 34.1 1.57 1.38
Cambridge Industrial Trust CREIT SP 0.545 SGD 576 91.1% Quarter 1.19 8.7% 4.90 4.90 9.0 9.0 38.1 0.58 0.95
AIMS AMP Capital Indus REIT AAREIT SP 0.225 SGD 447 76.6% Quarter 0.40 7.1% 1.90 2.10 8.4 9.3 28.8 0.31 0.73
Mapletree Industrial Trust MINT SP 1.07 SGD 1,565 68.4% Not Yet 3.10 NM 3.10 7.46 6.6 7.0 38.5 0.86 1.24
Mapletree Logistics Trust* MLT SP 0.955 SGD 2,317 48.2% Quarter 1.78 6.5% 6.10 6.30 6.4 6.6 39.4 0.86 1.11
Cache Logistics Trust CACHE SP 0.965 SGD 612 72.7% Irreg 1.94 8.1% 6.70 8.20 6.9 8.5 22.7 0.92 1.05
Sabana Shariah Comp. Indus REIT SSREIT SP 0.98 SGD 620 84.0% None 0.00 NM 8.63 8.67 8.8 8.8 26.9 0.99 0.99
Ascendas India Trust AIT SP 0.925 SGD 708 63.5% Semi-Anl 1.70 7.4% 6.90 7.80 7.5 8.4 17.9 0.83 1.11
Industrial Average 10,912 7.3% 7.5 8.0 30.8 0.86 1.07
Residential
Saizen REIT SZREIT SP 0.165 SGD 185 88.6% Semi-Anl NA NA NA NA NA NA 35.5 0.40 0.41
Residential Average 185 NA NA NA 35.5 0.40 0.41
S-REITs Average 5.8% 5.80 6.29 30.4 1.24 0.94
First REIT FIRT SP 0.74 SGD 460 90.2% Quarter 1.94 10.5% 3.38 6.55 4.6 8.8 16.3 0.80 0.93
* Under OIR coverage
OIR estimates for FREIT, consensus estimates used for the rest. Note that FY10 figures for FREIT are due to dilution of new rights issue
Source: OIR estimates, Bloomberg consensus

First REIT
Healthy leverage ratio. FREIT has a healthy debt-to-assets leverage

ratio of 16.3%, which much lower than the S-REIT universe's average of
30.4%. Although FREIT has no credit rating and hence is restricted to a
regulatory leverage ratio limit of 35%, we opine that there is ample headroom
for FREIT to continue its strategy of acquiring accretive healthcare-related
assets in the future. Management has guided that a comfortable long-term
leverage ratio would be 25%. We estimate that FREIT has a debt headroom
of around S$73.4m and S$181.6m before reaching management's target
and the regulatory limit respectively. Hence FREIT is well-equipped to grow
its portfolio size moving forward if the right opportunities come along, in our
opinion.
Attractive yields. Based on our DPU estimates, FREIT is trading at an

attractive forward yield of 8.8% for FY11. As FREIT's newly underwritten
rights units1 were issued and started trading on 31 Dec 10 (new units
accounted for in FY10's figures) while the rental revenue will only accrue in
FY11, we deem FY10's DPU and yield as not a meaningful gauge. FREIT's
FY11 distribution yield is an attractive 250 basis points (bp) above the S-
REIT average and 320 bp over ParkwayLife REIT (PLREIT) [NOT RATED],
its most directly comparable peer.
1
Recall that FREIT completed a 5-for-4 renounceable rights issue to fund the acquisitions
of MRCCC and SHLC. Hence a total of 345.7m new units were issued which rank pari
passu in all respects with the existing units.

First REIT
Exhibit 16: Yield comparisons
10.0%
8.8%
9.0%
8.0%
7.0% 6.3%
6.0% 5.6%
5.0%
4.0%
2.6% 2.7%
3.0%
2.0%
1.0%
0.0%
STI dividend yield 10 yr Sing Govt Parkw aylife REIT S-REIT average First REIT
Bond
Source: Bloomberg, Bloomberg consensus, OIR estimates
Trading at discount to NAV. Based on our estimates, FREIT is currently

trading at a price-to-book ratio (PBR) of 0.93x. On the other hand, PLREIT
is trading at a 26% premium to its NAV. We believe that investors are
willing to pay a higher premium for PLREIT due to the quality and safety of
its assets (29 nursing homes in Japan and three private hospitals in
Singapore). The broader S-REIT sector is trading at an average PBR of
0.94x which is in-line with FREIT. Although most of the REITs that own
largely foreign properties typically trade at a fairly large discount to NAV
due to perceived higher risk profiles, we argue that FREIT is justified to not
trade at a large discount. This is because of the general defensive nature of
the healthcare industry (which is also part of the reason why PLREIT is
trading at a premium). Moreover, FREIT's assets also operate on a long
master lease (10+10 years for Singapore properties and 15+15 years for
Indonesian properties). This is much longer than the 2-3 year retail leases,
3-5 year office leases and 5-7 year industrial leases. Coupled with a fixed
forex rate; downside rental protection; as well as a possible revenue sharing
component in its leases, we believe this provides income stability and
visibility for FREIT.
Our recent trip to visit some of FREIT's Indonesian properties also affirmed
our opinion on the quality of FREIT's assets. The Siloam hospitals were
well-furnished and equipped with modern equipment and technology. Siloam
is also able to benefit largely from economies of scale since the medical

