first reit sias 18112010

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www.siasresearch.com UUppddaattee RReeppoorrtt

13 November 2010

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First-Rate Acquisitions To Follow First-Class Results

S$1.210

S$0.960

Intrinsic Value

Prev Close

Main ActivitiesFirst Real Estate Investment Trust (Company)

invests in a diversified portfolio of income

producing real estate used for healthcare and/or

healthcare-related purposes. The Companys

assets are located in Singapore and Indonesia.

Financial Highlights

Dec YE (S$m) FY08A FY09A FY10E

Gross Revenue 29.9 30.2 31.3

Net Prop Income 29.8 29.9 30.2

Distr Earnings 20.8 20.9 21.1

Distr Per Unit (S$) 0.0762 0.0762 0.0763

Non-Curr Assets 324.9 340.9 339.1

Op Cash Flow 20.6 22.7 23.3

Source: Company, Bloomberg, SIAS Research

Key Ratios

Price Earnings (x) 6.91

Price Book (x) 0.92

Return on equity (%) 13.67

Return on assets (%) 10.36

Source: Bloomberg

Indexed Price Chart

First REIT (White)Straits Times Index (Orange)FTSE ST RE Invest Trust Index (Yellow)

Source: Bloomberg

52wks High-Low S$0.990 /S$0.720

Number of Shares 276.532 m

Market Capitalization S$265.47 m

Analyst:Moh Tze Yang, Lead [email protected]: 6227 2107

Update: We maintain our Increase Exposurerating on First REIT (Company), based on anupgraded intrinsic value of S$1.210 - representingan upside of 26.0% over its last traded price ofS$0.960.

Key Developments:

First REIT grew on an impressive set of 2Q10

results by releasing solid 3Q10 numbers on 22nd

October 2010. Gross revenue and net property

income increased 4.6% (3Q10: S$7.9m, 3Q09:

S$7.6m) and 3.7% (3Q10: S$7.8m, 3Q09:

S$7.5m) YoY respectively. Third quarter 2010

distribution amount grew 2.5% YoY (3Q10:

S$5.4, 3Q09: S$5.2m) with distribution per unit

for the period expanding from 1.90 Scts in 3Q09

to 1.94 Scts in 3Q10. On an annualized basis,

DPU also improved YoY from 7.62 Scts in 3Q09

to 7.70 Scts in 3Q10.

On 9th November 2010, the Company

announced that it would be acquiring two

Jakarta hospitals, the Mochtar Riady

Comprehensive Cancer Centre and Siloam

Hospitals Lippo Cikarang for a total

consideration of S$205.5m. Part of the

acquisitions will be funded by a rights issue of

approximately S$172.8m.

Outlook:

First REITs robust portfolio of high-yielding,

medical-related real estate investments has againimpressed with the Companys 3Q10 results coming

in above our prior third quarter estimates. With their

new acquisitions in place, the Company will be above

to increase its asset base, improve its overall

weighted average lease to expiry and importantly

increase DPU and dividend yield. At its current price,

we opine that the Company is still undervalued.

First REIT

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13 November 2010

Figure 5: First REIT rental income by geography

Figure 4: First REIT yield one of S-REIT's highest Figure 4: Consistent quarterly DPU payouts

Geographically, First REITs Indonesian assets generated 86.6%

(S$6.9m) of the Companys 3Q10 revenues, against 86.3% (S$6.5m)

for 3Q09. Going forward, we understand from management that First

REIT will be able to enjoy a variable rental growth component of

1.25% of total gross revenue from their four Indonesian assets in

FY2010. The Companys Singapore assets contributed 13.4%

(S$1.1m) to First REITs top line over 3Q10, compared to 13.7%

(S$1.0m) in 3Q10. As stated in our last update report on First REIT

(First Class 2Q10 Results, 27 July 2010), we continue to expect the

contribution from the Companys Singapore assets to expand further

with the completion of asset enhancement works on the CompanysPacific Cancer Centre@Adam Road. Management has guided that this

project is on track to be completed by mid-2011.

Source: Company

*includes deferred rental income of property under asset enhancement

Source: Company Source: Company

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13 November 2010

New value accretive acquisitions to raise earnings/DPU

Working capital remains healthy on solid current asset base

Healthy Working Capital-Backed Balance Sheet: As at 30th June

2010, First REITs balance sheet position remains solid as at 30 th

September 2010 with net asset value per unit standing at 97.77 Scts

- against end-FY2009s NAV per unit of 98.39 Scts. The Companys

total assets as at end-3Q10 amounted to S$359.3m, comprising

S$346.1m of non-current assets and S$13.2m of current assets.

Total liabilities stood at a total of S$89.2m, accounted for as

S$78.8m of non-current liabilities and S$10.3m of current liabilities.

Total unit holders fund for 3Q10 is a sound S$270.1m. First REITs

working capital, taken as current assets against current liabilities,

stands at a healthy 1.28x as at end-September 2010.

