13 November 2010

www.siasresearch.com Update Report

First REIT Increase Exposure

First-Rate Acquisitions To Follow First-Class Results
Update: We maintain our Increase Exposure
rating on First REIT (“Company”), based on an
upgraded intrinsic value of S$1.210 - representing
an upside of 26.0% over its last traded price of
S$0.960.
• Intrinsic Value S$1.210
• Prev Close S$0.960
•
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.

Key Developments: Financial Highlights

Dec YE (S$m) FY08A FY09A FY10E
• First REIT grew on an impressive set of 2Q10 Gross Revenue 29.9 30.2 31.3
results by releasing solid 3Q10 numbers on 22nd Net Prop Income 29.8 29.9 30.2
Distr Earnings 20.8 20.9 21.1
October 2010. Gross revenue and net property
Distr Per Unit (S$) 0.0762 0.0762 0.0763
income increased 4.6% (3Q10: S$7.9m, 3Q09: Non-Curr Assets 324.9 340.9 339.1
S$7.6m) and 3.7% (3Q10: S$7.8m, 3Q09: Op Cash Flow 20.6 22.7 23.3

S$7.5m) YoY respectively. Third quarter 2010 Source: Company, Bloomberg, SIAS Research

distribution amount grew 2.5% YoY (3Q10:

Key Ratios
S$5.4, 3Q09: S$5.2m) with distribution per unit
Price Earnings (x) 6.91
for the period expanding from 1.90 Scts in 3Q09
to 1.94 Scts in 3Q10. On an annualized basis, Price Book (x) 0.92

DPU also improved YoY from 7.62 Scts in 3Q09 Return on equity (%) 13.67

to 7.70 Scts in 3Q10. Return on assets (%) 10.36

Source: Bloomberg
• On 9th November 2010, the Company
announced that it would be acquiring two Indexed Price Chart
First REIT (White)
Jakarta hospitals, the Mochtar Riady Straits Times Index (Orange)
Comprehensive Cancer Centre and Siloam FTSE ST RE Invest Trust Index (Yellow)
Hospitals Lippo Cikarang for a total
consideration of S$205.5m. Part of the
acquisitions will be funded by a rights issue of
approximately S$172.8m.

Outlook:

First REIT’s robust portfolio of high-yielding,

Source: Bloomberg
medical-related real estate investments has again
impressed with the Company’s 3Q10 results coming 52wks High-Low S$0.990 /S$0.720
in above our prior third quarter estimates. With their Number of Shares 276.532 m
Market Capitalization S$265.47 m
new acquisitions in place, the Company will be above
to increase its asset base, improve its overall
Analyst:
weighted average lease to expiry and importantly Moh Tze Yang, Lead Analyst
increase DPU and dividend yield. At its current price, tzeyang@siasresearch.com
Tel: 6227 2107
we opine that the Company is still undervalued.
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Top and bottom lines continue to impress in 3Q10

Continued Strong Financial Figures Reported In 3Q10: First

Real Estate Investment Trust (“Company”) announced their financial
year 2010 second quarter earnings on 22nd October 2010. The
Company has continued its robust trend in 2010 of posting
impressive quarterly results as 3Q10 saw upticks in all of the
Company’s key financial performance barometers. Gross revenue and
net property income increased 4.6% (3Q10: S$7.9m, 3Q09: S$7.6m)
and 3.7% (3Q10: S$7.8m, 3Q09: S$7.5m) YoY respectively - with
the inclusion of deferred rental income of properties under asset
enhancement. Third quarter 2010 distribution amount grew 2.5%
YoY (3Q10: S$5.4, 3Q09: S$5.2m) with distribution per unit for the
period expanding from 1.90 Scts in 3Q09 to 1.94 Scts in 3Q10. On an
annualized basis, DPU also improved YoY from 7.62 Scts in 3Q09 to
7.70 Scts in 3Q10.

Figure 1: First REIT 3Q YoY relative performance Figure 2: First REIT 9M YoY relative performance

3Q10 3Q09 9M10 9M09

Gross Revenue (S$m) 7.9* 7.6 Gross Revenue (S$m) 23.5* 22.5
Net Prop Inc (S$m) 7.8* 7.5 Net Prop Inc (S$m) 23.2* 22.3
Distri Amt (S$m) 5.3 5.2 Distri Amt (S$m) 15.9 15.7
Distri Yield (%) 8.1 10.7** Distri Yield (%) 8.1 10.7**
Source: Company, SIAS Research Source: Company, SIAS Research

*Includes deferred rental income of property under asset enhancement *Includes deferred rental income of property under asset enhancement

**Based on closing price of S$0.715 as at 20th October 2009 **Based on closing price of S$0.715 as at 20th October 2009

We are equally encouraged by First REIT’s year to 30th September

performance as gross revenue (9M10: S$23.5m, 9M09: S$22.5m),
net property income (9M10: S$23.2, 9M09: S$22.3m) as well as
distributable amount (9M10: S$15.9m, 9M09: S$15.7m) all posted
sturdy growth rates of 4.6%, 4.3% and 1.4% YoY respectively. 9M10
gross revenue and net property income figures include the deferred
rental income of properties under asset enhancement. For the nine
month period ending 30 September, 2010 distribution per unit for the
period was 5.76 Scts – compared to 5.70 Scts for 9M09; while 2010
annualized DPU stood at 7.70 Scts – compared to 7.62 Scts for 9M09.
First REIT maintains a very healthy distribution yield of 8.1% (based
on a market closing price of S$0.95c as at 20th October 2010), which
is among the highest in the S-REIT sector.

