OCBC Investment Research (OIR) analyst Ada Lim has maintained her “buy” call on First REIT with an unchanged target price of 28 cents following the release of the healthcare REIT’s 1HFY2024 results ended June 30.
In her July 26 report, the analyst notes the REIT’s relatively long weighted average lease expiry (WALE) of 11 years, as at June 30.
This provides First REIT with strong cash flow visibility, while built-in rental escalation clauses in its well-structured master leases provide potential for rental growth and upside sharing with tenants, in the analyst’s view.
She also notes the REIT’s improving risk profile, with the introduction of its 2.0 Growth Strategy, alongside structural megatrends such as an ageing population and increasing demand for quality healthcare which has boosted demand for its assets.
“Although higher for longer interest rates may slow First REIT’s pace of diversification into developed markets (DM), we think its current steady state and attractive distribution yield make it a potential defensive addition to portfolios,” writes Lim.
In 1HFY2024, First REIT’s rental and net property income dipped 3.7% and 4.1% y-o-y to $52 million and $50.3 million, respectively.
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This comes on the back of significant depreciation of Indonesia Rupiah and Japanese Yen against the Singapore dollar.
However, on a local currency basis, the REIT’s properties in Indonesia and Singapore demonstrated healthy underlying performance, with rental income up 4.4% and 2% y-o-y respectively, while rental income from Japan remained flat.
As a result, distributable amount declined by 2.1% y-o-y to $25 million in 1HFY2024.
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That said, First REIT has since declared a 2QFY2024 distribution per unit (DPU) of 60 cents, dropping 3.2% y-o-y and constituting 25% of the analyst’s full year forecast, in line with OIR’s expectations.
The distribution is set to be paid out on Sept 25.
As at June 30, rentals outstanding from a tenant PT Metropolis Propertindo Utama (MPU) in relation to three hospital master lease agreements stood at $6.4 million, which was previously $5.2 million as at March 31.
First REIT currently holds a security deposit of approximately $2.2 million from MPU, as well as an additional security deposit of $3.8 million from PT Siloam International Hospitals with respect to underlying hospital properties.
MPU contributes 6.1% of First REIT’s 1HFY2024 rental income, and management continues to engage closely with the tenant on repayments.
“On the balance sheet front, foreign currency headwinds resulted in a greater decline in asset value as compared to the quantum of Japanese Yen debt when figures are translated back to the Singapore dollar for reporting purposes,” says the analyst.
Overall, First REIT’s gearing has risen 80 basis points (bps) q-o-q to 39.5%.
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However, all-in cost debt remains “stable” q-o-q at 5%, with the proportion of debt on fixed rates or hedged at 86.6%.
Management has since guided for its cost of debt to remain stable for the rest of FY2024.
The analyst adds: “It is also cautiously optimistic that the REIT’s interest costs may decline next year given rate cut expectations, as well as the fact that some of its interest rate hedges are due to come off at the end of the year.”
An increase of 100 bps in floating rates is estimated to weigh on the distributable amount by $0.6 million, constituting 1.2% of the REIT’s DPU, as per the analyst’s estimate.
The analyst has since adjusted her forecasts, lowering her FY2025 DPU estimate by 2.7% while increasing terminal growth rate assumption by 50 bps to 1%. This follows an easing interest rate environment which Lim views to potentially be more conducive for capital recycling activities.
“Additionally, management has announced a greater probability of divesting non-core asset Imperial Aryaduta Hotel & Country Club (IAHCC) by early FY2025 given that the overhang of elections in Indonesia has also been lifted,” concludes the analyst.
As at 11.17am, shares in First REIT are trading at 0.5 cents lower or down 1.96% at 25 cents.
