First REIT

OCBC on 26 Jul 2012

First REIT’s (FREIT) 2Q12 results were within our expectations. Gross revenue, distributable amount to unitholders and DPU rose 6.1%, 23.1% and 22.2%YoY to S$14.0m, S$12.2m and 1.93 S cents, respectively. For 1H12, gross revenue rose 6.2% YoY to S$28.0m and constituted 47.4% of our full-year projection. DPU increased 22.2% to 3.86 S cents and formed 50.1% of our FY12 forecast if we exclude a special distribution arising from an asset divestment. Looking ahead, we believe that acquisitions are possible in 2H12, which could be financed by a combination of debt and equity, given its current rich valuations. FREIT trades at FY12F P/B of 1.23x, a significant 26% premium to the S-REIT universes’ average P/B of 0.98x. Hence we downgrade FREIT from Buy to HOLD on valuation grounds, with an unchanged fair value estimate of S$0.96.

2Q12 results were within expectations
First REIT’s (FREIT) 2Q12 results were within our expectations. Gross revenue increased 6.1% YoY to S$14.0m. This was driven by contribution from its Sarang Hospital which was acquired in Aug 2011 and higher rental income from its remaining portfolio. Distributable amount to unitholders and DPU jumped 23.1% and 22.2%YoY to S$12.2m and 1.93 S cents, respectively. This is payable on 29 Aug 2012 (ex-div: 30 Jul). The hike in DPU was boosted by a special distribution of S$2.2m (S$0.34 per unit) which arose from a gain from the sale of the Adam Road property. This is the last tranche of special distribution arising from this divestment gain. Sequentially, revenue and DPU were both flat. For 1H12, gross revenue rose 6.2% YoY to S$28.0m and constituted 47.4% of our full-year projection. DPU increased 22.2% to 3.86 S cents. Excluding the special distribution highlighted earlier, DPU would have formed 50.1% of our FY12 forecast.

Acquisitions likely to complement organic growth
Looking ahead, we believe that acquisitions could possibly take place in 2H12, given FREIT’s low leverage ratio of 15.1% and ongoing negotiations with its sponsor Lippo Karawaci over the past several months. We had previously factored in acquisitions amounting to S$88.9m in our model assumptions, with details delineated in our 29 Jun 2012 report.

Downgrade to HOLD on valuation grounds
Following our last upgrade on FREIT to Buy on 29 Jun 2012, the stock has since appreciated 6.0%, outperforming both the STI and FTSE ST RE Invest Trust Index. Although FREIT offers an FY12F yield of 7.6% (6.9% if we strip out the special gain distributions), while providing income streams that are largely resilient in nature given its long-term master leases, valuations appear rich at current price level, in our opinion. The stock trades at FY12F P/B of 1.23x, a significant 26% premium to the S-REIT universes’ average P/B of 0.98x. Hence we downgrade FREIT from Buy to HOLD on valuation grounds, with an unchanged fair value estimate of S$0.96. We believe that it is also possible for FREIT to fund its next acquisitions via a combination of debt and equity given its current rich valuations.