2013-6-28_ocbc_firstreit

Not spared from equities sell-down despite defensive attributes

Concerns over the tapering off of the U.S. Federal Reserve’s

quantitative easing programme have driven bond yields up and

adversely impacted high-yield stocks such as First REIT (FREIT).

FREIT’s share price has slumped 18.3% since it reached its peak of

S$1.445 on 29 Apr this year (but stock still up 11.3% YTD). While

FREIT offers one of the most resilient portfolios given its defensive

long-term master leases which has downside revenue protection, we

see risks coming from higher borrowing costs in the medium-term as

~72% of its debt is based on a floating rate structure, according to our

estimates. In the near future, however, short-term interest rates in

Singapore are likely to stay low as it is driven by the U.S. federal funds

rate, which may only be raised in 2015.

Acquisitions appetite dependent on market conditions

Looking ahead, FREIT’s acquisition appetite would be dependent largely

on market conditions. With an estimated leverage ratio of 34.0%, we

believe that its next major acquisition would likely have to be funded by

a combination of both debt and equity, unless it obtains a credit rating.

That said, we believe that FREIT is in no hurry to further expand its

asset base as it only recently completed two DPU accretive acquisitions

from its sponsor Lippo Karawaci.

Not time to bottom-fish yet

We increase our cost of equity assumption from 7.7% to 8.3% as we

take into account the rising bond yields and reduced investor sentiment

for interest rate sensitive stocks. Correspondingly, our fair value

estimate dips from S$1.31 to S$1.20. We believe it is still too early to

bottom-fish despite the sharp correction in FREIT’s share price given

the expected market volatility ahead. In addition, although FREIT’s

FY13F distribution yield of 6.7% represents a spread of ~410 bps over

the Singapore 10-year government bond yield, it is still below the

historical average spread of 730 bps (or 620 bps if we exclude the GFC

period) since its IPO. Maintain HOLD.

VOLATILE TIMES AHEAD • Share price dips 18.3% from peak

• Prudent approach to new acquisitions

• Pare FV and maintain HOLD

28 Jun 2013 Company Update

FIRST REIT | HOLD

Asia Pacific Equity Research

Singapore | REITs

HOLD (maintain) Fair value S$1.20

add: 12m dividend forecast S$0.079

versus: Current price S$1.18

12m total return forecast 8%

Analysts

Wong Teck Ching (Andy) (Lead) ● +65 6531 9817

[email protected]

Kevin Tan ● +65 6531 9810

[email protected]

Key information

Market cap. (m) S$830.8 /

USD657.6

Avg daily turnover (m) S$1.0 /

USD0.8

Avg daily vol. (m) 0.9

52-wk range (S$) 0.9 - 1.45

Free float (%) 65.9

Shares o/s. (m) 704.1

Exchange SGX

BBRG ticker FIRT SP

Reuters ticker FRET.SI

ISIN code AW9U

GICS Sector Financials

GICS Industry REITs

Top shareholder Lippo Karawaci -

33.1%

Relative total return 1m 3m 12m

Company (%) -12 -2 39

STI-adjusted (%) -4 3 26

Price performance chart

0.92

1.06

1.21

1.35

1.50

1.65

Jun-12 Sep-12 Dec-12 Mar -13 Jun-13

2800

3280

3760

4240

4720

5200

Fai r Value FIRT SP FSSTI

Shar e P r i ce (S$ ) I ndex Level

`

Sources: Bloomberg, OIR estimates

Industry-relative metrics

0th 25th 50th 75th 100th

PB

PE

ROE

Beta

M kt Cap

Company Industr y Aver age

Per cent i l e

Note: Industry universe defined as companies under identical GICS classification

listed on the same exchange. Sources: Bloomberg, OIR estimates

Key financial highlights

Year Ended Dec 31 (S$m) FY11 FY12 FY13F FY14F

Gross revenue 54.0 57.6 83.2 92.5

Property operating expenses -0.6 -0.4 -1.1 -1.2

Net property income 53.4 57.2 82.1 91.3

Total distribution to unitholders 43.9 46.0 55.7 61.0

DPU (S cents) 7.0 7.3 7.9 8.6

Cons. DPU (S cents) na na 7.8 8.3

NAV per share (S$) 0.8 0.8 0.9 0.9

Distr yield (%) 5.9 6.2 6.7 7.3

P/NAV (x) 1.5 1.4 1.3 1.4

Total debt/total assets (x) 14.8 25.7 34.0 34.0

Please refer to important disclosures at the back of this document. MICA (P) 004/06/2013

