First REIT - Ending FY16 on a stable footing
- 4Q16 DPU grew 1.9% YoY.
- CPI growth expected to be positive in 2017.
- Healthy balance sheet.
4Q16 results met our expectations
- First REIT (FREIT) reported a stable set of 4Q16 results which met our expectations.
- Gross revenue and NPI rose 5.1% and 5.2% YoY to S$27.0m and S$26.7m, respectively, and this was driven largely by contribution from its Siloam Hospitals Kupang & Lippo Plaza Kupang property which was acquired in Dec 2015.
- DPU increased 1.9% to 2.13 S cents.
- For FY16, FREIT’s gross revenue grew 6.3% to S$107.0m and its NPI was up 6.6% to S$105.8m, with the latter forming 99.0% of our full-year forecast.
- DPU of 8.47 S cents represented growth of 2.0% and made up 99.4% of our FY16 projection.
- In terms of portfolio valuation, FREIT recorded a net fair value loss of S$8.9m for its investment properties in FY16 as the valuers ascribed more conservative growth rates for its Indonesian properties.
Higher expected inflation augurs well for FREIT
- According to median Bloomberg consensus projections, Singapore’s inflation is expected to come in at 1.0% in 2017 and 1.2% in 2018.
- Should this materialise, it would be a welcome reprieve for FREIT as the annual base rental revision for its Indonesian properties is pegged to two times Singapore’s Consumer Price Index growth (subject to a floor of 0% and cap of 2%).
- Inflation was negative for the first ten months of 2016 and was flat YoY in Nov.
- We incorporate this latest set of full-year results in our model, and make some tweaks to our forecasts.
- We also raise our cost of equity assumption from 7.4% to 7.7% as we factor in a higher risk-free rate of 2.7% (previously 2.4%) and beta given the higher interest rate environment and increased volatility in the financial markets.
- Rolling forward our valuations, our fair value estimate is lowered from S$1.36 to S$1.32.
- While we like FREIT for its healthy balance sheet (gearing of 30.8% as at end-FY16) and exposure to Indonesia’s robust healthcare sector, we maintain our HOLD rating on the stock as we see limited upside potential at current price level.