FirstREIT – OCBC

4QFY10 results within expectations

4QFY10 results within expectations. First REIT (FREIT) reported its 4QFY10 results which were within expectations. Gross revenue declined 0.2% YoY but increased 0.2% QoQ to S$7.65m; net property income decreased 0.3% YoY but increased 0.5% QoQ to S$7.56m; while distributable income increased 2.8% YoY and 1.6% QoQ to S$5.43m. FY10 gross revenue increased 0.4% to S$30.27m, which was 0.2% above our estimates; it would have increased 4.4% to S$31.49m if we include the deferred rental income from Pacific Cancer Centre’s asset enhancement initiative. Net property income grew 0.1% to S$29.88m, which formed 99.9% of our estimates. Distributable income for the same period rose 1.8% to S$21.35m and was 1.4% higher than our forecast.

New acquisitions to start contributing in FY11. FREIT’s growth was largely driven by higher rental income from its Indonesian properties, thanks in part to the variable rental component in its master leases. FREIT’s Indonesian properties formed 86.7% of its gross revenues (including the deferred income from Pacific Cancer Centre) for FY10 and we expect Indonesia to play an even more pivotal role in FREIT’s development. We opine that FREIT’s two new Indonesian hospital acquisitions in Dec 2010 will drive its earnings momentum moving forward, underpinned by the expanding healthcare market in Indonesia. We predict that FREIT’s gross revenue and distributable income will jump by 80.6% and 88.0% to S$54.66m and S$40.12m respectively in FY11 as contributions from the two hospitals kicks in.

Outlook. Management believes that the healthcare market in Asia, particularly Indonesia, is underserved and has good growth potential. As such, FREIT will continue to be on the lookout for new yield-accretive healthcare properties. This is likely to come from its sponsor Lippo Karawaci (Lippo), in our opinion, as FREIT has a first right of refusal to Lippo’s healthcare assets. We also expect any new acquisitions to be funded by debt, given FREIT’s healthy gearing ratio of 16.6% (our FY11F estimate), which implies ample debt headroom of S$183.8m before hitting the regulatory limit of 35%.

Maintain BUY. We believe that FREIT’s current valuations are still compelling, boosted by its attractive yield (estimated yield of 8.3% in FY11F). Future growth will be supported by its stable master lease terms, which has downside revenue protection and built-in step-up rental features. We continue to like FREIT’s strong sponsor support as well as management’s execution capabilities. Maintain BUY with a revised RNAVderived fair value estimate of S$0.82 (total returns of 15.5%) as we incorporate the latest figures into our assumptions.