Singapore | REITs

Asia Pacific Equity Research

FIRST REIT | HOLD

MARKET CAP: USD 658M AVG DAILY TURNOVER: USD 0.8M 28 Jun 2013 Company Update

VOLATILE TIMES AHEAD

Share price dips 18.3% from peak Prudent approach to new acquisitions Pare FV and maintain HOLD

HOLD (maintain)
Fair value add: 12m dividend forecast versus: Current price 12m total return forecast S$1.20 S$0.079 S$1.18 8%

Not spared from equities sell-down despite defensive attributes Concerns over the tapering off of the U.S. Federal Reserves quantitative easing programme have driven bond yields up and adversely impacted high-yield stocks such as First REIT (FREIT). FREITs share price has slumped 18.3% since it reached its peak of S$1.445 on 29 Apr this year (but stock still up 11.3% YTD). While FREIT offers one of the most resilient portfolios given its defensive long-term master leases which has downside revenue protection, we see risks coming from higher borrowing costs in the medium-term as ~72% of its debt is based on a floating rate structure, according to our estimates. 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. Acquisitions appetite dependent on market conditions Looking ahead, FREITs acquisition appetite would be dependent largely on market conditions. With an estimated leverage ratio of 34.0%, we 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. That said, we believe that FREIT is in no hurry to further expand its asset base as it only recently completed two DPU accretive acquisitions from its sponsor Lippo Karawaci. Not time to bottom-fish yet We increase our cost of equity assumption from 7.7% to 8.3% as we take into account the rising bond yields and reduced investor sentiment for interest rate sensitive stocks. Correspondingly, our fair value estimate dips from S$1.31 to S$1.20. We believe it is still too early to bottom-fish despite the sharp correction in FREITs share price given the expected market volatility ahead. In addition, although FREITs 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 (or 620 bps if we exclude the GFC period) since its IPO. Maintain HOLD.

Analysts Wong Teck Ching (Andy) (Lead) +65 6531 9817 andywong@ocbc-research.com Kevin Tan +65 6531 9810 kevintan@ocbc-research.com

Key information Market cap. (m) Avg daily turnover (m) Avg daily vol. (m) 52-wk range (S$) Free float (%) Shares o/s. (m) Exchange BBRG ticker Reuters ticker ISIN code GICS Sector GICS Industry Top shareholder S$830.8 / USD657.6 S$1.0 / USD0.8 0.9 0.9 - 1.45 65.9 704.1 SGX FIRT SP FRET.SI AW9U Financials REITs Lippo Karawaci 33.1% 1m -12 -4 3m -2 3 12m 39 26

Relative total return Company (%) STI-adjusted (%) Price performance chart
Shar e P r i ce (S$ )

I ndex Lev el

1.65 1.50 1.35 1.21 1.06 0.92 Jun-12 Sep-12 Fai r Val ue Dec-12 FIRT SP Mar -13 FSSTI
`

5200 4720 4240 3760 3280 2800 Jun-13

Sources: Bloomberg, OIR estimates

Key financial highlights Year Ended Dec 31 (S$m) Gross revenue Property operating expenses Net property income Total distribution to unitholders DPU (S cents) Cons. DPU (S cents) NAV per share (S$) Distr yield (%) P/NAV (x) Total debt/total assets (x) FY11 54.0 -0.6 53.4 43.9 7.0 na 0.8 5.9 1.5 14.8 FY12 57.6 -0.4 57.2 46.0 7.3 na 0.8 6.2 1.4 25.7 FY13F 83.2 -1.1 82.1 55.7 7.9 7.8 0.9 6.7 1.3 34.0 FY14F 92.5 -1.2 91.3 61.0 8.6 8.3 0.9 7.3 1.4 34.0

Industry-relative metrics
P er c ent i l e 0t h 25t h 50t h 75t h 100t h

M k t Cap B et a ROE PE PB Company I ndus t r y A v er age

Note: Industry universe defined as companies under identical GICS classification listed on the same exchange. Sources: Bloomberg, OIR estimates

Please refer to important disclosures at the back of this document.

