• First REIT's 1HFY18 DPU of 4.3 Scts was in line with our full-year estimate.
• Stronger 2QFY18 earnings came from new acquisitions and inorganic growth.
• Weighted average lease expiry (WALE) remains long at nine years.
• First REIT is exploring acquisition growth opportunities. Gearing is healthy at 34.2%.
• We reduce our DPU estimates as we factor in the write-off of unamortised loan related costs. Maintain HOLD.

Declared Higher DPU, in Line With Stronger Earnings

First REIT (FIRT)’s 2Q18 gross revenue increased 5.3% y-o-y to S$28.9m while net property income rose 5% to S$28.5m due to full quarter contribution from hospitals acquired in 4Q17 and higher income from its existing properties. But distribution income rose at a smaller rate of 1.6% y-o-y to S$16.9m on higher professional expenses incurred for Indonesia properties and write-off of unamortised loan related costs on refinancing of loans.

1H18 DPU edged up 0.5% y-o-y to 2.15 Scts (48% of our FY18 forecast), partly diluted by higher issuance of management fees in units (94% of total management fees in 2QFY18 vs. 70% in 2QFY17).

Increasing AUM and Strong Portfolio

New contributions came from Yogjakarta acquired in Dec 17. We expect the properties to collectively add S$5.3m to First REIT (FIRT)’s topline, or 4.5% of our FY18 revenue forecast. FIRT now owns 20 properties (S$1.35bn AUM in total) in its portfolio with almost full occupancy.

In terms of its master lease expiry profile, 22% and 34.6% of GFA will expire in the next 3-5 years and within 5-10 years respectively. This translates into a long WALE of nine years.

More Headroom for Acquisitions

First REIT (FIRT) has S$100m around 40 hospitals in Indonesia from its sponsor as well as other third-party assets.

With a gearing of 34.2% as at end-1Q18, it has good debt headroom to pursue further yield-accretive acquisitions and explore asset enhancement initiatives.

Reduce DPU Estimates

We reduce our FY18 DPU estimates by S$2m as management guided that the trust will continue to write off the unamortised loan related expense in the next two quarters. Accordingly, our DDM-based target price is lowered from S$1.44 to S$1.41 (cost of equity 8%).

We think that First REIT is currently fairly valued at 6.6% FY18F DPU yield and 1.2x P/BV. Maintain HOLD.

Upside risk to our call may come from additional acquisitions while downside risks include faster than expected interest rate hike.

Source: CGS-CIMB Research - 18 Jul 2018