First REIT
Exhibit 17: Indonesia property visit pictures
Source: OIR
Positive share price performance in 2010. Despite being touted largely

as defensive yield plays, the FTSE ST REIT Index has moved fairly in-line
with the broader market, posting a return of 10.6% in CY10 (10.1% for
STI). In particular, FREIT has returned an impressive gain of 19.1% while
PLREIT surged 35.2%. This could be attributed to both Healthcare REIT's
indirect play to the healthcare sector, which was the star performer of last
year. We believe that there could still be further upside potential ahead,
driven by the strong fundamentals of the healthcare sector.

First REIT
Exhibit 18: Comparison of price performance - CY10
150.0%
140.0%
130.0%
120.0%
110.0%
100.0%
90.0%
80.0%
70.0%
60.0%
50.0% 31/12/2009
31/01/2010
28/02/2010
31/03/2010
30/04/2010
31/05/2010
30/06/2010
31/07/2010
31/08/2010
30/09/2010
31/10/2010
30/11/2010
First REIT STI Index FTSE ST REIT Index Parkw aylife REIT
Source: Bloomberg
Earnings estimate. For the base rental, we assume a 2% increment p.a.

for the Indonesian portfolio based on our expectations of the CPI moving
forward. For the variable rent component, we estimate the Indonesian
hospitals and IAHCC to contribute an additional 1.25% and 0.75% of their
preceding year's gross revenue respectively. We also take into account
MRCCC and SHLC's base rental contribution accruing from FY11. These
considerations are underpinned by our view on the good growth potential of
Indonesia's healthcare sector.
Exhibit 19: FREIT financial data - FY07 - FY11F
60,000 54,661
50,000
40,000
30,162 30,215 41,276
29,964
S$'000
28,290
30,000
20,000
20,831 20,964
19,277 21,042
10,000
0
FY07 FY08 FY09 FY10F FY11F
Gross Revenue Total distribution to Unitholders
Note: FY10F and FY11F's gross revenue estimates exclude deferred income by Pacific Cancer
Centre
Source: Company, OIR estimates

First REIT
Valuation methodology. We value FREIT using a RNAV-based valuation

model. For the purpose of valuing the investment properties, we assume a
WACC discount rate of 7.41% for its Singapore assets and a WACC
discount rate of 10.41% for its Indonesian assets. As such, we derive a fair
value estimate of S$0.84.
Exhibit 20: RNAV fair value estimate

in S$'000
Valuation of investment properties 652,593
Book value of investment properties 617,300
Surplus from investment properties attributable
to unitholders 35,293
Book value 495,140
RNAV 530,433
No of Units in issue at end of period 630,373,997
RNAV per share (S$) 0.84
Current Price (S$) 0.740

Price Upside (%): 13.5%
Distribution Yield (%): 8.8%
Total Return (%): 22.4%
Source: OIR
Potential upside ahead; initiate with BUY. We believe that FREIT

represents a compelling investment story. This is driven by its income
stability due to its favourable master lease terms as well as the positive
prospects of Indonesia and Singapore's healthcare sector. We are sanguine
about the committed support which Lippo provides and the potential assets
in FREIT's pipeline. We also like management's strong execution capabilities
as demonstrated by the yield-accretive quality assets acquired over the
years. Our RNAV-derived fair value estimate of S$0.84 yields a potential
upside of 13.7% and a total return of 22.6%. As such, we initiate coverage
on FREIT with a BUY rating.

