SAC Capital analyst Yeo Peng Joon has initiated coverage on First Real Estate Investment Trust (First REIT) AW9U with a “buy” call as he sees the counter offering sustainable dividends per unit (DPU) with an improved risk profile.
In his report dated March 31, Yeo has given the REIT a target price of 30 cents, pricing First REIT at a 0.8x price-to-book value ratio (P/Bv) and distribution yield of 9.3% for FY2023.
According to the analyst, First REIT’s risk profile has improved due to the adoption of several strategies adopted. This includes lower reliance on collecting rental from PT Lippo Karawaci Tbk (LPKR) as its Siloam properties became a direct counterparty to each of the LPKR master lease agreements (MLAs) and increasing assets under management (AUM) in developed markets to over a quarter of its portfolio through the acquisition of nursing homes in Japan.
In his unrated report dated April 17, Phillip Securities Research analyst Darren Chan says that the restructured MLA that took effect in January 2021 for First REIT’s Indonesia hospitals, excluding Lippo Cikarang whose lease expires in December 2025, is the higher of an annual fixed base rent escalation of 4.5% or 8% of the hospital’s gross operating revenue (GOR) in the preceding financial year.
Based on the terms of the restructured MLA, Siloam and LPKR will pay 6.5% and 1.5% of the preceding year’s GOR respectively after FY2026, assuming performance-based rent is achieved.
“As a result, Siloam’s direct rental contribution is projected to rise from some 50% in FY2022 to some 80% in the long term. This brings more assurance of future rental collections, as before the restructuring LPKR contributed most of the rent. Siloam continues to see strong operating cash flow since FY2020 due to steady growth in non-Covid patient volumes, while LPKR has been in the red since FY2019,” explains Chan.
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SAC Capital’s Yeo adds that the improved risk profile buoyed is by First REIT’s 2.0 growth strategies, enabling sustainable rental collection and distribution. “The trust made its maiden foray into the Japanese healthcare real estate market in FY2022 to diversify its tenant and geographical assets and tap into the tailwinds of Japan’s healthcare sector.”
They completed the acquisition of 12 nursing homes in Japan in March 2022 and two more in September 2022, adding five more third party tenants, totaling to 11 in FY2022. With these, the combined AUM in the developed markets amounts to more than a quarter of its portfolio, with a target to have more than half of its AUM there by 2027, he adds.
With more than 15.2% of First REIT’s FY2022 rental income coming from developed markets, the analyst believes the Japanese acquisitions allow for a more dependable and foreseeable stream of rental income as the majority of its leases are designed as long-term with extended periods and predetermined rental increases.
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First REIT’s weighted average lease expiry for its properties is 12.5 years, with 16.9%, 10.0% and 73.0% expiring within five, five to ten and over ten years respectively. The Indonesia and Singapore properties have the option to renew for 15 and 10 years respectively.
Yeo believes the REIT is continuing to ride on the “tailwinds” of supply shortage in Indonesia and megatrends in Japan and Singapore. Underpenetration in the healthcare sector in Indonesia leaves the number of beds per 1000 people at 1.2 in 2021 according to him, missing the median set by Organisation for Economic Co-operation and Development (OECD) of 3.4.
Meanwhile, he says that ageing populations are becoming a serious problem in Japan and Singapore, with those aged 65 or older projected to reach 31.4% of the total population in Japan by 2030 and 33.3% by 2025 in Singapore. “This demographic shift has created strong demand for First REIT’s healthcare services and facilities,” he explains.
Yeo also notes that the REIT has undergone tenant and operator diversification and an increased mixture of funding sources from SGD debt and JPY and social loans, with its next debt, amounting to some 23.5% of the REIT’s total debt, maturing only in 2025.
He believes the REIT’s “solid rental structure” offers an attractive dividend yield. First REIT’s FY2022 DPU was 2.64 cents, translating to a 10.2% yield.
“After the new master lease agreement took effect in Jan 2021, its Indonesia properties (excluding Lippo Cikarang) have a fixed 4.5% rental escalation or 8.0% of the hospital’s gross operating revenue in the previous financial year,” says Yeo.
First REIT’s Singapore properties have a fixed base rental and a fixed annual increment of 2%, while for most of its Japan properties, rental may be revised upwards every two to three years upon negotiation based on the increase in Japan’s CPI or interest rates, adds Chan of Phillip Securities. He notes that most of the REIT’s properties are on triple net lease terms.
As at 11.20am, units in First REIT were trading 0.5 cents or 1.96% up at 26 cents, with a dividend yield of 9.97%.
