3Q24 results a miss. 3Q24 DPU of 0.58Scts (-3% q/q, -6% y/y) missed our expectations by -3%, mainly due to weakness in IDR against the SGD, despite growth in Indonesia's gross revenue in local currency terms. The -3% q/q dip in 3Q24 DPU is a rare occurrence, diverging from First REIT’s usual practice of consistently delivering steady DPUs each quarter (1Q/2Q DPU of 0.60Scts). 3Q24 gross revenue came in at SGD25.0mn (-3% q/q, -9% y/y) and NPI at SGD24.1mn (-4% q/q, -10% y/y), with 9M24 results making up 74% of our prior estimates. Balance sheet remains healthy, with gearing ratio stable at 39.3%, unchanged interest rate cost at 5.0% and 86% of debt fixed/hedged and no refinancing requirements until May 2026. Operationally, we believe hospital operations in Indonesia remains healthy based on positive data read-through from Siloam International Hospitals (“Siloam”) (last reported 1H24 overall revenue growth at 14% y/y), although those healthy operational datapoints have been clouded by negative FX impact.

Rental arrears from MPU remains an overhang. We are closely watching rentals outstanding from PT Metropolis Propertindo Utama (“MPU”) (6% contribution to 9M24 total gross revenue), dating back to 4Q22 and now stands at SGD7.9mn as of 3Q24 (up from SGD6.4mn in 2Q24). To-date, First REIT has collected SGD2.3mn in security deposits from MPU – SGD1.7mn for malls and SGD0.6mn for hospitals – as well as SGD4.3mn from Siloam under First REIT’s deed of novation and variation with MPU and Siloam. Total security deposits for MPU malls and hospitals amount to SGD1.7mn and SGD4.9mn respectively (see Table 1).

Write-downs could result in -8% to -12% impact on FY4F-26F DPU. In the event of bad debt write-downs in FY24F, we estimate a SGD3.9mn write-off (Table 1), which translates into a -8% impact on our FY24F distribution income, with FY24F DPU at 2.18Scts (which implies 4Q24F DPU of 0.40Scts, -32% q/q and -36% y/y) (Table 2). This would translate to dividend yields of 8.1%, down 60bps from 8.7% based on our current projections. For FY25F/26F, our worst-case scenario on full write-offs (without considering security deposits) on MPU’s rentals could result in -12% impact on our DPU estimates, translating into revised FY25F/26F forward dividend yields of 8.2%/8.7%, down >100bps from our current estimates of 9.3%/9.9%. Thus, with the write-downs, forward dividend yields could decline to 8-9% (historical average yields), down from previous estimates at 9-10% (at +1SD above historical yields). Other ongoing headwinds are negative FX impact.

Asset divestments remain as positive catalysts but could take more time. The divestment of Imperial Aryaduta Hotel & Country Club remains the key asset for recycling, although the targeted timeline has been now pushed back to 2025 (previously 2023, delayed to 2024). Potential divestments of Indonesian hospitals to Siloam also present an interesting opportunity to unlock value for investors and driving First REIT’s 2.0 Growth Strategy.

Downgrade to HOLD with lower TP of SGD0.28. Although management continues to reiterate their commitment in engaging with MPU, we prefer to await more positive progress on rental collections. Furthermore, ongoing FX weakness could also pose further headwinds to First REIT’s DPU. To factor FX weakness, we have trimmed our FY24F/25F distribution income by -1%/-1% as we assume weaker IDR against the SGD.