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Brokers' take: OCBC upgrades First Reit to 'buy'

OCBC has upgraded from a "hold" to a "buy" call for First Real Estate Investment Trust (First Reit), following news of a 0.9 per cent jump in distribution per unit (DPU) for the third quarter.

The target price for First Reit was increased to S$1.44 from S$1.38 on Tuesday. The Reit opened at S$1.375 on Tuesday.

For the three months ended Sept 30, 2017, DPU stood at 2.14 Singapore cents, up from 2.12 Singapore cents a year ago. The Reit has completed the acquisition of Siloam Hospitals Buton and Lippo Plaza Buton for S$28.5 million on Oct 10, 2017.

On Tuesday, OCBC said in an investment research report: "We believe this transaction will be DPU-accretive from fourth quarter 2017 onwards, and have duly incorporated this into our model.

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"Separately, First Reit is also seeking to conduct a joint acquisition of a DPU-accretive integrated development in Yogyakarta. While these should wrap up transactional activity in 2017 nicely, we believe that more could be in store for 2018."

Based on OCBC's estimates, First Reit's gearing level of 32.6 per cent as at Sept 30, 2017 should translate into about S$172 million of debt headroom before reaching 40 per cent, which the broker said should "comfortably support potential acquisitions from its sponsor's pipeline of about 40 hospitals".

"Positive base rental revisions should also be achievable, with the latest reported inflation for January-September 2017 coming in at a 0.6 per cent year-on-year increase," the report said.

It added that having considered First Reit's "increasingly stable portfolio, gradual appetite for acquisitions, as well as a benign inflationary environment", it believes the Reit's unit price is comparatively undervalued and the current valuation gap could potentially narrow.

On Monday, First Reit posted a 3.3 per cent increase in gross revenue to S$27.8 million on the back of contribution from Siloam Hospitals Labuan Bajo and higher rental income from existing properties in Indonesia, Singapore and South Korea.

Distributable income for the quarter rose 2.2 per cent to S$16.7 million, while net property income increased by 3.2 per cent to S$27.5 million.

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