First REIT 4Q13 DPU rises 14.5% YoY

FY13 results in-line with our expectations
First REIT (FREIT) reported a 48.2% YoY increase in gross revenue to S$22.8m and a 14.5% growth in DPU to 1.97 S cents in 4Q13. This culminated in FY13 gross revenue and DPU growth of 44.5% and 14.3% (excluding exceptional gains distribution of 0.68 S cent in FY12) to S$83.3m and 7.52 S cents, and closely matched our revenue and DPU forecast of S$83.2m and 7.54 S cents, respectively. This growth was driven by contribution from new acquisitions (two hospitals acquired each in Nov 2012 and May 2013) and organic growth. On the flipside, FREIT’s Sarang Hospital in South Korea registered a net property loss of S$297k in FY13 due to rental provisions made. Nevertheless, we believe this situation has now been resolved as FREIT has agreed to a lower rental structure to ensure the sustainability of Sarang Hospital’s operations. In addition, this asset contributed only
2.4% of FREIT’s FY13 revenue and we do not expect this event to adversely impact its business.

Exchange rate stability will be key priority
According to FREIT, its sponsor Lippo Karawaci has a strong pipeline of 24 hospitals to which FREIT has a right-of-first-refusal. In our view, this provides FREIT with a stream of acquisition targets to tap on the growing demand of private healthcare services in Indonesia. Given the sharp volatility in the IDR exchange rate, we believe FREIT’s key priority in any lease terms negotiation would be to maintain its base rental denomination in SGD.

Maintain BUY with slightly higher S$1.19 fair value
FREIT’s debt-to-assets ratio stood at 31.9% as at end FY13. With little debt headroom available given FREIT’s 35% gearing limit, we believe any future acquisitions would have to be financed partly by equity. We trim our FY14 and FY15 DPU forecasts marginally by 1.5%, on lower revenue and higher finance costs assumptions. But as we roll forward our valuations, our DDM-derived fair value estimate inches up from S$1.18 to S$1.19. Maintain BUY on FREIT as FY14F distribution yield remains attractive at 7.9%.