First REIT First-Rate Performance Increase Exposure Intrinsic Value Prev Closing S$1.100 S$0.880 Update: First REIT ( Company ) announced its financial year 2010 first quarter results on 23 rd April 2010. We upgrade the Company with an Increase Exposure rating, based on an intrinsic value of S$1.100 - representing an upside of 25% over its last traded price of S$0.880. Key Developments: On the back of a robust FY2009 performance that saw the Company achieve gross revenues of S$30.2m and net property income of S$29.9m, First REIT recorded a 1Q2010 gross revenue amount of S$7.5m and net property income figure of S$7.3m. Total distributable amount for the quarter stood at S$5.2m and distribution per unit for the period was S$0.0190. On a year-on-year basis, First REIT has impressively posted 1Q2010 gains in all three core areas of gross revenue (+0.6%), net property income (+0.3%) as well as distributable income (+1.3%). Distribution per unit was also superior to 1Q2009 s S$0.0188. As at 21 st April 2010, based on a share of price of S$0.865, the Company s distribution yield stood at a solid 8.9% Main Activities First Real Estate Investment Trust ( Company ) invests in a diversified portfolio of income producing real estate used for healthcare and/or healthcare-related purposes. The Company s assets are located in Singapore and Indonesia. Financial Highlights Dec YE (S$m) FY08A FY09A FY10E Gross Revenue 29.9 30.2 31.3 Net Prop Income 29.8 29.9 30.2 Distr Earnings 20.8 20.9 21.1 Distr Per Unit (S$) 0.0762 0.0762 0.0763 Non-Curr Assets 324.9 340.9 339.1 Op Cash Flow 20.6 22.7 23.3, Bloomberg, SIAS Research estimates Key Ratios Price Earnings (x) 6.72 Price Book (x) 0.89 Return on equity (%) 13.67 Return on assets (%) 10.36 Indexed Price Chart First REIT (White) Straits Times Index (Orange) FTSE ST Real Estate Index (Yellow) For 1Q2010, First REIT s interest coverage and debt-to-property ratio stands at very respectable 12.1 times and 15.7% respectively. The Company s debt level is significantly below the regulatory gearing limit of 35%. Outlook: First REIT s share price has grown over 24% since our last update report. We like the Company for its stellar FY2009 and 1Q2010 financial performance. First REIT has also maintained its robust distribution per unit payout, while boosting one of the highest yields in the S-REIT sector. We maintain our position on the counter as a first-rate defensive income generator and are of the opinion that at its current price, First REIT is still undervalued. 52wks High-Low Shares Outstanding Market Capitalization Analyst: Moh Tze Yang tzeyang@siasresearch.com Tel: 6227 2107 S$0.880/S$0.555 275.972 m S$242.86 m Page 1 of 7
Solid Income Growth Going From Strength To Strength: First Real Estate Investment Trust ( Company ) announced their financial year 2010 first quarter earnings on 23 April 2010. On the back of a robust FY2009 fullyear performance that saw the Company achieve gross revenues of S$30.2m and net property income of S$29.9m, First REIT recorded a 1Q2010 gross revenue amount of S$7.5m and net property income figure of S$7.3m. Total distributable amount for the quarter stood at S$5.2m and distribution per unit for the period was S$0.0190. On a year-on-year ( YoY ) basis, First REIT has impressively posted gains in all three core areas of gross revenue (+0.6%), net property income (+0.3%) as well as distributable income (+1.3%). Distribution per unit ( DPU ) was also superior to 1Q2009 s S$0.0188. As at 21 st April 2010, based on a share of price of S$0.865, the Company s distribution yield stood at a solid 8.9%. Geographically, First REIT s Indonesian assets generated 90.3% (S$6.7m) of the Company s 1Q2010 revenues. This represents a 3.8% YoY growth over 2009 s performance. Revenue contribution from First REIT s Singapore assets however moved in the opposite direction, sliding from 13.5% to 9.7% YoY. This has been attributed to the deferment of rental income from Pacific Cancer Centre@Adam Road. Refurbishment works begin in November 2009 on the centre and is slated to be complete by mid-2011. Robust Balance Sheet With Low Debt A Solid Base To