PhillipCapital analyst Darren Chan has initiated coverage on First REIT with a “buy” call and target price of 30 cents.
Chan’s dividend discount model (DDM) derived target is based on a cost of equity (COE) of 10.5% and a terminal growth rate of 2%.
In his report dated July 5, the analyst forecasted a distribution per unit (DPU) of 2.36 cents and 2.51 cents for FY2024 and FY2025, reflecting a forward yield of 9.6% and 10.3% respectively.
The REIT is Singapore’s first healthcare REIT focused on investing in income-producing real estate assets primarily used for healthcare-related purposes. Its portfolio currently consists of 32 properties, including 15 in Indonesia, 14 in Japan and three in Singapore, which reflects 74.5%, 22.7% and 2.8% of the REIT’s assets under management (AUM) respectively.
In Chan’s note dated July 5, the analyst notes several key positives including First REIT’s new master lease agreement (MLA) and long portfolio weighted average lease expiry (WALE) of 11.3 years which ensures long-term cash visibility.
“The new MLA includes a minimum annual rental escalation of 4.5% or a performance-based rent of 8% of the hospital’s gross operating revenue (GOR) from the preceding financial year, denominated in Indonesian rupiah, for the Indonesian hospitals,” says the analyst.
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Currently, three out of the 14 hospitals are paying performance-based rent, with more starting to contribute as the hospitals’ operational performance improves.
Additionally, with the introduction of PT Siloam International Hospitals Tbk and subsidiaries (Siloam) - one of the REIT’s largest tenants - to the new MLAs, the exposure to PT Lippo Karawaci Tbk and subsidiaries (LPKR) is set to decrease from around 88% before the restructuring to 18.7%.
LPKR, another of the REIT’s largest tenants has been experiencing “tight” cash flow since FY2019, adds Chan.
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The analyst also notes First REIT’s plans to divest some of its non-core and mature assets to fund its expansion plans.
For now, the REIT has identified Imperial Aryaduta Hotel and Country Club (IAHCC) as a non-core asset and is being marketed for divestment.
Chan adds that management is currently exploring divesting into some of the older nursing homes in Japan in an attempt to recycle the proceeds to buy newer, better nursing homes within the country.
Following the REIT’s expansion into Japan in FY2022, the analyst notes its plans to further diversify into developed markets, with a target AUM of over 50% in developed markets by FY2027.
Japan and Australia have been identified as potential developed markets for further acquisitions.
“This will help reduce exposure to Indonesia and the depreciating Indonesian rupiah against the strong Singapore dollar,” adds Chan.
As at July 9, shares in First REIT closed at 0.5 cents lower or down 2.0% at 24.5 cents.
