First Reit

First Reit (FREIT): Concerns over the tapering off of the U.S. Federal Reserve’s quantitative easing programme have driven bond yields up and adversely impacted high-yield stocks. While FREIT offers one of the most resilient portfolios given its defensive long-term master leases which has downside revenue protection, OCBC see risks coming from higher borrowing costs in the medium-term as ~72% of its debt is based on a floating rate structure. In the near future, however, short-term interest rates in Singapore are likely to stay low as it is driven by the U.S. federal funds rate, which may only be raised in 2015. With an estimated leverage ratio of 34.0%, OCBC believe that its next major acquisition would likely have to be funded by a combination of both debt and equity, unless it obtains a credit rating. OCBC has a HOLD rating, with TP of $1.20 (from $1.31) due to an increase of its cost of equity from 7.7% to 8.3%. Although FREIT’s FY13F distribution yield of 6.7% represents a spread of ~410 bps over the Singapore 10-year government bond yield, it is still below the historical average spread of 730 bps since its IPO.