Build On: ST March 2010, First REIT s balance sheet position remained sturdy with net asset value ( NAV ) per unit standing at S$0.9816 - against end-fy2009 s NAV per unit of S$0.9839. At end-1q2010, the Company s total assets amounted to S$355.6m, consisting of S$341.8m of non-current assets and S$13.8m of current assets. Total liabilities stood at a total of S$84.9m, accounted for as S$74.6m of non-current liabilities and S$10.3m of current liabilities. Total unit holders fund was a sound S$270.6m. Figure 1: First REIT 1Q2010 YoY performance (S$m) S$m 1Q2010 1Q2009 Figure 2: Rental income by geography, 1Q2010 against 1Q2009 (S$m) Figure 3: First REIT maintains a robust balance sheet position % Change Gross Revenue 7.5 7.4 0.6 Net Property Income 7.3 7.3 0.3 Distributable Amount 5.2 5.2 1.3 Distribution Per Unit (S$) 0.0190 0.0188 1.1 S$m Mar 2010 Dec 2009 Total Assets 355.6 354.7 Total Liabilities 84.9 83.6 Unit holders' Funds 270.6 271.0 NAV/unit (S$) 0.9816 0.9839 Page 2 of 7
Taken relative to the Company s 31 st December 2009 position, First REIT had expanded its asset base in the first quarter of 2010 with total asset growth of 0.3%. This can be mainly attributed to an increase in investment properties recorded in the Company s books. Total liabilities also increased (+1.6%) on the back of larger bank borrowings of S$53.2m. Conservatively Geared: First REIT s total debt as at end-2009 was valued at S$52.8m. On 31 st March 2010, total debt recorded had increased to S$53.8m. Interest coverage had fallen from 13.5 times to 12.1 times. Consequently, between the end of FY2009 and 1Q2010, the Company s debt-toproperty ratio had risen marginally by 0.2% to a still very respectable 15.7%. Figure 4: First REIT has managed gearing well Mar 2010 Figure 5: First REIT quarterly DPU breakdown Dec 2009 Total Debt (S$m) 53.8 52.8 Interest Cover (x) 12.1 13.5 Debt-To-Property (%) 15.7 15.5 Going forward, we understand that the cost of asset enhancement works on Pacific Cancer Centre@Adam Road will be funded through debt. Total cost of the enhancement has been estimated at S$18.6m. Management has guided that First REIT s gearing will be raised from its 1Q2010 level of 15.7% to just below 20%. We are unconcerned as yet despite the pending increase in gearing levels. As the current regulatory gearing limit stands at 35%, First REIT s forecasted higher debt level is still significantly below the mandatory bound. Superior DPU And Yield Providing Investors With Value: First REIT has consistently maintained a healthy quarterly DPU of between S$0.0185 and S$0.0194 since 1Q2008. The Company s 1Q2010 distribution of S$0.0190 represents a 1.1% YoY growth over 1Q2009 s S$0.0188 amount. On an annualized basis, the Company s 2010 first quarter DPU equates to a full year figure of S$0.0771. Coupled with an impressive distribution payout track record, First REIT s yield of 8.9% (based on a closing price of S$0.865 as at 21 st April 2010) currently stands as one of the highest in the S-REIT sector. Figure 6: S-REIT sector yield comparison (as at 21 st April 2010) Page 3 of 7
First REIT Value Proposition The Bottom Line: First REIT S financial year 2009 performance had surpassed our earlier estimates. The Company s 1Q2010 earnings has also surprised on the upside as the anti-cyclical nature of their medical-related real estate investments and consistency of their revenue stream shone through. Astute investment decisions have allowed the Company to grow gross revenue, net property income as well as distributable income YoY. Aside, First REIT has maintained its robust DPU payout, while boosting one of the highest yields in the S- REIT sector. We understand that going forward; First REIT will have a broader mandate to invest in a wider range of income-producing assets within the healthcare sector. We are further encouraged by management s clear direction for the year ahead. Figure 7: First REIT one year price-volume movement Since our previous update report on the Company (First s Impression Lasts, 11 November 2009), First REIT s share price movement has increased by over 24%. Yet, we are of the opinion that the