First REIT – OCBC

Stability in times of risk aversion

Providing stability amidst uncertain times. We believe that First REIT’s (FREIT) stability makes it an attractive investment thesis amidst such times of uncertainty. Growth is driven largely by Indonesia’s private healthcare sector, which is relatively inelastic in demand. Recall that FREIT performed decently in its recent FY10 results. Gross revenue increased 4.4% to S$31.49m (including deferred rental income); while distributable income rose 1.8% to S$21.35m. Looking ahead, we expect growth via both organic and inorganic means, since FREIT has a target to raise its asset base to S$1b in the next two to three years. Inorganic growth is likely to come from the acquisitions of hospitals from its sponsor Lippo Karawaci (Lippo).

Sponsor’s growth to spur FREIT’s earnings momentum. Lippo reported a good set of results last week. Revenue and net profit rose 21.8% and 35.4% to Rp3.13t and Rp525.3b respectively for FY10. We believe that the improving financial strength of Lippo will provide stronger support and stability for FREIT, given that Lippo contributed 86.7% of FREIT’s gross rental income as at 31 Dec 10. In particular, Lippo’s healthcare segment for FY10 experienced a healthy 15.8% growth to Rp1.04t (33.2% of total revenue), underpinned by rising demand for better quality healthcare services in Indonesia. FREIT is likely to be a key beneficiary of this trend, since the master leases for its Indonesian hospitals have a variable rental component to capture the upside in topline growth. Indonesia’s growing healthcare needs is likely to continue to lend support to Lippo, and hence FREIT’s growth momentum moving forward.

Higher emphasis on Singapore’s nursing homes. Singapore’s Ministry of Health has highlighted that there will be increasing emphasis placed on nursing homes in Singapore. The long waiting times and rising affluence of Singaporeans could entice more people to take up private nursing home services. While rental income from FREIT’s nursing homes is fixed at a 2% annual increase, the possible increase in profitability of the operators would help to boost their ability to fulfil their obligations to FREIT.

Reiterate BUY. We believe that FREIT has showcased its resilience and defensiveness during the current market downturn. Its share price has declined 2.6% (+5.0% YTD) since China announced its interest rate hikes on 8 Feb 11, which is milder than the broader market’s 3.4% decline (-3.4% YTD) and also the S-REIT universe’s 3.4% fall (-2.2% YTD). The prospective yield of 8.6% (our FY11F estimate) further enhances FREIT’s attractiveness, in our view. Reiterate BUY and fair value estimate of S$0.82.