SAC Capital analyst Lam Wang Kwan has initiated “hold” on First REIT with a target price of 32 cents.
The REIT is currently trading at a dividend yield of 8.0% and a P/NAV of 0.8x.
“We believe that with the restructured master lease agreement (MLA) terms and the addition of the Japan portfolio, First REIT will be able to sustain a similar distribution per unit (DPU) payout in the medium term,” writes Lam in his report dated Feb 24.
“The potential growth drivers would include future acquisition and the performance of Indonesian hospitals,” he adds.
In May 2021, First REIT successfully completed the restructuring of the MLA for 14 of its Indonesian properties. The restructuring will help the REIT provide a more sustainable income, says Lam.
“The new terms saw Siloam direct rental contribution increase from 1.5% to 46.6% and is estimated to rise to 81.3% in the long run,” he writes. “Having Siloam as a counterparty provides more assurance against future defaults.”
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Siloam is a healthcare operator and is able to turn stable earnings. It has remained profitable in the last two financial years. In contrast, the REIT’s existing counterparty property developer Lippo Karawaci is more cyclical and has been in the red since FY2018.
“With straight-line accounting applied to the base rental escalation of 4.5%, we expect topline to remain relatively constant. The performance-based rent term [at 8%] could be a potential growth driver in the future.
The REIT, on Dec 8, 2021, also announced the acquisition of 12 nursing homes in Japan, which is supposed to provide higher income and cash flow stability to the REIT.
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“Aside from the purchase price of $168 million, First REIT will inherit around $128 million [of] debt, however cost of debt is expected to fall slightly possibly owing to lower interest rate JPY debt,” says Lam.
“The Japan portfolio is expected to contribute [some] 15% of future rental income and provide a slight uplift on DPU. We expect the acquisition to be completed by 1HFY2022,” he adds.
Finally, Lam sees “room for growth” for the REIT. As at end-FY2021, the REIT’s gearing stood at 33.6%. This is expected to rise to around 36.4% on a pro forma basis after the acquisition in Japan.
“This leaves ample debt room ([around] $350 million at 50% leverage limit) for First REIT to pursue acquisition targets. Moreover, First REIT can potentially take advantage of lower interest JPY debt to finance future growth. In FY2022, First REIT is also due to receive exceptional income of [around] $30.6 million in settlement amount over termination of development work in Surabaya,” writes Lam.
Downside risks come in the form of exchange rate risks as 80% of the REIT’s revenue is denominated in the Indonesian rupiah (IDR).
“A 10 basis-point (bps) drop in [the] Singapore dollar (SGD)/IDR is likely to cause a 10bps drop in DPU. First REIT currently does not hedge the exchange rate risk, but the Japan acquisition is expected to provide some natural hedge against IDR,” says Lam. “While First REIT is trading at a dividend yield of 8.6%, real yield is actually closer to 2.1% amidst the rising risk-free rate.”
Units in First REIT closed 0.5 cent lower or 1.64% down at 30 cents on Feb 24, or an FY2022 P/NAV of 0.8x and DPU yield of 123%.
Photo: First REIT