full earnings potential of the REIT s underlying assets has not been fully priced in. Pockets of investors may still be implementing an unnecessarily high risk premium on the Company as a result of apprehension over the quality of their Indonesian assets. That said, based on the Company s financial performance over FY2009 and into 1Q2010, we uphold our view that the market s opinion is erroneous and that investors fear of First REIT s assets are fuelled by ignorance as opposed to logic. We maintain our position on First REIT as a firstrate defensive income generator and upgrade the counter at a derived intrinsic value of S$1.10 - based on revised FY2010 estimates. We believe that at its current price, First REIT is still undervalued. We also remind investors that our valuation does not account for the DPU growth potential from the Company s arrangement with tenants that accords First REIT a percent of these tenant s earnings. Recommendation: Increase Exposure Page 4 of 7
Summary Financial Table (Dec YE) Total Return (S$m) FY2007A FY2008A FY2009A FY2010E Gross Revenue 28.3 29.9 30.2 31.3 Net Property Income 28.1 29.8 29.9 30.2 Distributable Earnings 19.3 20.8 20.9 21.1 Distribution Per Unit (S$) 0.0709 0.0762 0.0762 0.0763 Financial Position (S$m) FY2007A FY2008A FY2009A FY2010E Non-current assets 325.6 324.9 340.9 339.1 Current assets 15.3 14.6 13.7 13.3 Current liabilities 11.9 61.4 10.2 11.1 Non-current liabilities 77.7 23.1 73.4 71.3 Cash Flow (S$m) FY2007A FY2008A FY2009A FY2010E Operating cash flow 30.0 20.6 22.7 23.3 Investing cash flow -234.5 0.3-1.9-1.1 Financing cash flow 218.1-22.1-25.6-22.1, Bloomberg, SIAS Research estimates Summary Ratios & Peer Comparison Specialty REITS P/E ROE P/B ROA First REIT 6.72 13.67 0.89 10.36 CDL Hospitality Trusts 23.74 5.56 1.32 4.37 Parkway Life REIT 11.00 8.86 0.96 6.45 First REIT Portfolio Breakdown Page 5 of 7
Indonesia Portfolio Singapore Portfolio Page 6 of 7
Rating Definition: Increase Exposure The current price of the stock is significantly lower than the underlying fundamental value higher level. Invest The current price of the stock is sufficiently lower than the underlying fundamental value of the firm. Readers can consider adding this stock to their portfolio. Fairly Valued The current price of the stock is reflective of the underlying fundamental value of the firm. Readers may not need to take actions at current price. Take Profit The current price of the stock is sufficiently higher than the underlying fundamental value of the firm. Readers can consider rebalancing their portfolio to take advantage of the profits. Reduce Exposure - The current price of the stock is significantly higher than the underlying fundamental value of the firm. Readers can consider reducing their holdings in their portfolio. IMPORTANT DISCLOSURE SIAS Research Pte Ltd received compensation for conducting this valuation research. The estimated fair value of the stock is statement of opinion, and not statement of fact or recommendation on the stock. As of the date of the report, the analyst and his immediate family do not hold positions in the securities recommended in this report. This research report is based on information, which we believe to be reliable. Any opinions expressed reflect our judgment at report date and are subject to change without notice. This research material is for information only. It does not have regards to the specific investment objectives, financial situation and the particular needs of any specific person who may receive or access this research material. It is not to be construed as an offer, or solicitation of an offer to sell or buy securities referred herein. The use of this material does not absolve you of your responsibility for your own investment decisions. We accept no liability for any direct or indirect loss arising from the use of this research material. We, our associates, directors and/or employees may have an interest in the securities and/or companies mentioned herein. This research material may not be reproduced, distributed or published for any purpose by anyone without our specific prior consent. Page 7 of 7