Here's how First REIT will milk benefits from 2 hospital acquisitions

It'll cut its weighted average age of properties to 8.6 years.

According to OCBC Investment Research, it is positive on the acquisitions as it is expected to be accretive in nature and would enlarge FREIT’s asset base, lower its weighted average age of properties from 10.4 years to 8.6 years and increase its weighted average lease to expiry from 11.3 years to 12.0 years.

OCBC further noted that the lease terms are largely similar to its two previous acquisitions made in Nov last year, and offers strong stability and visibility to unitholders (15+15 years lease tenure with downside base rental protection), in its view. 

Here's more:

Recently proposed two sponsor-related acquisitions First REIT (FREIT) recently announced that it has entered into two conditional sale and purchase agreements for the acquisition of two new hospitals from its sponsor Lippo Karawaci (Lippo)1.

The hospitals are Siloam Hospitals Bali (SHBL) and Siloam Hospitals TB Simatupang (SHTS), with purchase considerations amounting to S$97.3m and S$93.1m, respectively. This represents a 13.3% and 12.5% discount to the average of two independent valuations for each property, respectively.

The purchase of SHBL would be funded wholly by a drawdown from FREIT’s committed debt facility, while SHTS would be purchased using a combination of both debt and issuance of new units to Lippo (funding mix not finalised).

We raise our FY13 and FY14 DPU estimates by 5.9% and 13.2%, respectively, as we incorporate contribution from the assets in our forecasts. We assume that SHTS wouldbe financed by S$45m of debt and S$50m of equity.

This would raise FY13F gearing ratio to 34.0%, based on our estimates. Yields for FY13F and FY14F remain healthy at 6.2% and 6.8%, respectively. We also adopt aDDM model (cost of equity: 7.7%; terminal growth rate: 1.0%) as our new valuation matrix (previously RNAV).