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Figure 4: First REIT yield one of S-REIT's highest Figure 4: Consistent quarterly DPU payouts

Source: Company Source: Company

Geographically, First REIT’s Indonesian assets generated 86.6%

(S$6.9m) of the Company’s 3Q10 revenues, against 86.3% (S$6.5m)
for 3Q09. Going forward, we understand from management that First
REIT will be able to enjoy a variable rental growth component of
1.25% of total gross revenue from their four Indonesian assets in
FY2010. The Company’s Singapore assets contributed 13.4%
(S$1.1m) to First REIT’s top line over 3Q10, compared to 13.7%
(S$1.0m) in 3Q10. As stated in our last update report on First REIT
(First Class 2Q10 Results, 27 July 2010), we continue to expect the
contribution from the Company’s Singapore assets to expand further
with the completion of asset enhancement works on the Company’s
Pacific Cancer Centre@Adam Road. Management has guided that this
project is on track to be completed by mid-2011.

Figure 5: First REIT rental income by geography

Source: Company

*includes deferred rental income of property under asset enhancement

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Working capital remains healthy on solid current asset base

Healthy Working Capital-Backed Balance Sheet: As at 30th June

2010, First REIT’s balance sheet position remains solid as at 30th
September 2010 with net asset value per unit standing at 97.77 Scts
- against end-FY2009’s NAV per unit of 98.39 Scts. The Company’s
total assets as at end-3Q10 amounted to S$359.3m, comprising
S$346.1m of non-current assets and S$13.2m of current assets.
Total liabilities stood at a total of S$89.2m, accounted for as
S$78.8m of non-current liabilities and S$10.3m of current liabilities.
Total unit holders’ fund for 3Q10 is a sound S$270.1m. First REIT’s
working capital, taken as current assets against current liabilities,
stands at a healthy 1.28x as at end-September 2010.

Low Debt Levels: First REIT’s total debt as at 30th September 2010
was recorded at S$57.3m - an increase of S$4.5m over end-2009’s
amount. Interest coverage had fallen from 13.5x to 11.6x with the
Company’s debt-to-property ratio rising by from 15.5% as at 31st
December 2009 to 16.5% as at 30th September 2010. That said, we
maintain our view that First REIT’s gearing is very well managed as
the Company’s current level of 16.5% is still significantly below the
regulatory limit of 35%.

New value accretive acquisitions to raise earnings/DPU

Acquisitions Of Two New Assets: On 9th November 2010, First

REIT announced that it would be acquiring two Jakarta hospitals, the
Mochtar Riady Comprehensive Cancer Centre (“MRCC”) and Siloam
Hospitals Lippo Cikarang (“SHLC”) for a total consideration of
S$205.5m. MRCC is to be acquired from Wincatch Limited for
S$170.5m and SHLC will be purchased form PT Lippo Karawaci Tbk
for S$35m. To partially finance the acquisitions, First REIT has
announced plans to raise approximately S$172.8m in gross proceeds
through a rights issue to eligible unit holders on a pro-rata basis of
five rights units for every four existing units - at an issue price of
S$0.50 per unit (345,664,382 new units).

Specifically, we understand that the purchase of MRCC as well as

related transaction costs will be completed via:

1) Proceeds from rights issue.

2) New term loan facility of up to S$50m from Oversea-Chinese
Banking Corporation Limited.

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While the purchase of SHLC will be completed via:

1) Proceeds from rights issue.

MRCC, to begin operations in December 2010, is a 29 storey, 160

bed location that is to be Indonesia’s first private comprehensive
cancer treatment center that is equipped with state of the art cancer
treatment and diagnostic facilities. It will be the first facility in the
whole of Indonesia to offer Positron Emission Tomography (PET)
scanning, High Intensity Focused Ultrasound (HIFU) and Radio-
immunotherapy. MRCC is located near Plaza Semanggi, the Aryaduta
Suites Hotel Semanggi as well as other five-star hotels in the central
business district of South Jakarta.

