• 4Q16 DPU grew 1.9% YoY
• CPI growth expected to be positive in 2017
• Healthy balance sheet

4Q16 results met our expectations

First REIT (FREIT) reported a stable set of 4Q16 results which met our expectations. Gross revenue and NPI rose 5.1% and 5.2% YoY to S$27.0m and S$26.7m, respectively, and this was driven largely by contribution from its Siloam Hospitals Kupang & Lippo Plaza Kupang property which was acquired in Dec 2015.

DPU increased 1.9% to 2.13 S cents. For FY16, FREIT’s gross revenue grew 6.3% to S$107.0m and its NPI was up 6.6% to S$105.8m, with the latter forming 99.0% of our full-year forecast. DPU of 8.47 S cents represented growth of 2.0% and made up 99.4% of our FY16 projection. In terms of portfolio valuation, FREIT recorded a net fair value loss of S$8.9m for its investment properties in FY16 as the valuers ascribed more conservative growth rates for its Indonesian properties.

Higher expected inflation augurs well for FREIT

According to median Bloomberg consensus projections, Singapore’s inflation is expected to come in at 1.0% in 2017 and 1.2% in 2018. Should this materialise, it would be a welcome reprieve for FREIT as the annual base rental revision for its Indonesian properties is pegged to two times Singapore’s Consumer Price Index growth (subject to a floor of 0% and cap of 2%). Inflation was negative for the first ten months of 2016 and was flat YoY in Nov.

Maintain HOLD

We incorporate this latest set of full-year results in our model, and make some tweaks to our forecasts. We also raise our cost of equity assumption from 7.4% to 7.7% as we factor in a higher risk-free rate of 2.7% (previously 2.4%) and beta given the higher interest rate environment and increased volatility in the financial markets.

Rolling forward our valuations, our fair value estimate is lowered from S$1.36 to S$1.32. While we like FREIT for its healthy balance sheet (gearing of 30.8% as at end-FY16) and exposure to Indonesia’s robust healthcare sector, we maintain our HOLD rating on the stock as we see limited upside potential at current price level.

Source: OCBC Research - 19 Jan 2017