UNDAUNTED BY VOLATILE MACROECONOMIC ENVIRONMENT

•4Q11 results in line

•Acquisitions likely debt funded

•Resilient and robust fundamentals

4Q11 results within expectations.

First REIT (FREIT) reported its 4Q11 results which were within our expectations. Gross revenue surged 82.0% YoY to S$13.9m while distributable amount to unitholders jumped 122.9% to S$12.1m. This was partly due to a special distribution of S$2.2m arising from FREIT’s recent divestment of the Adam Road property. For FY11, gross revenue increased 78.4% to S$54.0m and was just 0.2% higher than our full-year projection. Distributable income to unitholders rose 105.8% to S$43.9m, in line with our forecast of S$41.9m if we exclude the special S$2.2m distribution in 4Q11. DPU for FY11 was 7.01 S cents, versus 6.63 S cents in FY10 due to additional distributions from the asset divestment as highlighted earlier and a 5-for-4 rights issue in Dec 2010. This translates into an attractive yield of 9.1%. We think that the remaining S$4.4m from the S$8.7m gain on the divestment could be distributed to unitholders in two tranches in 1Q12 and 2Q12, although usage of these funds would be at the full discretion of FREIT’s Manager.

Acquisitions likely in FY12.

Management has reiterated its focus on Indonesia, given rising demand for quality healthcare services there and visibility from the strong pipeline of hospitals from its sponsor Lippo Karawaci. We reckon that any acquisitions in the near term are likely to be debt funded, since FREIT’s gearing ratio of 14.8% (end FY11) provides ample debt headroom of S$89.8m-S$143.4m before reaching its comfortable gearing ratio range of 25%-30%.

Maintain BUY.

We opine that FREIT has showcased its resilience amid the current volatile economic environment, underpinned by healthy industry fundamentals and its stable master lease structure. Maintain BUY with a revised RNAV-derived fair value estimate of S$0.89 (previously S$0.84) as we roll forward our valuations and lower our terminal capitalisation rate inputs for some of its properties. We also apply a smaller discount rate to its Indonesian assets given improving fundamentals of the country.

First Reit Q4 DPU doubles on divestment

It’ll pay 1.93 cents per unit; gross revenue up 82%

FIRST Real Estate Investment Trust (First Reit) saw its distribution per unit (DPU) for the fourth quarter ended Dec 31, rise to 1.93 Singapore cents, up 121.8 per cent in the previous corresponding quarter.

This was helped by other gains relating to the distribution of a portion of the total gain on divestment of its Adam Road property of about $8.7 million, which was sold in Q1 last year to Fortis Global Healthcare.

The DPU is payable Feb 29.

The amount distributable rose 122.9 per cent to $12.12 million for the fourth quarter. Meanwhile, gross revenue rose 82 per cent to $13.93 million while net property income also rose 82.2 per cent to $13.77 million.

Results were lifted partly by maiden contributions from its three new properties: Mochtar Riady Comprehensive Cancer Centre and Siloam Hospitals Lippo Cikarang in Indonesia, and South Korea’s Sarang Hospital.

On a full-year basis, the Trust posted a DPU of 7.01 Singapore cents, as compared to 6.63 cents a year ago. Due to the effect of the rights issue and acquisitions made in Dec 2010, full-year 2011 DPU is not comparable to 2010 DPU.

For the full fiscal year, the amount distributable gained 105.8 per cent to $43.93 million.

Gross revenue rose 78.4 per cent to $54.01 million while net property income also rose 78.9 per cent to $53.44 million for the full year.

Earnings per unit were 3.39 cents for 4QFY11 and 8.15 cents for FY11.

As at Dec 28 last year, the total value of First Reit’s investment properties rose from $612.8 million to $618 million, following the acquisition of Sarang Hospital and the divestment of the Adam Road property.

Going forward, manager of First Reit, Bowsprit Capital Corporation, said it expects Indonesia to remain a key focus, and it sees strong potential as Indonesia’s consumption growth continues to grow, which invariably will increase the demand for quality healthcare services.

‘We have been in discussions with our sponsor PT Lippo Karawaci Tbk to acquire some of its upcoming properties on which we have a right of first refusal,’ said Bowsprit’s CEO Ronnie Tan.

On the Singapore front, Bowsprit said the nation’s ageing population and current ‘bed shortage’ will continue to drive the demand for more nursing homes and community hospitals.

As part of its asset enhancement strategy for its properties, the Trust is adding a new five-storey extension block at The Lentor Residence, which is slated for completion in the second half of 2012.

First Reit shares closed at 77 cents yesterday, up half a cent.

3Q11 results within expectations

3Q11 DPU of 1.92 S cents. First REIT (FREIT) reported a set of 3Q11 results which were within our expectations (excluding any one-off distribution). Gross revenue surged 79.2% YoY to S$13.7m due largely to new contributions from three of its recently-acquired properties; while distributable amount to unitholders jumped 125.7% YoY to S$12.1m. The latter was boosted by a one-off gain distribution of S$2.2m arising from the total gain on divestment of the Adam Road property amounting to ~S$8.7m. The balance will be distributed to unitholders at the discretion of the manager of FREIT in future periods. Sequentially, gross revenue and distributable amount rose 3.4% and 22.2% respectively. DPU of 1.92 S cents represented a decline of 1.0% YoY due to an enlarged unit base from the effects of the 5-for-4 rights issue in Dec 2010 but increased 21.5% QoQ due to the one-off distribution highlighted earlier. For 9M11, gross revenue increased 77.2% to S$40.1m and formed 74.3% of our full-year projection. Excluding the special non-recurring distribution of 0.34 S cents per share, 9M11 DPU of 4.74 S cents constituted 75.0% of our FY11 forecasts.

