A Breath of New Life
• Sustainable rental model with restructured MLAs, direct rental exposure to operators, and long WALE of >12 years
• Beneficiary of Siloam Hospitals’ improving performance
• Positive catalysts: Capital recycling and expansion activities
• Attractive valuation with forward P/B ratio of 0.9x and dividend yield of c.10%; Initiate with BUY and TP of S$0.30
Investment Thesis:
First REIT focuses on investing in healthcare and healthcare-related real estate assets within and outside of Asia. First REIT has 32 assets with an AUM of S$1.15bn, with 15 assets in Indonesia (72.1% of AUM), 14 Japan nursing homes (25.1%), and 3 nursing homes in Singapore (2.8%).
Sustainable rental income model including upside-sharing with Siloam International Hospitals (Siloam). We like First REIT for its long-term cash flow visibility following its 2021 Master Lease Agreement (MLA) restructuring, which ensures a minimum rental escalation of 4.5% per annum for Indonesian assets, alongside stable nursing home assets in Singapore and Japan, and a long weighted average lease expiry (WALE) of >12 years. We think the rebased rental rates are more sustainable, with revised rents now aligned with industry rates (was previously higher than industry) and Siloam being added as a party to the MLAs, which helps to reduce the exposure to PT Lippo Karawaci (LPKR). Furthermore, there is a potential upside in rental income via performance-based rents in tandem with Siloam’s stronger growth, with consensus Siloam’s FY23F/24F revenue growth at +15%/11%. We observe a positive correlation between First REIT’s and Siloam’s share prices; First REIT could be a beneficiary to Siloam’s improving performance.
Watch for capital recycling and expansion activities. Potential divestment of non-core and/or Indonesian assets to build sufficient firepower for future expansion activities, e.g., Japan, Australia.
Initiate with BUY with TP of S$0.30. First REIT is currently trading at attractive valuations with a forward P/B ratio of 0.9x (at -1SD of the historical average of 1.0x) and forward dividend yield of c.10% (at +1SD of the historical average of 8.2%). Our TP implies a forward P/B ratio and dividend yield of 1.0x and 8%, aligned with the historical average.
Key Risks
Weaker-than-expected operations from Siloam Hospitals due to the macroeconomic slowdown, rising competition, and more. Other risks include forex risks relating to IDR and JPY against the SGD.