MARKET CAP: USD 658M AVG DAILY TURNOVER: USD 0.8M

OCBC Investment Research Singapore Equities

2

Exhibit 1: FREIT's yield spread over Singapore government 10-year bond yield

Source: Bloomberg, OIR estimates

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%Jan 2

007

Apr

2007

Jul 2007

Oct 2007

Jan 2

008

Apr

2008

Jul 2008

Oct 2008

Jan 2

009

Apr

2009

Jul 2009

Oct 2009

Jan 2

010

Apr

2010

Jul 2010

Oct 2010

Jan 2

011

Apr

2011

Jul 2011

Oct 2011

Jan 2

012

Apr

2012

Jul 2012

Oct 2012

Jan 2

013

Apr

2013

Spread FREIT's annualised yield SG govt 10-year bond yield

Hist average spread = 7.3% Hist avg. spread ex. GFC = 6.2%

Exhibit 2: Singapore Swap Offer Rates (SOR)

Source: Bloomberg, OIR

-1

0

1

2

3

4

5

Jan 2

006

Apr

2006

Jul 2006

Oct 2006

Jan 2

007

Apr

2007

Jul 2007

Oct 2007

Jan 2

008

Apr

2008

Jul 2008

Oct 2008

Jan 2

009

Apr

2009

Jul 2009

Oct 2009

Jan 2

010

Apr

2010

Jul 2010

Oct 2010

Jan 2

011

Apr

2011

Jul 2011

Oct 2011

Jan 2

012

Apr

2012

Jul 2012

Oct 2012

Jan 2

013

Apr

2013

%

1-month 3-month 6-month 12-month 2-year 5-year

Long-term rates

have spiked up

more significantly

than short-term

rates

Recent renewal of two Singapore nursing home master leases

FREIT recently announced on 3 Jun that it has extended the master

leases of two of its Singapore nursing homes (Pacific Healthcare Nursing

Home @ Bukit Merah and Pacific Healthcare Nursing Home II @ Bukit

Panjang) with its existing tenants for an additional term of 10 years each.

Both leases will now expire on 11 Apr 2027 (previously 11 Apr 2017).

The lease structure is similar as before, which is on a triple-net lease

basis with 100%-committed occupancy and annual fixed rental escalation

of 2%. We believe this development will provide FREIT with a stronger

income rental visibility, as its next earliest lease expiry will happen only

in Jun 2017 (see Exhibit 3).