New acquisitions could occur soon. First REIT has a strong pipeline of possible acquisition targets from its sponsor Lippo Karawaci (Lippo), of which it has a right of first refusal. Lippo has placed strong emphasis on its Hospitals segment due to the rising demand for quality healthcare services in Indonesia. Media reports have also stated that the group is aiming to sell some of its hospital assets by this year or in 2012 while FREIT said that it is already engaging in preliminary discussions with Lippo on the possibility of acquiring some these assets.

Likely to be debt funded. We believe that these acquisitions, should it occur, would likely be funded by debt given its low gearing ratio of 15.1% as at 30 Sep 2011. This leaves FREIT with ample debt headroom of S$86.0m-S$138.4m before reaching its comfortable gearing ratio range of 25%-30%.

Defensive qualities in times of uncertainty; upgrade to BUY. We expect FREIT’s long master leases with downside revenue protection to provide resilience and stability to its income stream, which would provide an attractive investment merit in times of global uncertainties. FREIT also offers a good proxy to the growing healthcare scene in Indonesia. With a pull-back in its share price since our downgrade to HOLD, we believe that value has re-emerged again. Our RNAV-derived fair value estimate is unchanged at S$0.84, but as this represents a total return of 14.0%, we upgrade the stock to BUY.

First Reit’s amount distributable for Q3 rises to $12.08m

FIRST Real Estate Investment Trust (First Reit) saw the amount distributable for the third quarter ended Sept 30 rise to $12.08 million, up from $5.35 million in the previous corresponding quarter.

This was helped by other gain from the distribution of a portion of the total gain on divestment of the Adam Road property which was sold in Q1 this year to Fortis Global Healthcare. The distribution per unit (DPU), payable Nov 29, is 1.92 cents, compared to 1.94 cents in 3Q10.

Meanwhile, gross revenue rose 79.2 per cent to $13.67 million while net property income also rose 79.2 per cent to $13.47 million. Earnings per unit were 1.23 cents for 3QFY11, compared to 1.25 cents in 3QFY10.

Results were lifted partly by maiden contributions from its three new properties: Mochtar Riady Comprehensive Cancer Centre and Siloam Hospitals Lippo Cikarang in Indonesia, and South Korea’s Sarang Hospital.

The gain on divestment from the Adam Road property is about $8.7 million, of which a portion (0.34 cent per unit) will be distributed this quarter as a special non-recurring distribution. The balance will be distributed to unitholders at Bowsprit Capital Corporation’s (First Reit’s manager) discretion in the future, it said in a press release.

In an update on the new five-storey extension block at The Lentor Residence, First Reit expects this to be completed by the second half of 2012.

‘With a visible pipeline from our sponsor PT Lippo Karawaci Tbk, we believe we will be able to strengthen our property portfolio in Indonesia by tapping the sustained demand for quality healthcare services as well as leveraging our sponsor’s long-term expansion plans to develop over 25 hospitals over the next five years,’ said Bowsprit CEO Ronnie Tan. ‘We have been engaging in preliminary discussions with our sponsor to acquire some of its upcoming properties to which we have a first right of refusal.’

Meanwhile, First Reit expects the demand for nursing homes and community hospitals to increase in Singapore as the government lobbies for better tertiary care. Given First Reit’s debt-to-property valuation ratio of 16.4 per cent, Bowsprit said it will continue to look for valuable, yield-accretive healthcare-related assets in the region.

First Reit shares closed at 79.5 cents yesterday, up half a cent.

A healthcare property giant in the making

• On a property tour to visit four properties in Jakarta, Indonesia

• The installation of state-of-the-art medical facilities and equipments are way beyond our expectations prior to the visit

• Strong sponsor with visible pipeline is the key to grow exponentially

• No rating given to First REIT

Background

First REIT is Singapore-based REIT with a mandate to invest in income-producing healthcare and healthcare-related assets in Singapore and Asia. The trust was listed in December 2006 and has concluded several transactions over the past one year. To date, it owned five hospitals and a hotel & country club in Indonesia and three nursing homes in Singapore with an estimated asset value of SGD 600 million.

Key takeaways

• Imperial Aryaduta Hotel & Country Club not only attracted business and leisure travelers but also outpatients and its families from Siloam Hospitals Lippo Village due to its close proximity.

• The Siloam Hospitals Group management and medical professionals are well-trained and portrayed proficiency in their field of specialization based on our conversation and observation.

• Multiple firsts in Indonesia’s medical developments have put Siloam Hospitals Group ahead of the curve. The two other private hospitals, namely, Rumah Sakit Pondok Indah Group – with two hospitals in Jakarta – and Grha Kedoya Hospital are considered new players in the healthcare industry with less than three-year in operation.

• Mochtar Riady Comprehensive Cancer Centre is Indonesia’s first private cancer treatment centre with state-of-the-art equipment. It can be a game changer to avert the drain of mid- to upper- income natives from seeking medication in the region.

Investment Merits

• Low gearing ratio (c.15.4%) leaves First REIT with SGD 200 million to acquire new property assets.

• Long lease term to expiry (c.11 years) provides visible and sustainable income which brings along stability and resilience.

• Visible pipeline from sponsor with over 10 hospitals to be completed over the next five years.

Potential risks

• High rental concentration from Indonesia properties which made up 94.4% of rental contribution.