FREIT’s revenue surges 79.2% to S$13.7m in 3Q11

3Q11 DPU of 1.92 S cents. First REIT reported a set of 3Q11 results which were within our expectations (excluding any one-off distribution). Gross revenue surged 79.2% YoY to S$13.7m due largely to new contributions from three of its recently-acquired properties; while distributable amount to unitholders jumped 125.7% YoY to S$12.1m. The latter was boosted by a one-off gain distribution of S$2.2m arising from the total gain on divestment of the Adam Road property amounting to ~S$8.7m.

The balance will be distributed to unitholders at the discretion of the manager of FREIT in future periods. Sequentially, gross revenue and distributable amount rose 3.4% and 22.2% respectively. DPU of 1.92 S cents represented a decline of 1.0% YoY due to an enlarged unit base from the effects of the 5-for-4 rights issue in Dec 2010 but increased 21.5% QoQ due to the one-off distribution highlighted earlier. For 9M11, gross revenue increased 77.2% to S$40.1m and formed 74.3% of our full-year projection. Excluding the special non-recurring distribution of 0.34 S cents per share, 9M11 DPU of 4.74 S cents constituted 75.0% of our FY11 forecasts.

New acquisitions could occur soon. First REIT has a strong pipeline of possible acquisition targets from its sponsor Lippo Karawaci (Lippo), of which it has a right of first refusal. Lippo has placed strong emphasis on its Hospitals segment due to the rising demand for quality healthcare services in Indonesia. Media reports have also stated that the group is aiming to sell some of its hospital assets by this year or in 2012 while FREIT said that it is already engaging in preliminary discussions with Lippo on the possibility of acquiring some these assets.

Likely to be debt funded. We believe that these acquisitions, should it occur, would likely be funded by debt given its low gearing ratio of 15.1% as at 30 Sep 2011. This leaves FREIT with ample debt headroom of S$86.0m-S$138.4m before reaching its comfortable gearing ratio range of 25%-30%.

Defensive qualities in times of uncertainty; upgrade to BUY. We expect FREIT's long master leases with downside revenue protection to provide resilience and stability to its income stream, which would provide an attractive investment merit in times of global uncertainties. FREIT also offers a good proxy to the growing healthcare scene in Indonesia. With a pull-back in its share price since our downgrade to HOLD, we believe that value has re-emerged again. Our RNAV-derived fair value estimate is unchanged at S$0.84, but as this represents a total return of 14.0%, we upgrade the stock to BUY.