First REIT - CGS-CIMB Research 2019-08-06: Stable 2Q19


First REIT - Stable 2Q19

  • First REIT's 2Q/1HFY19 DPU of 2.15/4.3 Scts was in line at 24.4%/48.7% of our FY19F.
  • Stable portfolio performance; clarity over Indonesia master lease renewals could lead to share price outperformance.
  • Maintain ADD with an unchanged Target Price of S$1.23.

First REIT's 2Q19 results highlights

  • First REIT (SGX:AW9U) reported a 0.2% y-o-y rise in 2Q gross revenue to S$29m. However, net property income declined 0.6% y-o-y due to higher operating expenses from the Sarang Hospital in South Korea and Indonesia properties.
  • Distribution income grew 2.3% y-o-y to S$17.1m on lower finance costs and other expenses.
  • 2Q DPU of 2.15 Scts was flat y-o-y and within our expectations at 24.4% of our FY19 forecast.

No refinancing needs till 2021

  • First REIT secured a S$100m syndicated term loan facility in Apr 19 and has extended its debt maturity profile to 2.51 years, with no refinancing due until 2021. An estimated 60% of its total debt are also hedged, thus mitigating interest rate fluctuations.

22% of GFA due for renewal over next 3-5 years

  • First REIT has a long weighted average lease to expiry of 8 years, with an estimated 22% of its GFA due in the next 3-5 years. The closest would be the Sarang Hospital in Aug 2021 and the Siloam Lippo Village, Siloam Kebun Jeruk and Siloam Surabaya hospitals as well as the Imperial Aryaduta Hotel and Country Club, by Dec 2021.

Share price performance hinge on clarity of master lease renewals

  • Uncertainty over the renewal of the upcoming Indonesian master lease expiries has been a major drag to First REIT’s share price performance.
  • First REIT’s Indonesia rental structure comprises a fixed base rental with annual base rental escalation (of 2x percentage increase of Singapore CPI, capped at 2%) plus additional variable rental growth component.
  • Our current projections and valuation assumes renewal of the 4 Indonesian master leases at the last renewal rate as at end-2021. Any reduction in this rate would result in downside risks to our earnings and DDM-based valuation for FIRT.

Maintain ADD

  • We leave our FY19-21F DPU estimates unchanged and maintain our DDM-based Target Price of S$1.23.
  • While we expect First REIT’s near-term share price to be underpinned by the relatively attractive yield of 8.2%, outperformance would likely materialise with clarity over its master lease renewals in 2021.
  • In the medium term, potential geographical diversification could also be another growth driver.
  • Downside risks include non-renewal or change in terms of the master lease.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | 2019-08-06
SGX Stock Analyst Report ADD MAINTAIN ADD 1.230 SAME 1.230