• First REIT's 3Q DPU of 2.15 Scts was in line but 9M DPU of 6.45 Scts was slightly below our FY19 projection.
• Largely stable portfolio performance; clarity over Indonesia master lease renewals could lead to share price re-rating.
• Maintain ADD with a slightly lower Target Price of S$1.20.

3Q19 Results Highlights

• FIRST REIT (SGX:AW9U) reported a 1.5% y-o-y decline in 3Q gross revenue to S$28.8m. However, net property income declined a larger 2.5% y-o-y due to higher operating expenses from the Sarang Hospital in South Korea and Indonesia properties.
• Distribution income was up 1.3% y-o-y to S$17.2m on lower finance costs.
• 3Q DPU of 2.15 Scts was within our expectations at 24.4% of our FY19 forecast; however, 9M DPU of 6.45 Scts was slightly below at 73.1% of our FY19 forecast.

Topline Dragged by Lower Variable Income

• The drag in 3Q19 topline was due to lower variable rental component for Indonesia properties. First REIT’s Indonesia rental structure comprises a fixed base rental with annual base rental escalation (of 2x percentage increase of Singapore CPI, capped at 2%) plus additional variable rental growth component.

Share Price Performance Hinges on Clarity of Master Lease Renewals

• Looking ahead, First REIT has a long weighted average lease expiry of 8 years, with an estimated 22% of its GFA due in the next 3-5 years. The closest would be the Sarang Hospital in Aug 2021 and the Siloam Lippo Village, Siloam Kebun Jeruk and Siloam Surabaya hospitals as well as the Imperial Aryaduta Hotel and Country Club, by Dec 2021.
• Uncertainty over the renewal of the upcoming Indonesian master lease expiries has been a major drag on First REIT's share price performance.
• Our current projections and valuation assume renewal of the 4 Indonesian master leases at the last renewal rate as at end-2021. Any reduction in this rate would result in downside risks to our earnings and DDM-based valuation for First REIT.

Maintain ADD

• We tweak down our FY19-21F DPU estimates by 2.1% post results on lower variable income expectations. In addition, we roll forward our DDM assumptions to FY20.
• Overall, this results in a slight dip in our DDM-based Target Price to S$1.20.
• While we expect First REIT’s near-term share price to be underpinned by the relatively attractive yield of 8.2%, outperformance would likely materialise with clarity over its master lease renewals in 2021.
• In the medium term, potential geographical diversification could be another growth driver.
• Downside risks include non-renewal or change in the terms of the master lease.

Source: CGS-CIMB Research - 7 Nov 2019