Low Debt Levels: First REITs total debt as at 30th September 2010

was recorded at S$57.3m - an increase of S$4.5m over end-2009s

amount. Interest coverage had fallen from 13.5x to 11.6x with the

Companys debt-to-property ratio rising by from 15.5% as at 31st

December 2009 to 16.5% as at 30th September 2010. That said, we

maintain our view that First REITs gearing is very well managed as

the Companys current level of 16.5% is still significantly below the

regulatory limit of 35%.

Acquisitions Of Two New Assets: On 9th November 2010, First

REIT announced that it would be acquiring two Jakarta hospitals, the

Mochtar Riady Comprehensive Cancer Centre (MRCC) and Siloam

Hospitals Lippo Cikarang (SHLC) for a total consideration of

S$205.5m. MRCC is to be acquired from Wincatch Limited for

S$170.5m and SHLC will be purchased form PT Lippo Karawaci Tbk

for S$35m. To partially finance the acquisitions, First REIT has

announced plans to raise approximately S$172.8m in gross proceeds

through a rights issue to eligible unit holders on a pro-rata basis of

five rights units for every four existing units - at an issue price of

S$0.50 per unit (345,664,382 new units).

Specifically, we understand that the purchase of MRCC as well as

related transaction costs will be completed via:

1) Proceeds from rights issue.

2) New term loan facility of up to S$50m from Oversea-Chinese

Banking Corporation Limited.

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13 November 2010

Figure 6: Mochtar Riady Comprehensive Cancer Centre

While the purchase of SHLC will be completed via:

1) Proceeds from rights issue.

MRCC, to begin operations in December 2010, is a 29 storey, 160

bed location that is to be Indonesias first private comprehensive

cancer treatment center that is equipped with state of the art cancer

treatment and diagnostic facilities. It will be the first facility in the

whole of Indonesia to offer Positron Emission Tomography (PET)

scanning, High Intensity Focused Ultrasound (HIFU) and Radio-

immunotherapy. MRCC is located near Plaza Semanggi, the Aryaduta

Suites Hotel Semanggi as well as other five-star hotels in the central

business district of South Jakarta.

SHLC, which has been in operations since 2002, is a six-storey

hospital with the capacity to accommodate 75 beds by end-2010. Itis situated in the growing residential and industrial areas of East

Jakarta offering a broad range of general and specialist services such

as A&E, orthopedic, neurology, urology, thorax, and cardiovascular

surgery. The hospital also has Centres of Excellence in Urology,

Internal Medicine and Trauma. In particular, SHLC is well-respected

for its Pediatric Neonatal Intensive Care Unit for premature, sick

babies.

Source: Company

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13 November 2010

Figure 7: Siloam Hospitals Lippo Cikarang

Following the acquisition of both assets, management has guidedthat First REITs distribution in projection for 2011 is expected to rise

from 8.57% (distribution yield before acquisition calculated based on

4th November 2010 closing price of S$0.95 per unit) to 9.14%

(distribution yield after acquisition based on TERP of S$0.70 per unit).

This forecast is based on an estimated annualized DPU of 6.40 Scts

for the full financial year ending 31st December 2010, in relation to its

enlarged portfolio and financing through a combination of the

underwritten renounceable rights issue.

In addition, upon completion of the purchase for the two assets, First

REIT management has also expressed that they expect to see an

increase in annual gross rental income of approximately 80% - fromS$30.3m in forecast year 2010 to S$54.5m in projection year 2011

as a result of the enlarged portfolio. Consequent distributable income

is also estimated to rise by 89% from S$21.3m to S$40.3m.

Leverage will also be lowered from 18.6% to 17.25% in projection

year 2011.

Source: Company

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13 November 2010

Figure 8: GFA by business (current/enlarged portfolio)

Figure 9: Gross rental income by geography (current/enlarged portfolio)

We are of the opinion that the acquisitions of MRCC and SHLC hold

significant upside potential for First REIT going forward. Importantly,

with the substantial lack of proper healthcare facilities and qualified

medical practitioners in Indonesia, ownership of such assets becomes

veritable gold mines for landlords. We noted a lack of

understanding and education on the part of the investing communitywith regards to the potential of Indonesian healthcare facilities during

our attendance at First REITs 2Q10 results briefing. That said, the

numbers do not lie and the financial performance capability of First

REITs Indonesian assets is very apparent as results are posted each

quarter. Bearing that in mind, we view the strategic addition of the

two new Indonesian assets as astute and value accretive.

Source: Company

Source: Company

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13 November 2010

First REIT Value Proposition

Figure 10: First REIT internal forecast based on completed acquisitions

The Bottom Line: First REITs robust portfolio of high-yielding,

medical-related real estate investments has again impressed with the

Companys 3Q10 come in above our prior third quarter estimates. All

three core income statement areas of gross revenue, net property

income as well as distributable income registered solid YoY

expansions. This improvement can largely be attributed to the quality

of the Companys Indonesia properties as well as strong demand for

proper healthcare facilities and services in Indonesia. We also expect

First REITs Singapore assets to contribute further to the Companys

top and bottom lines on the completion of asset enhancement works

at the Pacific Cancer Centre@Adam Road. In addition, First REIT has

also confirmed with their tenant on a new extension block to theCompanys Lentor Residence nursing home. The proposed extension

is valued at S$4.5m and is expected to commence after receiving

necessary regulatory approvals.

