Lim & Tan analyst Chan En Jie is keeping his “buy” call on First REIT AW9U with a target price of 30 cents after the REIT’s revenue and distributable income for the 1HFY2023 ended June 30 came in line with his expectations.
On Aug 1, the manager reported a distribution per unit (DPU) of 1.24 cents, 6.1% lower y-o-y. 1HFY2023 revenue rose by 0.4% y-o-y to $54 million while distributable income rose 1.0% y-o-y to $25.5 million.
“Management has shared that [its] quarterly distributions of 0.62 cents per unit is sustainable even with another two 25 basis points (bps) rate hikes this year. First REIT’s yield spread of 4.2% remains attractive relative to its other healthcare peers’ yield spread of under 2%,” writes Chan.
His target price of 30 cents is pegged to a forward yield spread of 2.8% or 0.5 standard deviation (s.d.) of its five-year average.
In his report dated Aug 4, Chan is positive on the progress of the REIT’s execution of its 2.0 growth strategy. The REIT first unveiled its “2.0 growth strategy” in December 2021 where it aims to diversify into developed markets, strengthen its capital structure, reshape its portfolio for capital efficient growth and finally, pivot to ride on the megatrends such as environmental, social and governance (ESG).
“First REIT managed to strengthen its capital structure by completing the early refinancing of the Japan-Yen TMK bond due May 2025 till 2030. Floating interest rates of [around] 1.2% previously are now locked in at 1.5% fixed rates. The proportion of total debt on hedged or fixed rates now stands at 86.0% as of end 1HFY2023, a sharp increase from 59.6% at end-FY2022,” Chan notes.
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“After this refinancing, weighted average debt to maturity lengthened from 3.4 years to 4.1 years and gearing stands at 38.7% at a healthy 4.1x interest coverage ratio. All-in cost of debt is at 4.9%, an increase from 3.7% at end-FY2022 and we expect it to remain elevated through 2023 but will be partly shielded by First REIT’s reduction of floating-rate debt,” he adds. “While First REIT continue its inroads into developed markets, possible locations include Australia and the acquisition of additional Japan nursing homes.”
In addition, Chan sees that the REIT is well positioned to the reap the benefits of the strong performance from Siloam Hospitals in Indonesia.
“Under First REIT’s agreement with Siloam Hospitals, First REIT will receive the higher of base rent escalation of 4.5% or a performance-based rent of 8.0% of each hospital’s preceding year’s gross operating revenue. This implies that if First REIT’s Indonesia assets does well, First REIT will stand to reap the benefits,” he notes.
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“We understand that out of its 14 hospital assets in Indonesia, three hospitals are currently on the performance-based rent scheme. Siloam has reported strong growth momentum and higher patient volumes with its 1HFY2023 revenue/profits growing by 19.1%/142.5% respectively,” he adds.
“With a resilient outlook expected for Siloam, we think it is only a matter of time before more of First REIT’s assets shift towards the performance-based rent scheme and provide an uplift to rental income,” continues Chan.
As at 4.14pm, units in First REIT are trading 0.5 cents lower or 1.89% down at 26 cents.