First REIT
First REIT's Key Financial Data
EARNINGS FORECAST BALANCE SHEET

Year Ended 31 Dec (S$m) FY08 FY09 FY10F FY11F As at 31 Dec (S$m) FY08 FY09 FY10F FY11F
Gross revenue 30.0 30.2 30.2 54.7 Investment properties 324.9 340.9 612.8 617.3
Property operating expenses -0.2 -0.3 -0.3 -0.6 Total non-current assets 324.9 340.9 612.8 617.3
Net property income 29.8 29.9 29.9 54.1 Cash and cash equivalents 12.4 11.5 14.4 8.9
Fees -3.1 -2.9 -3.0 -5.4 Total current assets 14.6 13.7 16.7 13.0
Net interest expense -1.6 -1.9 -3.8 -3.8 Total assets 339.5 354.7 629.5 630.3
Other expenses -0.6 -0.3 -0.5 -0.5 Current liabilities ex debt 10.6 10.2 10.3 11.8
Total return before tax 23.8 38.7 89.0 44.3 Debt 50.8 52.3 102.3 102.3
Income tax expense -0.8 -2.7 -17.8 -8.9 Total liabilities 84.4 83.6 133.7 135.2
Total return after tax 23.0 36.0 71.2 35.5 Total unitholders' funds 255.1 271.0 495.8 495.1
Total distribution to unitholders 20.8 21.0 21.0 41.3 Total equity and liabilities 339.5 354.7 629.5 630.3
CASH FLOW
Year Ended 31 Dec (S$m) FY08 FY09 FY10F FY11F KEY RATES & RATIOS* FY08 FY09 FY10F FY11F
Net cash from operations 20.6 22.7 10.5 44.1 DPU (S cents) 7.6 7.6 3.4 6.5
Increase in invt properties 0.0 -2.0 -205.5 -4.5 NAV per share (S$) 0.9 1.0 0.8 0.8
Net cash from investing 0.3 -2.0 -205.5 -4.4 Distr yield (%) 10.3 10.3 4.6 8.8
Proceeds from unitholders 0.0 0.0 172.8 0.0 P/CF (x) 9.8 9.0 44.1 10.6
Increase in borrowings 0.0 1.3 50.0 0.0 P/NAV (x) 0.8 0.8 0.9 0.9
Interest paid -1.8 -1.9 -3.9 -3.9 NPI margin (%) 99.3 99.0 99.0 99.0
Net cash from financing -22.1 -25.6 197.9 -45.2 Distr to revenue (%) 69.5 69.5 69.6 75.5
Net cash flow -1.2 -4.9 2.9 -5.5 Total debt/total assets (x) 15.0 14.7 16.3 16.2
Cash at beginning of year 13.6 12.4 11.5 14.4 ROE (%) 9.0 13.3 14.4 7.2
Cash at end of year 12.4 11.5 14.4 8.9 ROA (%) 6.8 10.1 11.3 5.6
Source: Company data, OIR estimates

*Note: FY10F's DPU and yield are due to dilution from new rights issue which traded on 31 Dec 10

First REIT
SHAREHOLDING DECLARATION:
The analyst/analysts who wrote this report holds NIL shares in the above security.
RATINGS AND RECOMMENDATIONS:

OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and trading
oriented.
- However, OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month
investment horizon. OIR’s Buy = More than 10% upside from the current price; Hold = Trade within +/-10%
from the current price; Sell = More than 10% downside from the current price.
- For companies with less than S$150m market capitalization, OIR’s Buy = More than 30% upside from the
current price; Hold = Trade within +/- 30% from the current price; Sell = More than 30% downside from the
current price.
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Published by OCBC Investment Research Pte Ltd Head of Research

2010 Jun 07 - OCBC - First Reit

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SINGAPORE Company

SINGAPORE Company Update

view as yield-accretive in nature.

Strong and committed sponsor. We believe that FREIT

Please refer to the important disclosures at the back of this document.

Section A Company Profile 3

Section B Investment Highlights 5

Section C Industry Trends and Outlook 11

Section D SWOT Analysis 17

Section E Peer Comparison and Valuation 20

Page 2 7 January 2011

Section A: Company Profile

First REIT (FREIT) is a Singapore-based REIT which seeks to invest in a

FREIT's sponsor is PT Lippo Karawaci Tbk (Lippo), Indonesia's largest

Exhibit 1: FREIT's trust structure

Page 3 7 January 2011

Indonesian assets as key driver. FREIT's gross revenue is mainly driven

Exhibit 2: Breakdown of FREIT's gross revenue by country

Source: Company, OIR

Exhibit 3: Breakdown of FREIT's FY09 gross revenue by property type

Hospitals Nursing homes Hotel/Country club

Source: Company, OIR

Page 4 7 January 2011

Section B: Investment Highlights

Good quality assets… FREIT's portfolio comprises of good quality assets

…backed by yield accretive acquisitions. With a well-defined acquisition

Page 5 7 January 2011

Exhibit 4: MRCCC and SHLC

Source: Siloam Hospitals website

Page 6 7 January 2011

Increased income stability and enlarged asset base. As a result of the

Steady and sustainable income… FREIT has delivered consistent and

Page 7 7 January 2011

Exhibit 5: Quarterly DPU breakdown, 1Q07 - 3Q10

Source: Company, OIR

Page 8 7 January 2011

Exhibit 6: Master lease summary

Floor of 0% and cap of 2%

Exhibit 7: Gross operating revenues of Siloam Hospitals

Siloam Hospitals Lippo Village Siloam Hospitals Kebon Jeruk

Source: Lippo Annual Report 2009

Page 9 7 January 2011

Established and committed sponsor. We believe that FREIT would benefit

Page 10 7 January 2011

Section C: Industry Trends and Outlook

Rising population and life expectancy. Indonesia's population has grown

Exhibit 8: Population growth and life expectancy of Indonesia

Population size (LHS) Life expectancy at birth (RHS)

Source: World Bank

Page 11 7 January 2011

Increasing affluence to drive demand for high quality healthcare.

Exhibit 9: Rising affluence of Indonesians

Source: World Bank

Page 12 7 January 2011

Underserved healthcare market has good growth potential… Although

Exhibit 10: Health expenditure as a percentage of GDP

3.0 3.3 3.1

Indonesia Singapore Malaysia China Thailand India

Source: World Bank

Page 13 7 January 2011

Exhibit 11: Percentage of population with outpatient treatment

Source: Badan Pusat Statistik (Statistics Indonesia)

…although thriving medical tourism poses challenges. While rising