Significantly, with the announcement of two new asset additions to

First REITs portfolio, we believe that the Company stands to benefit

substantially going forward. Via long term master lease agreements

on both MRCC and SHLC, First REIT is able to take advantage of

increased income stability as well as improve the Companys overall

weighted average lease to expiry (10.6 years as at end-September

2010 to 12.4 years). The REITs absolute asset base will also be

consequently increased, which would raise the profile of the Company

and enhance its competitive positioning and ability to pursue future

acquisitions. For First REIT investors, currently already receiving one

of the highest yield payouts in the S-REIT sector, DPU going into

2011 is forecasted to increase further providing even higher returns.

Source: Company

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Figure 11: First REIT one year price-volume

Figure 12: First REIT portfolio breakdown as at end-September 2010

On the back of the third quarters salient results as well as

forthcoming acquisition of MRCC and SHLC, we have revised our

estimates and valuation on the counter. Based on TERP of S$0.70 per

unit, our model suggests a robust potential 2011 post-acquisitiondividend yield of between 8.91% and 9.33% for investors. We further

upgrade First REIT at a derived intrinsic value of S$1.21 - based on

revised FY11 estimates. At its current price, we opine that the

Company is still undervalued. For prudence, we have not accounted

for the DPU growth potential from the Companys arrangement with

tenants that accords First REIT a percent of these tenants earnings

in our valuation. Recommendation: Increase Exposure

Source: Bloomberg

Source: Company

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Figure 13: First REIT Indonesia asset details as at end-September 2010

Figure 14: First REIT Singapore asset details as at end-September 2010

Source: Company

Source: Company

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Summary Financial Table

(Dec YE)

Total Return (S$m) FY2007A FY2008A FY2009A FY2010E

Gross Revenue 28.3 29.9 30.2 31.3

Net Property Income 28.1 29.8 29.9 30.2

Distributable Earnings 19.3 20.8 20.9 21.1

Distribution Per Unit (S$) 0.0709 0.0762 0.0762 0.0763

Financial Position (S$m) FY2007A FY2008A FY2009A FY2010E

Non-current assets 325.6 324.9 340.9 339.1

Current assets 15.3 14.6 13.7 13.3

Current liabilities 11.9 61.4 10.2 11.1

Non-current liabilities 77.7 23.1 73.4 71.3

Cash Flow (S$m) FY2007A FY2008A FY2009A FY2010E

Operating cash flow 30.0 20.6 22.7 23.3

Investing cash flow -234.5 0.3 -1.9 -1.1

Financing cash flow 218.1 -22.1 -25.6 -22.1

Source: Company, Bloomberg, SIAS Research estimates

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Rating Definition:

Increase Exposure The current price of the stock is significantly lower than the underlying fundamental value. Readers can

consider increasing their exposure in their portfolio to a higher level.Invest The current price of the stock is sufficiently lower than the underlying fundamental value of the firm. Readers canconsider adding this stock to their portfolio.Fairly Valued The current price of the stock is reflective of the underlying fundamental value of the firm. Readers may notneed to take actions at current price.Take Profit The current price of the stock is sufficiently higher than the underlying fundamental value of the firm. Readerscan consider rebalancing their portfolio to take advantage of the profits.Reduce Exposure - The current price of the stock is significantly higher than the underlying fundamental value of the firm.Readers can consider reducing their holdings in their portfolio.

IMPORTANT DISCLOSURE

SIAS Research Pte Ltd received compensation for conducting this valuation research. The estimated fair value ofthe stock is statement of opinion, and not statement of fact or recommendation on the stock.

As of the date of this report, the analyst and his immediate family may own or have positions in any securities mentionedherein or any securities related thereto and may from time to time add or dispose of or may be materially interested in any

such securities. Portfolio structure should be the responsibility of the investor and they should take into consideration theirfinancial position and risk profile when structuring their portfolio. Investors should seek the assistance of a qualified andlicensed financial advisor to help them structure their portfolio. This research report is based on information, which we believeto be reliable. Any opinions expressed reflect our judgment at report date and are subject to change without notice. Thisresearch material is for information only. It does not have regards to the specific investment objectives, financial situation andthe particular needs of any specific person who may receive or access this research material. It is not to be construed as anoffer, or solicitation of an offer to sell or buy securities referred herein. The use of this material does not absolve you of yourresponsibility for your own investment decisions. We accept no liability for any direct or indirect loss arising from the use of thisresearch material. We, our associates, directors and/or employees may have an interest in the securities and/or companiesmentioned herein. This research material may not be reproduced, distributed or published for any purpose by anyone withoutour specific prior consent.

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