Results broadly in-line. With locked-in master leases and revenue derived mostly from base rents, full year results came in well, with revenue (+12% YoY), NPI (+15% YoY) and DPU (+7% YoY) in-line with our forecasts. We like the continued DPU growth fuelled by acquisitions, though we keep our target price of S$1.38 unchanged. Full-year DPU of 8.05c translates to a yield of 6.3% – an attractive 4.5% spread over the 10-year risk free rate.

Sheltered from refinancing and interest rate risks. The bridge loan of S$26.5m will be refinanced to a fixed rate loan in 1H15 and come due only in 2019. After which, the earliest debt will come due only from 2017, with ~95% of the total debt hedged on fixed rates. Therefore, there is little interest rate risk in the next 2 years.

Strong potential for upward rerating remains. The potential for yield-accretive acquisitions remains given that First REIT owns only 11 out of 18 hospitals that Siloam currently operates. Management revealed that 29 hospitals remains in the pipeline, of which First REIT has the ROFR. First REIT has also highlighted the potential for asset enhancement at3 of its original IPO assets. With the distribution reinvestment plan in place, we believe that First REIT may utilize the reinvested capital for acquisition.

Maintain BUY with rerating catalysts in view. Although our target price implies only ~14% upside after including dividends, the fair value may be higher given potential yield accretion from the acquisition pipeline. We note that over the last 5 years, the total returns on First REIT is more than 200% (assuming reinvestment of dividends into the stock). This is in part contributed by 9 acquisitions that enlarged the portfolio size to 16 assets, and we believe that similar acquisitions may continue to propel growth. However, the accretion from each property will likely be at a lower rate than before as future acquisitions are likely to be partly funded by equity (and no longer solely by debt) as First REIT nears the gearing limit of 35%.

We initiate coverage on First Real Estate Investment Trust (First REIT) with a BUY rating and a fair value of S$1.380 based on a dividend discount model. First REIT’s 6.4% FY15F yield is anchored by long master leases, with ~95% of the rental income from Indonesia’s healthcare sector backed by Lippo Karawaci and Siloam Hospitals. First REIT stands to benefit from its sponsor’s huge asset pipeline which may continue to offer very attractive yield.

Distribution underpinned by long master leases. First REIT boasts of a long portfolio WALE of10.7 years, with the first renewal coming due only on 2017. As~98% of the rents are priced and paid in SGD with rental growth rates at twice Singapore CPI growth, subject to a cap of 2% and a floor of 0%, the long master leases offers a partial hedge against inflation.

A huge asset pipeline ahead. After acquiring 12 properties and enlarging the portfolio nearly fourfold to S$1.2b since IPO in 2006, we estimate that 28 more assets remain in the pipeline. Typically acquired at high 9% to high 10% rental yield with at least 9% discount to valuation, the acquisitions have been highly accretive to DPU and NAV.

Asset sustainability with long lifespan. The Indonesia assets, which constitute ~96% of property valuation, are on Hak Guna Bangunan (Right to Build), which is essentially leasehold tenure. Nevertheless, there is a possibility for renewal after the expiration of the initial lease period of 30 years and an additional term of 20 years. Meanwhile, First REIT is poised to benefit from the developments in the Indonesia healthcare market.

Initiate BUY with target of S$1.38 with more upside on acquisitions. We see a 15% upside (incl dividends) with our DDM -derived price target. The target price could prove to be conservative, given that it is based only on the current portfolio of assets. If we assume that First REIT acquires another 6 properties with purchase and lease details (e.g. size of asset and NPI yield) that is similar to the average of the most recent 6 acquisitions, our target price rises to S$1.49 (23.0% upside).

Ends FY13 with 7.52 S cents DPU

• 4Q13 DPU rises 14.5% YoY
  
• Healthy pipeline of acquisition targets
  
• FY14F distribution yield of 7.9%
  

FY13 results in-line with our expectations

First REIT (FREIT) reported a 48.2% YoY increase in gross revenue to S$22.8m and a 14.5% growth in DPU to 1.97 S cents in 4Q13. This culminated in FY13 gross revenue and DPU growth of 44.5% and 14.3% (excluding exceptional gains distribution of 0.68 S cents in FY12) to S$83.3m and 7.52 S cents, and closely matched our revenue and DPU forecast of S$83.2m and 7.54 S cents, respectively. This growth was driven by contribution from new acquisitions (two hospitals acquired each in Nov 2012 and May 2013) and organic growth. On the flipside, FREIT’s Sarang Hospital in South Korea registered a net property loss of S$297k in FY13 due to rental provisions made. Nevertheless, we believe this situation has now been resolved as FREIT has agreed to a lower rental structure to ensure the sustainability of Sarang Hospital’s operations. In addition, this asset contributed only 2.4% of FREIT’s FY13 revenue and we do not expect this event to adversely impact its business.

