• 3Q16 DPU grew 1.9% YoY
• Maiden issuance of perpetual securities
• Increased debt headroom

3Q16 results came in within our expectations

First REIT (FREIT) reported a steady set of 3Q16 results which met our expectations. Gross revenue rose 6.5% YoY to S$26.9m and this was mainly underpinned by contribution from Siloam Hospitals Kupang & Lippo Plaza Kupang which was acquired in Dec 2015. NPI increased by 6.3% to S$26.6m, which translates into a NPI margin of 98.9%. DPU grew at a slower pace of 1.9% YoY to 2.12 S cents due to higher management fees, finance costs and an enlarged unit base. On a 9M16 basis, FREIT’s gross revenue and NPI was up 6.7% and 7.1% to S$80.0m and S$79.1m, respectively. DPU of 6.34 S cents represented growth of 2.1% and constituted 75.7% of our FY16 forecast.

Gearing lowered following issuance of perpetual securities

FREIT carried out its maiden S$60m subordinated perpetual securities issuance on 8 Jul this year as a means of diversifying its sources of funding. The perpetual securities come with a fixed distribution rate of 5.68% per annum for the first five years up to 8 Jul 2021. If they are not redeemed at the first call date, the distribution rate will be reset. Proceeds raised were used to pare down FREIT’s bank borrowings, thus lowering its gearing ratio from 34.1% (as at 30 Jun 2016) to 29.7%. However, the 5.68% distribution rate of the perpetual securities is higher than the ~4% interest rates on FREIT’s bank loans.

Maintain HOLD

Looking ahead, FREIT will continue to source for yield accretive acquisitions given its increased debt headroom. We estimate that it can take on additional borrowings of S$110.6m and S$231.8m before reaching a gearing ratio of 35% and 40%, respectively. We finetune our assumptions but our fair value estimate remains unchanged at S$1.36. Maintain HOLD on FREIT, with the stock trading at FY16F and FY17F distribution yield of 6.2% and 6.0%, respectively.

Source: OCBC Research - 20 Oct 2016