2Q11 results within expectations

2Q11 results within expectations. First REIT (FREIT) reported its 2Q11 results which were within expectations. Gross revenue surged 75.3% YoY and 0.3% QoQ (deferred rental from the Adam Road property of S$1.4m recognised in 1Q11 as revenue has been reclassified to ‘gain on divestment of investment property’) to S$13.2m, forming 24.0% of our full year projection. The YoY increase was due to contributions from its two Indonesian hospitals acquired in Dec 2010. Income available for distribution jumped 86.5% YoY but was flat QoQ at S$9.9m. However, DPU of 1.58 S cents represented a 17.7% YoY decline (flat sequentially) due to an enlarged unit base from the effects of the 5-for-4 rights issue in Dec 2010 and constituted 25.5% of our FY11 estimate. This equates to an annualised yield of 7.6%. For 1H11, gross revenue increased 76.1% to S$26.4m while DPU fell 17.3% to 3.16 S cents due to the larger unit base highlighted earlier.

Sufficient debt headroom for new acquisitions. As at 30 Jun 2011, FREIT’s gearing ratio stands at a healthy 12.7%. Hence we expect any future acquisitions in the near term to be funded by debt as FREIT still has sufficient debt headroom of S$103.3-155.5m before reaching its long-term target gearing ratio range of 25-30%. While FREIT is keeping a lookout for accretive targets in the region, we opine that future acquisitions are likely to come from its sponsor Lippo Karawaci (Lippo). This is because FREIT has the first right of refusal to the pipeline of hospitals in Lippo’s portfolio.

Downgrade to HOLD on valuation grounds. We fine-tune our assumptions in accordance with FREIT’s 2Q11 results, and our RNAV-derived fair value estimate inches up to S$0.84 (previously S$0.835). FREIT’s share price has surged 12.8% since we initiated coverage with a BUY rating on 7 Jan 2011, outperforming the STI and FTSE ST Real Estate Investment Trusts Index substantially by 15.8 ppt and 14.2 ppt respectively. We opine that current valuations appear fair, with FREIT now trading at a PBR of 1.07x, versus its historical PBR of 0.80x. We note that companies with assets in overseas countries which are economically and politically more risky than Singapore typically trade at a discount to NAV. While we continue to like FREIT for its resilient business model, strong management and proxy to Indonesia’s growing private healthcare sector, we believe that these positives have already been factored in. Hence we downgrade FREIT to HOLD, purely on valuation grounds. Downside risk should be limited by its healthy FY11F distribution yield of 7.6%; while re-rating catalysts include yield-accretive acquisitions.

HEALTHCARE real estate investment trust First Reit announced on Friday that its second-quarter distribution per unit (DPU) is 1.58 cents compared to 1.92 cents for the same time period a year ago.

After taking into account the effect of the rights issue made in December 2010, the second-quarter DPU of 1.58 cents this year is up from an adjusted DPU of 0.85 cents in the previous corresponding time period.

First Reit reported an annualised DPU of 6.37 cents, while its distribution yield stood at 7.8 per cent based on its closing price of 82 cents on July 20.

Distributable income for the second-quarter this year rose 86.5 per cent to S$9.89 million, up from S$5.30 million last year.

Gross revenue increased 75.3 per cent year-on-year to S$13.2 million helped by maiden contributions from two of its new hospitals acquired in December 2010.

Looking ahead, First Reit said it is in preliminary discussions with its sponsor, Lippo Karawaci, to acquire two of the latter's new hospitals in Indonesia.

First Reit also said its gain on divestment of the Adam Road property in the first quarter this year is about S$8.7 million, which will be distributed either wholly or partially to unitholders in the coming quarters.

First Reit buys Korean hospital

FIRST Real Estate Investment Trust (Reit) has purchased South Korea’s Sarang Hospital for US$13 million.

Sarang Hospital – said to be one of the largest rehabilitative and nursing facilities in Yeosu – is a six-storey hospital with one basement accommodating 217 beds. Yeosu is the city that will host the World Expo next year.

The hospital boasts a gross floor area of nearly 5,000 square metres on a total freehold land area of 2,142 sq m.

The acquisition, funded entirely by a bank loan, is expected to be completed by next month.

Upon completion, the master lease agreement for Sarang Hospital will start for a 10-year lease term, with an option to renew for a further term of 10 years.

According to First Reit, Sarang Hospital has an initial net property yield in excess of 9 per cent and its annual rental income is expected to climb 2 per cent annually.

After the acquisition, First Reit’s total asset size is expected to grow to S$602.6 million, and its gearing to increase 16.4 per cent before transaction costs.

‘The quality of healthcare in South Korea is among the highest in Asia, supported by top-notch medical professionals, facilities and technology,’ said Ronnie Tan, CEO of Bowsprit Capital Corporation Ltd, manager of First Reit. ‘Operating in such an environment, Sarang Hospital provides a very niche service in rehabilitative care and enjoys a high occupancy rate throughout the year.’

First Reit also saw the opening of its Mochtar Riady Comprehensive Cancer Centre (MRCCC) in Indonesia yesterday.

Located in the heart of Central Jakarta, the 29-storey MRCCC is said to be the first of such facilities in Indonesia that specialises in cancer diagnostics and treatment.

Moving forward, the healthcare real estate investment trust plans to expand its portfolio size to S$1 billion in the next 2-3 years as it seeks out yield-accretive assets throughout the Asia Pacific region.

The company’s shares rose one cent to close at 80.5 Singapore cents yesterday.