First REIT - OCBC Investment 2017-10-24: Relative Value Emerges

First REIT - OCBC Investment 2017-10-24: Relative Value Emerges FIRST REAL ESTATE INV TRUST AW9U.SI

First REIT - Relative Value Emerges

  • In-line set of 3Q17 results.
  • More dry powder for acquisitions.
  • Upgrade to BUY.

3Q17 results were in-line with expectations 

  • First REIT’s (FREIT) 3Q17 gross revenue and NPI grew 3.3% YoY and 3.2% YoY to S$27.8m and S$27.5m, respectively. Contribution from Siloam Hospitals Labuan Bajo, coupled with higher rental income from existing properties in Indonesia, Singapore and South Korea, collectively helped to boost the top-line in 3Q17. DPU rose 0.9% YoY to 2.14 S-cents, forming 25.2% of our full-year projection. 
  • On a 9M17 basis, DPU is up 1.3% YoY at 6.42 S-cents, constituting 75.7% of our full-year forecast.

Dual tailwinds of acquisitions and inflation 

  • First REIT (FREIT) has completed the acquisition of Siloam Hospitals Buton and Lippo Plaza Buton for a consideration of S$28.5m on 10 October 2017. We believe this transaction will be DPU-accretive from 4Q17 onwards, and have duly incorporated this into our model. 
  • Separately, FREIT is also seeking to conduct a joint acquisition of a DPU-accretive integrated development in Yogyakarta.
  • While these should wrap up transactional activity in 2017 nicely, we believe that more could be in store for 2018. Based on our estimates, FREIT’s gearing level of 32.6% as at 30 September 2017 should translate into ~S$172m of debt headroom before reaching 40.0%, which should comfortably support potential acquisitions from its sponsor’s pipeline of ~40 hospitals. 
  • Positive base rental revisions should also be achievable, with the latest reported inflation for Jan-Sep 2017 coming in at a 0.6% YoY increase. The median Bloomberg consensus for 2017’s CPI currently stands at 0.8% YoY.

Time to play catch-up 

  • First REIT (FREIT)’s valuation against Parkway Life REIT (PLREIT) has widened substantially. First REIT currently trades at a FY17F P/B ratio of 1.37x, lower than Parkway Life REIT's 1.64x (based on Bloomberg’s consensus). 
  • Over a 5-year period, Parkway Life REIT typically trades at a premium of 14.6% over First REIT, and this has now grown to 19.8%.
  • Having considered First REIT’s increasingly stable portfolio, gradual appetite for acquisitions, as well as a benign inflationary environment, we believe First REIT’s share price is comparatively undervalued and the current valuation gap could potentially narrow. Against this backdrop, we lower our Beta assumption and our cost of equity drops from 7.7% to 7.5%. Consequently, we increase our fair value from S$1.38 to S$1.44 and upgrade our rating from Hold to BUY.

Joseph Ng OCBC Investment | http://www.ocbcresearch.com/ 2017-10-24
OCBC Investment SGX Stock Analyst Report BUY Upgrade HOLD 1.44 Up 1.380