Brokers’ take: DBS initiates coverage on First Reit with ‘buy’

DBS Group Research has initiated coverage on First Real Estate Investment Trust (First Reit) with a “buy” rating, in view of the Reit’s attractive valuation and a more sustainable rental model.

In a report released on Friday (Jun 30), the research house said it believes that the healthcare-focused Reit is now trading at an attractive valuation relative to its pre-restructuring period, with a forward price-to-book (PB) ratio of 0.9 times; this is one standard deviation less than the historical average forward PB ratio of one time before the Master Lease Agreement (MLA) restructuring. 

DBS also estimates a forward dividend yield of 10 per cent, which is one standard deviation above First Reit’s historical average dividend yield of 8.2 per cent.

The research team is recommending a target price of S$0.30 for the Reit, and this implies a forward PB ratio of one time, and dividend yield of 8 per cent based on historical average.

First Reit is also being traded at a discount relative to other healthcare-related trusts, as they are trading at a forward PB ratio of one time with an average dividend yield of 9 per cent, said the bank’s analysts Elizabelle Pang, Rachel Tan and Derek Tan.

As at Dec 31, 2022, the Reit had a portfolio of 32 nursing homes and hospitals located in Singapore, Japan and Indonesia. Its asset-under-management (AUM) was at S$1.15 billion. 

DBS said that the restructuring has enabled the assets under the Reit’s portfolio to have the weighted average lease expiry extending from 7.4 years previously to 12.6 years.

Moreover, the restructured rental model has taken into consideration currency volatility by ensuring a minimum rental escalation of 4.5 per cent per annum, built-in rental escalation clauses, and revised the performance-based rent structure in its master leases.

This has given the Reit a more sustainable rental model to generate the rental growth potential and enables it to ride on the long-term growth of Siloam International Hospital, while reducing exposure to Lippo Karawaci.

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The analysts also indicated that First Reit’s growth could come from its recent expansion into Japan, which will help raise its stable income from developed markets. 

Other upsides include the divestment of non-core, non-healthcare assets and mature healthcare assets that will provide the “firepower” for expansion activities in markets such as Japan and Australia.

DBS added that the Reit has plans to increase its AUM exposure in these developed countries by more than 50 per cent in the medium to long term.

Units of First Reit were traded 1.9 per cent or S$0.005 down to S$0.255 as at 2.45 pm.