SINGAPORE (July 15): CIMB Research is maintaining its “add” call on First REIT with a higher target price of $1.38 from $1.33 previously, after its 2Q16 results came in line with the research house’s expectations.

(See First REIT posts 1.9% rise in DPU)

In a Thursday note, analyst Lock Mun Yee observes First REIT’s growth in earnings came from higher gross revenue of $26.6 million, underpinned by new acquisitions such as the Kupang property as well as higher interest income from the first progress payment for the development works on its new project, Siloam Hospital Surabaya.

“This more than offset the increased interest expense from new asset purchases,” says Lock.

With an improved NPI margin to 98.9% due to lower property expenses from the trust’s Sarang Hospital in Korea, Lock foresees the steady expansion of its income stream due to its master lease structure and inbuilt escalation growth of about 2%.

CIMB projects good income visibility for the trust over the next few years, as Lock thinks the earliest renewal of First REIT’s master leases should occur only from around 2021.

Given its recent issuance of $60 million of 5.68% perpetual securities this month, which has lowered the trust’s gearing to 30% from 34.4% as at end June, Lock says it has an estimated further debt headroom of $70 million to potentially fund new buys.

Looking ahead, she expects new acquisitions to continue driving First REIT’s growth.

She also anticipates the trust’s pending $40.8 million purchase of Siloam Hospitals Yogyakarta to be earnings-accretive based on a NPI yield of 9.4% vs. its current implied yield of 7.2% – which has not been factored into the research house’s current forecasts.

As at 12.52am, units of First REIT are up 0.77% at $1.31.