• 1Q17 DPU grew 1.4% YoY
• Gearing remains healthy
• Awaiting acquisitions

1Q17 Results Met Our Expectations

First REIT (FREIT) reported a steady set of 1Q17 results which met our expectations. Gross revenue and NPI both rose 2.5% YoY to S$27.2m and S$26.9m, respectively, and formed 24.8% of our FY17 forecasts. Growth was driven largely by a full-quarter contribution from the acquisition of Siloam Hospitals Labuan Bajo, which was completed in Dec 2016. DPU edged up 1.4% YoY to 2.14 S cents, and was partly boosted by the REIT Manager’s decision to take 92.0% of its management fees in units (1Q16: 70.1%). 1Q17 DPU constituted 25.6% of our fullyear projection.

Focus Will Remain on Indonesia

Singapore’s last reported inflation data for the month of Feb stayed in positive territory, coming in at 0.7% YoY (Jan-Feb 2017 +0.6% YoY). This would be supportive of FREIT’s base rental revision for its Indonesian properties which is pegged to two times Singapore’s Consumer Price Index growth (subject to a floor of 0% and cap of 2%).

Looking ahead, FREIT will continue to seek growth from Indonesia as its key focal market. This is buttressed by its right-of-firstrefusal agreement with its sponsor, Lippo Karawaci, over its expanding pipeline of more than 40 hospitals.

Lippo Karawaci highlighted in its FY16 annual report that the Indonesian government’s move to merge all healthcare programmes under the BPJS Healthcare programme has increased healthcare awareness among Indonesians and led to a jump in demand, especially for low-to-middle income patients.

Keeping Our HOLD Rating

We have not factored in any potential acquisitions in our forecasts. Hence we see room for upward revision to our DPU estimates should management pursue accretive acquisitions for the remainder of the year, supported by its healthy gearing ratio of 30.8%, as at 31 Mar 2017. Potential size of acquisitions for 2017 may amount to S$100m-S$150m, in our view.

Based on our calculations, FREIT has debt headroom of S$86.3m and S$205.2m before reaching gearing levels of 35% and 40%, respectively. We maintain HOLD and S$1.32 fair value estimate on FREIT. We believe a more favourable entry point would be S$1.25 and below.

Source: OCBC Research - 19 Apr 2017