MICA (P) 004/06/2013

OCBC Investment Research Singapore Equities

Exhibit 1: FREIT's yield spread over Singapore government 10-year bond yield
25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Apr 2007 Apr 2008 Apr 2009 Apr 2010 Apr 2011 Apr 2012 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2013 Apr 2013 Apr 2013 Jul 2007 Jul 2008 Jul 2009 Jul 2010 Jul 2011 Oct 2007 Oct 2008 Oct 2009 Oct 2010 Oct 2011 Jul 2012 Jul 2012 Oct 2012 Oct 2012

Spread Hist average spread = 7.3% Source: Bloomberg, OIR estimates

FREIT's annualised yield Hist avg. spread ex. GFC = 6.2%

SG govt 10-year bond yield

Exhibit 2: Singapore Swap Offer Rates (SOR)

5 4 3 2 1 0 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Apr 2006 Apr 2007 Apr 2008 Apr 2009 Apr 2010 Apr 2011 -1 Apr 2012 Oct 2006 Oct 2007 Oct 2008 Oct 2009 Oct 2010 Oct 2011 Jul 2006 Jul 2007 Jul 2008 Jul 2009 Jul 2010 Jul 2011 2-year % Long-term rates have spiked up more significantly than short-term rates

1-month Source: Bloomberg, OIR

3-month

6-month

12-month

5-year

Recent renewal of two Singapore nursing home master leases FREIT recently announced on 3 Jun that it has extended the master leases of two of its Singapore nursing homes (Pacific Healthcare Nursing Home @ Bukit Merah and Pacific Healthcare Nursing Home II @ Bukit Panjang) with its existing tenants for an additional term of 10 years each. Both leases will now expire on 11 Apr 2027 (previously 11 Apr 2017). The lease structure is similar as before, which is on a triple-net lease basis with 100%-committed occupancy and annual fixed rental escalation of 2%. We believe this development will provide FREIT with a stronger income rental visibility, as its next earliest lease expiry will happen only in Jun 2017 (see Exhibit 3).

OCBC Investment Research Singapore Equities

Exhibit 3: FREIT's lease expiry profile Property The Lentor Residence Sarang Hospital Siloam Hospitals Lippo Village Siloam Hospitals Kebon Jeruk Siloam Hospitals Surabaya Imperial Aryaduta Hotel & Country Club Mochtar Riady Comprehensive Cancer Centre Siloam Hospitals Lippo Cikarang Pacific Healthcare Nursing Home @ Bukit Merah Pacific Healthcare Nursing Home II @ Bukit Panjang Siloam Hospitals Manado & Hotel Aryaduta Manado Siloam Hospitals Makassar Siloam Hospitals Bali Siloam Hospitals TB Simatupang
Source: Company

Lease expiry date Jun 2017 Aug 2021 Dec 2021 Dec 2021 Dec 2021 Dec 2021 Dec 2025 Dec 2025 Apr 2027 Apr 2027 Nov 2027 Nov 2027 May 2028 May 2028

Exhibit 4: Dividend Discount Model (DDM) Valuation Period Distributable amount to unitholders (S$ '000) DPU (S cents) Terminal value (S cents) Present value of DPU (S cents) Fair value (S$) 7.29 1.20 7.31 6.85 6.48 FY13F 55,699 7.89 FY14F 60,974 8.56 FY15F 62,418 8.69 FY16F 64,552 8.91 FY17F 66,947 9.15 127.21 91.67

Current price (S$) Potential upside (%) DPU yield (%) Total expected return (%) Assumptions Cost of equity (%) Terminal growth rate (%)
Source: OIR estimates

1.18 1.7% 6.7% 8.4%

8.3% 1.0%

OCBC Investment Research Singapore Equities

Company financial highlights

Income statement Year Ended Dec 31 (S$m) Gross revenue Property operating expenses Net property income Fees Net interest expense Other expenses Total return before tax Income tax expense Total return after tax Total distribution to unitholders

