First Reit — First among equals?

OCBC Securities issued a report a few days ago.

First Reit’s Q4 2010 results were within expectations. Gross revenue declined 0.2 per cent y-o-y but increased 0.2 per cent q-o-q to $7.65 million; net property income decreased 0.3 per cent y-o-y but increased 0.5 per cent q-o-q to $7.56 million; while distributable income increased 2.8 per cent y-o-y and 1.6 per cent q-o-q to $5.43 million. FY2010 gross revenue increased 0.4 per cent to $30.27 million, which was 0.2 per cent above our estimates; it would have increased 4.4 per cent to $31.49 million if we include the deferred rental income from Pacific Cancer Centre’s asset enhancement initiative. Net property income grew 0.1 per cent to $29.88 million, which formed 99.9 per cent of our estimates.

Distributable income for the same period rose 1.8 per cent to $21.35 million and was 1.4 per cent higher than our forecast.

First Reit’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. First Reit’s Indonesian properties formed 86.7 per cent of its gross revenues (including the deferred income from Pacific Cancer Centre) for FY2010, and we expect Indonesia to play an even more pivotal role in First Reit’s development.

We opine that First Reit’s two new Indonesian hospital acquisitions in December 2010 will drive its earnings momentum moving forward, underpinned by the expanding healthcare market in Indonesia. We predict that First Reit’s gross revenue and distributable income will jump by 80.6 per cent and 88 per cent to $54.66 million and $40.12 million respectively in FY2011, as contributions from the two hospitals kick in.

Management believes that the healthcare market in Asia, particularly Indonesia, is under-served and has good growth potential. As such, First Reit will continue to be on the lookout for new yield-accretive healthcare properties. In our opinion, this is likely to come from its sponsor Lippo Karawaci as First Reit has a first right of refusal to Lippo’s healthcare assets. We also expect any new acquisitions to be funded by debt, given First Reit’s healthy gearing ratio of 16.6 per cent (our FY2011 estimate), which implies ample debt headroom of $183.8 million before hitting the regulatory limit of 35 per cent.

We believe that First Reit’s current valuations are still compelling, boosted by its attractive yield (estimated yield of 8.3 per cent in FY2011). Future growth will be supported by its stable master lease terms, which have downside revenue protection and built-in step-up rental features. We continue to like First Reit’s strong sponsor support as well as its management’s execution capabilities. Maintain ‘buy’ with a new RNAV-derived fair-value estimate of $0.82, as we incorporate the latest figures into our assumptions.
BUY

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