3

Exhibit 3: FREIT's lease expiry profile

Property Lease expiry date

The Lentor Residence Jun 2017

Sarang Hospital Aug 2021

Siloam Hospitals Lippo Village Dec 2021

Siloam Hospitals Kebon Jeruk Dec 2021

Siloam Hospitals Surabaya Dec 2021

Imperial Aryaduta Hotel & Country Club Dec 2021

Mochtar Riady Comprehensive Cancer Centre Dec 2025

Siloam Hospitals Lippo Cikarang Dec 2025

Pacific Healthcare Nursing Home @ Bukit Merah Apr 2027

Pacific Healthcare Nursing Home II @ Bukit Panjang Apr 2027

Siloam Hospitals Manado & Hotel Aryaduta Manado Nov 2027

Siloam Hospitals Makassar Nov 2027

Siloam Hospitals Bali May 2028

Siloam Hospitals TB Simatupang May 2028

Source: Company

Exhibit 4: Dividend Discount Model (DDM) Valuation

Period FY13F FY14F FY15F FY16F FY17F

Distributable amount to unitholders (S$ '000) 55,699 60,974 62,418 64,552 66,947

DPU (S cents) 7.89 8.56 8.69 8.91 9.15

Terminal value (S cents) 127.21

Present value of DPU (S cents) 7.29 7.31 6.85 6.48 91.67

Fair value (S$) 1.20

Current price (S$) 1.18

Potential upside (%) 1.7%

DPU yield (%) 6.7%

Total expected return (%) 8.4%

Assumptions

Cost of equity (%) 8.3%

Terminal growth rate (%) 1.0%

Source: OIR estimates


Company financial highlights

Company financial highlights

Income statement


Gross revenue 54.0 57.6 83.2 92.5

Property operating expenses -0.6 -0.4 -1.1 -1.2

Net property income 53.4 57.2 82.1 91.3

Fees -5.4 -5.8 -8.4 -9.4

Net interest expense -3.7 -4.2 -11.8 -14.3

Other expenses -1.7 -0.1 -0.4 -0.5

Total return before tax 60.6 77.9 88.7 67.1

Income tax expense -9.7 -12.7 -17.7 -13.4

Total return after tax 51.0 65.2 70.9 53.7

Total distribution to unitholders 43.9 46.0 55.7 61.0

Balance sheet

As at Dec 31 (S$m) FY11 FY12 FY13F FY14F

Investment properties 618.0 796.7 1,015.3 1,016.3

Total non-current assets 618.5 797.3 1,015.9 1,016.9

Cash and cash equivalents 32.7 20.5 18.0 17.3

Total current assets 42.2 31.5 33.2 34.2

Total assets 660.6 828.8 1,049.1 1,051.1

Current liabilities ex debt 27.3 32.1 36.4 38.5

Debt 97.8 212.8 357.0 357.0

Total liabilities 155.3 278.8 427.3 429.3

Total unitholders' funds 505.3 550.1 621.8 621.8

Total equity and liabilities 660.6 828.8 1,049.1 1,051.1

Cash flow statement


Net cash from operations 42.6 49.8 62.1 75.7

Increase in invt properties -69.0 -148.8 -191.4 -1.0

Net cash from investing -35.9 -148.7 -191.3 -0.9

Proceeds from unitholders 0.0 28.2 50.0 0.0

Increase in borrowings 38.7 115.6 144.2 0.0

Net cash from financing -1.5 86.7 126.6 -75.4

Net cash flow 5.1 -12.2 -2.5 -0.7

Cash at beginning of year 27.6 32.7 20.5 18.0

Cash at end of year 32.7 20.5 18.0 17.3

Cash and cash equivalents 32.7 20.5 18.0 17.3

Key rates & ratios FY11 FY12 FY13F FY14F

DPU (S cents) 7.0 7.3 7.9 8.6

NAV per share (S$) 0.8 0.8 0.9 0.9

Distr yield (%) 5.9 6.2 6.7 7.3

P/Operating CF (x) 17.4 15.8 13.4 11.1

P/NAV (x) 1.5 1.4 1.3 1.4

NPI margin (%) 98.9 99.3 98.7 98.7

Distr to revenue (%) 81.4 79.9 66.9 65.9

Total debt/total assets (x) 14.8 25.7 34.0 34.0

ROE (%) 10.3 11.7 11.4 8.6

ROA (%) 7.9 7.8 6.8 5.1

Sources: Company, OIR forecasts

Important disclosures


SHAREHOLDING DECLARATION: The analyst/analysts who wrote this report holds/hold NIL shares in the above security. DISCLAIMER FOR RESEARCH REPORT This report is solely for information and general circulation only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connected and associated corporations together with their respective directors and officers may have or take positions in the securities mentioned in this report and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally. Privileged / confidential information may be contained in this document. If you are not the addressee indicated in this document (or responsible for delivery of this message to such person), you may not copy or deliver this message to anyone. Opinions, conclusions and other information in this document that do not relate to the official business of OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connected and associated corporations shall not be understood as neither given nor endorsed. RATINGS AND RECOMMENDATIONS: - OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and trading oriented. - OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. - As a guide, OIR’s BUY rating indicates a total return in excess of 10% based on the current price; a HOLD rating indicates total returns within +10% and -5%; a SELL rating indicates total returns less than -5%. Co.Reg.no.: 198301152E

Carmen Lee Head of Research

For OCBC Investment Research Pte Ltd

Published by OCBC Investment Research Pte Ltd

2013-6-28_ocbc_firstreit

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