OCBC Investment Research (OIR) analyst Ada Lim has initiated “buy” on First REIT AW9U with a fair value estimate of 31 cents, representing an implied P/B of 1.0x.
In her report dated April 21, Lim listed several positives for the Singapore-listed healthcare REIT, which includes its relatively long weighted average lease expiry (WALE) of 12.5 years, which provides strong cash flow visibility.
The REIT’s built-in rental escalation clauses in its well-structured master leases also provide potential for rental growth and upside sharing with its tenants, adds Lim.
In addition, the REIT’s turnaround strategy is well under way with its risk profile improving as it seeks to diversify its business across tenants and geographies. It should also enjoy healthy demand from structural megatrends such as an ageing population and increasing demand for quality healthcare.
The effects of the REIT’s 2.0 growth strategy are also beginning to be evident in its financial performance. For the FY2022 ended Dec 31, 2022, First REIT’s rental income grew by 8.7% y-o-y to $111.3 million while its net property income (NPI) rose by 8.3% y-o-y to $108.6 million.
During the year, the REIT’s distributable income rose by 24.4% y-o-y to $52.4 million while its distribution per unit (DPU) rose by 1.15% y-o-y to 2.64 cents. Its FY2022 DPU represents a distribution yield of 10.2% based on its unit price of 26 cents.
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At its current unit prices, First REIT’s valuations are undemanding, trading at a P/B of 0.8x, less than 1 standard deviation (s.d.) above its historical average of 0.68x.
However, Lim notes that the REIT’s historical P/B has been depressed since its previous sponsor and largest tenant’s near-default in FY2020.
“Based on our fair value, we expect First REIT to return an attractive distribution yield of 9.1% in FY2023,” she says.
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“Taken together with the defensive nature of its portfolio, we believe that overall valuations are undemanding,” she adds.
Units in First REIT closed flat at 25.5 cents on April 24.
