First REIT: Proposed acquisition of South Korean Hospital (OCBC)

First REIT (FREIT) announced last Friday evening that it has entered into a conditional sale and purchase agreement to acquire the Sarang Hospital in Yeosu City, South Korea for a total consideration of US$13m (~S$16m). FREIT expects to complete this acquisition in Aug 2011 and fund it using USD bank borrowings. We estimate that FREIT's gearing ratio would increase from 13.6% to 15.9% as a result of this acquisition. We view this move positively as management highlighted that the proposed acquisition would be yield accretive. NPI yields for the Sarang Hospital is estimated to be ~9.0%, higher than our projected FY11F distribution yield of 7.7% prior to the acquisition. Moreover this Korean hospital represents FREIT's first foray into Korea and would provide a means of diversifying its revenue stream as current assets include three nursing homes in Singapore and six properties in Indonesia. The lease term lasts for ten years (option to renew for another ten years thereafter) with an annual rental escalation of 2.0%, similar to its Singapore assets. We are placing our BUY rating and S$0.80 fair value estimate UNDER REVIEW pending a discussion with management.