First REIT

First REIT: AmFraser initiates coverage with a BUY rating and a fair value of $1.38. First REIT’s 6.4% FY15F yield is anchored by long master leases, with ~95% of the rental income from Indonesia’s healthcare sector backed by Lippo Karawaci and Siloam Hospitals. First REIT stands to benefit from its sponsor’s huge asset pipeline which may continue to offer very attractive yield. Distribution underpinned by long master leases. First REIT boasts of a long portfolio WALE of 10.7 years, with the first renewal coming due only on 2017. As ~98% of the rents are priced and paid in SGD with rental growth rates at twice Singapore CPI growth, subject to a cap of 2% and a floor of 0%, the long master leases offers a partial hedge against inflation. A huge asset pipeline ahead. After acquiring 12 properties and enlarging the portfolio nearly fourfold to S$1.2b since IPO in 2006, we estimate that 28 more assets remain in the pipeline. Typically acquired at high 9% to high 10% rental yield with at least 9% discount to valuation, the acquisitions have been highly accretive to DPU and NAV. Asset sustainability with long lifespan. The Indonesia assets, which constitute ~96% of property valuation, are on Hak Guna Bangunan (Right to Build), which is essentially leasehold tenure. Nevertheless, there is a possibility for renewal after the expiration of the initial lease period of 30 years and an additional term of 20 years. Meanwhile, First REIT is poised to benefit from the developments in the Indonesia healthcare market. The house sees a 15% upside (incl dividends) with its DDM-derived price target. The target price could prove to be conservative, given that it is based only on the current portfolio of assets. If we assume that First REIT acquires another 6 properties with purchase and lease details (e.g. size of asset and NPI yield) that is similar to the average of the most recent 6 acquisitions.