First REIT: 1Q 2012 DPU 1.93c and a higher fair value?

First REIT has declared a DPU of 1.93c. The unit price of First REIT has been rising steadily. It is clear that Mr. Market is willing to pay a gradually higher price for the REIT's units which leads me to wonder if we could see First REIT's distribution yield compressing to 6% which would bring it closer to PLife REIT's distribution yield which is currently under 6%. This could see the REIT's unit price going to $1.06.

When calculating distribution yield, I would rather use a DPU of 1.6c per quarter instead of 1.93c. Why? When we look at the numbers, we would see that the net property income (NPI) has improved 6% while distributable income has improved some 22%. This is because First REIT is still paying out its gains from divesting its Adam Road property. If we remove this component, the DPU should hover at 1.6c or so.

In fact, year on year, if we look at the distributions from operation, it has actually declined a marginal 1.4%. Total comprehensive income, even after the removal of the one off gain from the divestment of its Adam Road property, saw a reduction of some 7%; this is due to higher income tax expense. So, one would not be wrong to wonder if its estimated post rights DPU of about 1.6c per quarter in future could be maintained, everything else remaining equal.

When the REIT acquired its first property in South Korea, freehold Sarang Hospital, many were optimistic. However, the acquistion increased the REIT's gross revenue by 6.3% while increasing its operating expenses by 51.1%. Expectations for a higher DPU due to the acquisition has yet to be met.

Some might say that the underperformance is to be expected since being the REIT's only facility in South Korea, there is no economies of scale per se. In fact, I wondered about this when the acquisition was announced last year.

See the relevant blog post: here (First REIT: Yield accretive purchase in South Korea).

Although S-REITs distribute a minimum of 90% of their income to unitholders unlike companies which pay dividends from their earnings, it might still be of interest to some to note that First REIT's earnings per unit has declined year on year from 2.13c to 1.51c. This takes into consideration its rights issue, of course.

With its NAV per unit at 79.99c, the REIT is now trading at a 15% premium to NAV.

What remains largely in the REIT's favour is its very low gearing level and if it were to gear up to 40% to make yield accretive purchases in locations where it could benefit from economies of scale, we could see its DPU bump up by more than 20%.

At current prices, I would hold and not add to my long position.

See financial statement: here.

Related post:
First REIT: To sell or not to sell?

SPH: Interim dividend of 7c per share.

SPH remains my largest investment in a blue chip. Over the years, it has been very good to me. Last year, I had hoped to buy more SPH shares if price should dip to $3.60 a piece but it never did.

Clementi Mall.

Singapore Press Holdings’ (SPH) 2QFY12 PATMI came in at S$83.9m, or 5 S-cents per share, which was 16% higher YoY. 1HFY12 PATMI now make up 46% of our full year forecast, falling short mainly due to lower investment income.

2QFY12 topline was S$298.5m - in-line with our expectations - and making up 50% of our full year forecast. An interim dividend of 7 S-cents was declared.

We continue to view SPH favorably as it continues to ramp up on its retail mall strategy - a stable counterweight to its print business going forward. Group investible funds currently stand at S$0.9bn, which points to sufficient capacity for further allocation into its retail strategy ahead.

Maintain BUY with a higher fair value estimate of S$4.05 (versus S$3.99 previously) mostly due to stronger assumptions for Clementi Mall.

Source: OCBC Research, 16 April 2012.