Exchange rate stability will be key priority

According to FREIT, its sponsor Lippo Karawaci has a strong pipeline of 24 hospitals to which FREIT has a right-of-first-refusal. In our view, this provides FREIT with a stream of acquisition targets to tap on the growing demand of private healthcare services in Indonesia. Given the sharp volatility in the IDR exchange rate, we believe FREIT’s key priority in any lease terms negotiation would be to maintain its base rental denomination in SGD.

Maintain BUY with slightly higher S$1.19 fair value

FREIT’s debt-to-assets ratio stood at 31.9% as at end FY13. With little debt headroom available given FREIT’s 35% gearing limit, we believe any future acquisitions would have to be financed partly by equity. We trim our FY14 and FY15 DPU forecasts marginally by 1.5%, on lower revenue and higher finance costs assumptions. But as we roll forward our valuations, our DDM-derived fair value estimate inches up from S$1.18 to S$1.19. Maintain BUY on FREIT as FY14F distribution yield remains attractive at 7.9%.

3Q13 DPU below expectations

• 3Q13 DPU rises 16.7% YoY
  
• Largely unaffected by weakening IDR
  
• Lower FV to S$1.18
  

Revenue in-line but DPU came in below expectations

First REIT (FREIT) reported 3Q13 revenue of S$22.8m, representing an increase of 60.7% YoY. This was driven by contribution from four new Indonesian properties, of which two were acquired in Nov 2012 and the remaining two in May 2013. DPU rose 16.7% YoY to S$0.0196, and is payable on 29 Nov 2013. For 9M13, revenue jumped 43.1% to S$60.4m and was within our expectations (72.6% of our FY13 projection). After stripping out exceptional distributions paid out in 1Q12 and 2Q12, distributable amount to unitholders and DPU rose 24.6% and 14.2% to S$38.1m and S$0.0555, respectively, with the latter forming 70.4% of our full-year forecast. We view this as below our expectations due to higher-than estimated expenses. On a positive note, FREIT’s financial performance was largely unaffected by the recent weakening of the IDR, given that the base rental for its ten Indonesian properties are denominated in SGD.

Will continue to seek quality asset acquisitions

FREIT highlighted that it will continue to seek opportunities at expanding its footprint in Indonesia, given her growing healthcare market and the strong pipeline of possible acquisition targets from its sponsor Lippo Karawaci. Following Siloam International Hospital’s successful IPO recently in Sep 2013, we believe proceeds raised would allow it to embark on a more aggressive hospital development programme, thus further providing FREIT with assets that may be purchased in the medium to long term horizon. FREIT will also look out for healthcare assets in other parts of Asia to expand its portfolio.

Maintain BUY

We maintain our revenue estimates but tweak our DPU forecasts for FY13 and FY14 downwards by 4.4% and 1.9%, respectively. This correspondingly lowers our DDM-derived fair value estimate from S$1.20 to S$1.18. Given a decent FY14F dividend yield of 7.5%, we maintain our BUY rating for FREIT.

Upgrade to BUY on valuation grounds

• Hospitals are well-equipped
  
• FY14F distribution yield of 8.3%
  
• Value has re-emerged
  

Indonesian properties visit

We visited five of First REIT’s (FREIT) properties (four hospitals and one hotel and country club) in Indonesia over a two-day period last week. This included its Siloam Hospitals TB Simatupang (SHTS), which is located in South Jakarta and acquired by FREIT only in May this year. The hospitals are operated by Siloam International Hospitals (subsidiary of Lippo Karawaci) and are generally well-maintained and equipped with modern medical equipment from international brands such as Siemens and Philips. For example, SHTS, Siloam Hospitals Lippo Village (SHLV) and Mochtar Riady Comprehensive Cancer Centre (MRCCC) all offer the 3-tesla magnetic resonance imaging (MRI) machines, which we consider as advanced in today’s medical field.

Floating rate exposure reduced following refinancing exercise

FREIT announced on 28 Aug 2013 that it had successfully refinanced S$92m of its floating rate debt to a 4-year fixed-rate secured Transferable Term Loan Facility (all-in cost of borrowing of ~3.7%). We estimate that this would lower FREIT’s floating rate exposure from 72% to 46% of its total debt. Following this successful refinancing exercise, FREIT’s next refinancing need will only come in 2016.

Share price correction overdone; upgrade to BUY

Concerns over Indonesia’s easing economic growth, high inflation and sharp depreciation in the IDR have adversely impacted stocks with large exposure to Indonesia, such as FREIT. Coupled with QE tapering fears, FREIT’s share price has dipped 28% since mid-May this year. However, FREIT has minimal exposure to the IDR volatility, in our view. This is because the base rental for its Indonesian properties is denominated in SGD, while the variable rental component is pegged to a fixed SGD/IDR rate throughout the entire lease tenure. We had also previously taken into account the spike in the Singapore government 10-year bond yield in our risk-free rate assumption (2.6% used in our model). We believe that the correction in FREIT’s share price is overdone. Hence we upgrade FREIT from Hold to BUY on valuation grounds, with an unchanged fair value estimate of S$1.20. FREIT also offers an attractive forecasted distribution yield of 7.6% in FY13 and 8.3% in FY14.