FY11 54.0 -0.6 53.4 -5.4 -3.7 -1.7 60.6 -9.7 51.0 43.9

FY12 57.6 -0.4 57.2 -5.8 -4.2 -0.1 77.9 -12.7 65.2 46.0

FY13F 83.2 -1.1 82.1 -8.4 -11.8 -0.4 88.7 -17.7 70.9 55.7

FY14F 92.5 -1.2 91.3 -9.4 -14.3 -0.5 67.1 -13.4 53.7 61.0

Balance sheet As at Dec 31 (S$m) Investment properties Total non-current assets Cash and cash equivalents Total current assets Total assets Current liabilities ex debt Debt Total liabilities Total unitholders' funds Total equity and liabilities

FY11 618.0 618.5 32.7 42.2 660.6 27.3 97.8 155.3 505.3 660.6

FY12 796.7 797.3 20.5 31.5 828.8 32.1 212.8 278.8 550.1 828.8

FY13F 1,015.3 1,015.9 18.0 33.2 1,049.1 36.4 357.0 427.3 621.8 1,049.1

FY14F 1,016.3 1,016.9 17.3 34.2 1,051.1 38.5 357.0 429.3 621.8 1,051.1

Cash flow statement Year Ended Dec 31 (S$m) Net cash from operations Increase in invt properties Net cash from investing Proceeds from unitholders Increase in borrowings Net cash from financing Net cash flow Cash at beginning of year Cash at end of year Cash and cash equivalents

FY11 42.6 -69.0 -35.9 0.0 38.7 -1.5 5.1 27.6 32.7 32.7

FY12 49.8 -148.8 -148.7 28.2 115.6 86.7 -12.2 32.7 20.5 20.5

FY13F 62.1 -191.4 -191.3 50.0 144.2 126.6 -2.5 20.5 18.0 18.0

FY14F 75.7 -1.0 -0.9 0.0 0.0 -75.4 -0.7 18.0 17.3 17.3

Key rates & ratios DPU (S cents) NAV per share (S$) Distr yield (%) P/Operating CF (x) P/NAV (x) NPI margin (%) Distr to revenue (%) Total debt/total assets (x) ROE (%) ROA (%) Sources: Company, OIR forecasts

FY11 7.0 0.8 5.9 17.4 1.5 98.9 81.4 14.8 10.3 7.9

FY12 7.3 0.8 6.2 15.8 1.4 99.3 79.9 25.7 11.7 7.8

FY13F 7.9 0.9 6.7 13.4 1.3 98.7 66.9 34.0 11.4 6.8

FY14F 8.6 0.9 7.3 11.1 1.4 98.7 65.9 34.0 8.6 5.1

Company financial highlights

OCBC Investment Research Singapore Equities

SHAREHOLDING DECLARATION: The analyst/analysts who wrote this report holds/hold NIL shares in the above security.

DISCLAIMER FOR RESEARCH REPORT This report is solely for information and general circulation only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connected and associated corporations together with their respective directors and officers may have or take positions in the securities mentioned in this report and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally. Privileged / confidential information may be contained in this document. If you are not the addressee indicated in this document (or responsible for delivery of this message to such person), you may not copy or deliver this message to anyone. Opinions, conclusions and other information in this document that do not relate to the official business of OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connected and associated corporations shall not be understood as neither given nor endorsed.

RATINGS AND RECOMMENDATIONS: - OCBC Investment Researchs (OIR) technical comments and recommendations are short-term and trading oriented. - OIRs fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. - As a guide, OIRs BUY rating indicates a total return in excess of 10% based on the current price; a HOLD rating indicates total returns within +10% and -5%; a SELL rating indicates total returns less than -5%.

Co.Reg.no.: 198301152E Carmen Lee Head of Research For OCBC Investment Research Pte Ltd

Published by OCBC Investment Research Pte Ltd

Important disclosures