• Indonesian hospital assets enjoy a long WALE of 11 years with a minimum annual rental escalation of 4.5% or a performance-based rent. FY23 rental income from Indonesia grew 7.6% in local terms, due to strong hospital revenue and performance rents.
• Capitalising on Japan’s aging population by expanding into Japan in 1Q22 by acquiring 12 nursing homes from its sponsor OUEH and a further 2 in 3Q22 from a third party. Targeting to increase the portfolio in developed markets to more than 50% of AUM by 2027, while simultaneously reducing exposure to Indonesia as a percentage of total income.
• First REIT is trading at an attractive 20% discount to NAV and a forward FY24e distribution yield of 9.6%.  We initiate coverage with a BUY recommendation on First REIT with a DDM-derived target price of S$0.30.

Company Background
First REIT (FIRT) is Singapore’s first healthcare REIT focused on investing in income-producing real estate assets primarily used for healthcare-related purposes. Its S$1.14bn portfolio consists of 32 properties comprising 15 in Indonesia (74.5% of assets under management), 14 in Japan (22.7%), and 3 in Singapore (2.8%). FIRT’s sponsors are OUE Limited and OUE Healthcare Limited (OUEH). FIRT has the right-of-first-refusal (ROFR) from OUEH, and a ROFR for a pipeline of hospitals from Lippo Karawachi (LPKR), a majority shareholder of Siloam. Siloam International Hospitals (38.7%) and LPKR (34.9%) are major tenants.

Key Investment Merits
• Restructured MLA and a long portfolio WALE of 11.3 years ensure long term cash flow 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 IDR, for the Indonesian hospitals. Currently, 3 of the 14 hospitals are already paying performance-based rent, and more may start contributing as the operational performance of the hospitals improves. Furthermore, with Siloam added as a party to the new Tripartite MLAs, the exposure to LPKR will decrease from c.88% before the restructuring to 18.7%, assuming that rentals for each of the Tripartite MLAs beyond 2026 are calculated based on the performance-based rent. LPKR has been experiencing tight cash flow since FY19.

• Recycling capital to fund expansion plans. FIRT plans to divest some of its non-core and mature assets to fund its expansion plans. Currently, Imperial Aryaduta Hotel and Country Club (IAHCC) has been identified as a non-core asset and is being marketed for divestment. The manager is also exploring divesting into some of the older nursing homes in Japan to recycle the proceeds and buy newer, better nursing homes in Japan. FIRT is also open to divesting some of its mature Indonesian hospitals, if the conditions are right.

• Expansion into developed markets. After expanding into Japan in FY22, FIRT plans to diversify further into developed markets, with a target of having >50% of AUM in developed markets by FY27. This could be done through further acquisitions in Japan or Australia. This will help reduce exposure to Indonesia and the depreciating Indonesian Rupiah against the strong Singapore Dollar.

We initiate coverage on First REIT with a BUY rating and a DDM-derived target price of S$0.30, based on a COE of 10.5% and a terminal growth rate of 2%. We forecast a DPU of 2.36 cents for FY24e and 2.51 cents for FY25e, translating into a forward yield of 9.6% and 10.3%, respectively.

Source: Phillip Capital Research - 5 Jul 2024