Figure 6: Mochtar Riady Comprehensive Cancer Centre

Source: Company
SHLC, which has been in operations since 2002, is a six-storey
hospital with the capacity to accommodate 75 beds by end-2010. It
is situated in the growing residential and industrial areas of East
Jakarta offering a broad range of general and specialist services such
as A&E, orthopedic, neurology, urology, thorax, and cardiovascular
surgery. The hospital also has Centres of Excellence in Urology,
Internal Medicine and Trauma. In particular, SHLC is well-respected
for its Pediatric Neonatal Intensive Care Unit for premature, sick
babies.
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Figure 7: Siloam Hospitals Lippo Cikarang

Source: Company

Following the acquisition of both assets, management has guided

that First REIT’s distribution in projection for 2011 is expected to rise
from 8.57% (distribution yield before acquisition calculated based on
4th November 2010 closing price of S$0.95 per unit) to 9.14%
(distribution yield after acquisition based on TERP of S$0.70 per unit).
This forecast is based on an estimated annualized DPU of 6.40 Scts
for the full financial year ending 31st December 2010, in relation to its
enlarged portfolio and financing through a combination of the
underwritten renounceable rights issue.

In addition, upon completion of the purchase for the two assets, First
REIT management has also expressed that they expect to see an
increase in annual gross rental income of approximately 80% - from
S$30.3m in forecast year 2010 to S$54.5m in projection year 2011
as a result of the enlarged portfolio. Consequent distributable income
is also estimated to rise by 89% from S$21.3m to S$40.3m.
Leverage will also be lowered from 18.6% to 17.25% in projection
year 2011.

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Figure 8: GFA by business (current/enlarged portfolio)

Source: Company

Figure 9: Gross rental income by geography (current/enlarged portfolio)

Source: Company

We are of the opinion that the acquisitions of MRCC and SHLC hold
significant upside potential for First REIT going forward. Importantly,
with the substantial lack of proper healthcare facilities and qualified
medical practitioners in Indonesia, ownership of such assets becomes
veritable “gold mines” for landlords. We noted a lack of
understanding and education on the part of the investing community
with regards to the potential of Indonesian healthcare facilities during
our attendance at First REIT’s 2Q10 results briefing. That said, the
numbers do not lie and the financial performance capability of First
REIT’s Indonesian assets is very apparent as results are posted each
quarter. Bearing that in mind, we view the strategic addition of the
two new Indonesian assets as astute and value accretive.

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First REIT Value Proposition

The Bottom Line: First REIT’s robust portfolio of high-yielding,

medical-related real estate investments has again impressed with the
Company’s 3Q10 come in above our prior third quarter estimates. All
three core income statement areas of gross revenue, net property
income as well as distributable income registered solid YoY
expansions. This improvement can largely be attributed to the quality
of the Company’s Indonesia properties as well as strong demand for
proper healthcare facilities and services in Indonesia. We also expect
First REIT’s Singapore assets to contribute further to the Company’s
top and bottom lines on the completion of asset enhancement works
at the Pacific Cancer Centre@Adam Road. In addition, First REIT has
also confirmed with their tenant on a new extension block to the
Company’s Lentor Residence nursing home. The proposed extension
is valued at S$4.5m and is expected to commence after receiving
necessary regulatory approvals.

Significantly, with the announcement of two new asset additions to

First REIT’s portfolio, we believe that the Company stands to benefit
substantially going forward. Via long term master lease agreements
on both MRCC and SHLC, First REIT is able to take advantage of
increased income stability as well as improve the Company’s overall
weighted average lease to expiry (10.6 years as at end-September
2010 to 12.4 years). The REIT’s absolute asset base will also be
consequently increased, which would raise the profile of the Company
and enhance its competitive positioning and ability to pursue future
acquisitions. For First REIT investors, currently already receiving one
of the highest yield payouts in the S-REIT sector, DPU going into
2011 is forecasted to increase further – providing even higher returns.

Figure 10: First REIT internal forecast based on completed acquisitions

Source: Company
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On the back of the third quarter’s salient results as well as
forthcoming acquisition of MRCC and SHLC, we have revised our
estimates and valuation on the counter. Based on TERP of S$0.70 per
unit, our model suggests a robust potential 2011 post-acquisition
dividend yield of between 8.91% and 9.33% for investors. We further
upgrade First REIT at a derived intrinsic value of S$1.21 - based on
revised FY11 estimates. At its current price, we opine that the
Company is still undervalued. For prudence, we have not accounted
for the DPU growth potential from the Company’s arrangement with
tenants that accords First REIT a percent of these tenant’s earnings
in our valuation. Recommendation: Increase Exposure

Figure 11: First REIT one year price-volume

Source: Bloomberg

Figure 12: First REIT portfolio breakdown as at end-September 2010

Source: Company

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Figure 13: First REIT Indonesia asset details as at end-September 2010

Source: Company

Figure 14: First REIT Singapore asset details as at end-September 2010

Source: Company

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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
Source: Company, Bloomberg, SIAS Research estimates

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Rating Definition:

Increase Exposure – The current price of the stock is significantly lower than the underlying fundamental value. Readers can
consider increasing their exposure in their portfolio to a 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 this report, the analyst and his immediate family may own or have positions in any securities mentioned
herein or any securities related thereto and may from time to time add or dispose of or may be materially interested in any
such securities. Portfolio structure should be the responsibility of the investor and they should take into consideration their
financial position and risk profile when structuring their portfolio. Investors should seek the assistance of a qualified and
licensed financial advisor to help them structure their portfolio. 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.

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