First REIT

OCBC on 23 Apr 2012

First REIT (FREIT) reported its 1Q12 results which were within our expectations. Gross revenue rose 6.3% YoY to S$14.0m, meeting 24.6% of our FY12 forecast. Distributable income and DPU jumped 22.7% and 22.2% YoY to S$12.1m and 1.93 S cents, respectively. This constituted 24.5% and 24.8% of our full-year forecasts, respectively, if we exclude a special distribution of S$2.2m. We see both organic and inorganic growth as drivers for FREIT in FY12. Although conditions in the healthcare sector remain buoyant, we ease our revenue growth assumptions for some of FREIT’s hospitals. But as we also update our WACC assumptions by incorporating a lower equity risk premium, our RNAV-derived fair value estimate is lifted from S$0.89 to S$0.935. Given the 21.7% YTD appreciation in FREIT’s share price, we downgrade the stock from Buy to HOLD on valuation grounds.

1Q12 results within expectations
First REIT (FREIT) reported its 1Q12 results which were within our expectations. Gross revenue rose 6.3% YoY to S$14.0m, meeting 24.6% of our FY12 forecast. Distributable income and DPU jumped 22.7% and 22.2% YoY to S$12.1m and 1.93 S cents, respectively. Excluding a special distribution of S$2.2m arising from a gain from the sale of a property, distributable income and DPU constituted 24.5% and 24.8% of our full-year forecasts, respectively. This distribution is payable on 30 May 2012 (ex-dividend: 26 Apr 2012).

Growth drivers in FY12
Organic growth for FREIT would likely be relatively stable in FY12. We expect positive base rental reversion of 2% for its Indonesian assets. FY12 will also see positive impact from: 1) a full year contribution from its Sarang Hospital (acquired in Aug 2011), 2) kick in of variable rental from its Siloam Hospitals Lippo Cikarang, 3) additional rental income from the completion of its Lentor Residence asset enhancement initiative (AEI) in 2H12, and 4) possible new acquisitions in the coming months.

Downgrade to HOLD on valuation grounds
Lippo Karawaci (Lippo), FREIT’s sponsor, has high aspirations for its Hospitals division given the bright growth prospects in the healthcare sector. While the hospitals owned by FREIT and operated by Lippo continued to exhibit growth with higher revenue reported in FY11 as compared to the preceding year, we note that the growth rates of some of these hospitals have eased (partly due to higher base effect). This would translate into lower variable rental for FREIT should this trend persist, given that the variable rental component is a function of the hospital’s preceding year revenue growth rate. We lower our estimates for some of FREIT’s hospital revenue growth, but our RNAV-derived fair value estimate is lifted from S$0.89 to S$0.935 as we also update our WACC assumptions by incorporating a lower equity risk premium. Given FREIT’s strong share price performance this year (+21.7% YTD), we downgrade the stock from Buy to HOLD on valuation grounds.