• First REIT's 1H20 DPU of 2.3 Scts below expectations, at 27.2% of our FY20F forecast.
• Rent relief to tenants eroded earnings, while uncertainty over master lease expiries are likely to continue drag.
• Reiterate ADD, with a lower DDM-based Target Price of S$0.96.

First REIT's 1H20 Results Highlights

• First REIT (SGX:AW9U) reported a 33% y-o-y decline in 1H20 gross revenue to S$38.6m, due to the rental relief it extended to its tenants. Correspondingly, distribution income and DPU fell 46%/46.5% y-o-y to S$18.4m/2.30 Scts.
• First REIT's 1H20 DPU was below expectations, at 27.2% of our FY20F forecast.

Rental Relief to Tenants Eroded Earnings

• First REIT extended S$19.6m worth of rental relief for the months of May and Jun 2020 to all its tenants in Indonesia, Singapore and South Korea, as its tenants’ operations were impacted by the Covid-19 outbreak. Additionally, First REIT will pass on all property tax rebates to its three Singapore tenants.
• First REIT said that it will continue to monitor the situation and has indicated the possibility of further similar relief in 2H20.

Uncertainty Over Master Lease Expiries Continue to Drag

• Looking ahead, First REIT had a long weighted average lease expiry of 7 years as at end-1H20. An estimated 22% of its GFA is due for renewal in 2021, mainly from Siloam Lippo Village, Siloam Kebun Jeruk and Siloam Surabaya hospitals, as well as the Imperial Aryaduta Hotel and Country Club (due Dec 2021).
• First REIT indicated that the lessees will initiate a rental restructuring process with First REIT, in view of the economic distress caused by the pandemic. Uncertainty over the renewal of these master leases has been a major drag on First REIT's share price performance and would likely continue to hamper outlook until there is better visibility.
• Our current projections and valuation assume renewal of the four 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.

Reiterate ADD

• We tweak down our First REIT's FY20-22F DPU estimates by 1.6-42% as we assume that there will be further rent relief extended to tenants in 2H20. Accordingly, our DDM-based Target Price is lowered to S$0.957. While we expect First REIT’s near-term share price to be underpinned by its relatively attractive yield of 8.8%, any outperformance would likely materialise with clarity over its master lease renewals in 2021.
• In the medium term, potential geographical diversification could provide more portfolio resilience and act as another growth driver.
• Downside risks include non-renewal or changes in the terms of the master leases.

Source: CGS-CIMB Research - 30 Jul 2020