First REIT - CGS-CIMB Research 2020-01-30: Lower Variable Income Dragged Revenue

FIRST REAL ESTATE INV TRUST (SGX:AW9U)

First REIT - Lower Variable Income Dragged Revenue

First REIT's 4Q/FY19 DPU of 2.15/8.60 Scts was in line with our FY19 projection.
Largely stable portfolio performance; clarity over Indonesia master lease renewals could lead to share price re-rating, in our view.
Maintain ADD with a slightly lower DDM-based Target Price. See First REIT Target Price.

FIRST REIT (SGX:AW9U) reported a 1.6% y-o-y decline in 4Q gross revenue to S$28.9m. However, 4Q distribution income was up 0.9% y-o-y at S$17.2m largely due to a slight improvement in net property income margin to 98.1% (from 97.3% at 3QFY18). For FY19, the trust achieved distribution income of S$68.5m, +1.2% y-o-y. See First REIT Announcements.
4Q/FY19 DPU of 2.15/8.60 Scts was within our expectations at 24.9%/99.6% of our FY19 forecast. See First REIT Dividend History.
First REIT reported a S$5.6m revaluation loss on investment properties, lowering its end-FY19 book value to S$0.9994/unit (vs. S$1.0251 at end-FY18).

The drag in 4Q19 topline was due to lower variable rental component for Indonesia properties. 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.

Looking ahead, First REIT had a long weighted average lease expiry of c.7.5 years at end- FY19, with an estimated 22% of its GFA due for renewal in 2021. 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.
Uncertainty over the renewal of the upcoming Indonesian master lease expiries has been a major drag on First REIT’s share price performance.
Our current projections and valuation assume renewal of the four 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 First REIT.

We tweak down our FY20/21F DPU estimates by 2.3%/2.6% post results, on a slightly lower FY19 base. Overall, this led to a slight dip in our DDM-based Target Price. See First REIT Target Price.
While we expect First REIT’s near-term share price to be underpinned by the relatively attractive yield of 8.6%, any outperformance would likely materialise with clarity over its master lease renewals in 2021.
In the medium term, potential geographical diversification could provide more portfolio resilience as well as act as another growth driver.
Downside risks include non-renewal or changes in the terms of the master lease.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-01-30

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