First Real Estate Investment Trust - Growth Path Intact

Results broadly in-line

With locked-in master leases and revenue derived mostly from base rents, full year results came in well, with revenue (+12% YoY), NPI (+15% YoY) and DPU (+7% YoY) in-line with our forecasts. We like the continued DPU growth fuelled by acquisitions, though we keep our target price of S$1.38 unchanged. Full-year DPU of 8.05c translates to a yield of 6.3% - an attractive 4.5% spread over the 10-year risk free rate.

Sheltered from refinancing and interest rate risks

The bridge loan of S$26.5m will be refinanced to a fixed rate loan in 1H15 and come due only in 2019. After which, the earliest debt will come due only from 2017, with ~95% of the total debt hedged on fixed rates. Therefore, there is little interest rate risk in the next 2 years.

Strong potential for upward rerating remains

The potential for yield-accretive acquisitions remains given that First REIT owns only 11 out of 18 hospitals that Siloam currently operates. Management revealed that 29 hospitals remains in the pipeline, of which First REIT has the ROFR. First REIT has also highlighted the potential for asset enhancement at 3 of its original IPO assets. With the distribution reinvestment plan in place, we believe that First REIT may utilize the reinvested capital for acquisition.

Technical Analysis

Daily Chart

Maintain BUY with rerating catalysts in view

Although our target price implies only ~14% upside after including dividends, the fair value may be higher given potential yield accretion from the acquisition pipeline. We note that over the last 5 years, the total returns on First REIT is more than 200% (assuming reinvestment of dividends into the stock). This is in part contributed by 9 acquisitions that enlarged the portfolio size to 16 assets, and we believe that similar acquisitions may continue to propel growth. However, the accretion from each property will likely be at a lower rate than before as future acquisitions are likely to be partly funded by equity (and no longer solely by debt) as First REIT nears the gearing limit of 35%.