First REIT has taken a battering during 1H2020 as Covid-19 ravages property markets. Rent reliefs to beleaguered tenants and uncertainty over master leases have done the trust no favours. Still, CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei have reiterated their “add” call on the counter due to its attractive dividend potential and geographical diversification.
The counter reported a 33% y-o-y decline in 1H2020 gross revenue to $38.6 million, in part due to $19.6 million worth of rent relief offered to all its tenants in Indonesia, Singapore and South Korea for May and June 2020. All property tax rebates received by First REIT will be passed on to its three Singaporean tenants. Management is considering similar rent relief for 2H2020.
As a result, the firm’s distribution income and distribution per unit (DPU) fell 46% and 46.5% y-o-y respectively. Distribution income came in at $18.4 million for 1H2020 while DPU stood at 2.30 cents. This DPU was below expectations for the CGS-CIMB analysts, coming in at just 27.2% of their FY2020 forecast.
“We tweak down our FY20-22F DPU estimates by 1.6-42% as we assume that there will be further rent relief extended to tenants in 2H20. Accordingly, our DDM-based TP is lowered to S$0.957 [from $1.15],” say the analysts in a broker’s report last week. Still, they are optimistic that the counter’s attractive 8.8% dividend yield will make First REIT an attractive proposition for investors, despite this yield being nearly half the 15.5% yield offered at the end of 2019.
Uncertainty over master lease renewal has also been another drag on First REIT’s earnings. First REIT has a long weighted average lease expiry (WALE) of around 7 years as of 1H2020, with an estimated 22% of its gross floor area due for lease renewal in 2021. Yet, the firm has reported that the lessees will be looking to initiate rent restructuring due to the economic pressures of Covid-19.
The lack of visibility has hurt the REIT’s share price performance and will likely continue to do so until visibility improves. “Our current projections and valuation assume renewal of the four Indonesian master leases at the last renewal rate as at end-2021. Any reduction in this rate would result in downside risks to our earnings and DDM-based valuation for First REIT,” warn Lock and Eing. Any outperformance of this stock, they say, depends on improved clarity regarding master leases in 2021.
Nevertheless, Lock and Eing are hopeful that potential geographical diversification in the medium-term could provide more portfolio resilience and act as another growth driver. The main downside risk for this counter, they feel, will be any non-renewal or changes in the terms of the master leases when greater guidance is available in 2021.
As of 4.34 pm, First REIT is trading 0.005 points down at $0.55 with a price-to-earnings (P/E) ratio of 16.15. Its dividend yield currently stands at 14.23%.
