Brokers’ take: First Reit’s hospital revenues could spur organic growth; Maybank initiates coverage at ‘buy’

MAYBANK Securities initiated coverage on First Real Estate Investment Trust (First Reit) with a “buy” call, as the research house is positive on the trust’s diversified portfolio.

The research house issued First Reit a target price of S$0.28, which implies an upside of 16.7 per cent from its current share price.

On Wednesday (Jun 26), analyst Li Jialin said First Reit’s top line has improved back to levels near pre-restructuring, while its valuation is still attractive at a 20 per cent discount to book despite moderate risks.

Looking ahead, Li projects a dividend yield of 10 per cent for the current financial year. 

Noting that First Reit has expanded its portfolio and geographic exposure, Li said she is positive on the trust’s diversified income coming from the nursing homes in Japan that support the ageing population.

“As First Reit’s nursing homes are in prefectural capitals, they do not face direct competition from the large Japan Reit counterparts in metropolitan areas,” she said.

While both hospitals and nursing homes provide stable recurring income streams to tenants and operators, the latter offers a “slightly different proposition” with a longer length of stay for patients, Li said.

“We like the rebalanced allocation in asset classes, growing assets under management in developed markets, and an enlarged tenant pool to reduce concentration risk,” she said.

The analyst also highlighted that the trust’s hospitals in Indonesia are seeing more affluent patients who prefer private hospitals due to Covid-19 travel restrictions and medical tourism.

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Given revenue gains in First Reit’s Indonesia private hospital chain since FY2022, Li said the trust can drive its organic growth if more hospitals’ top line “surpass their benchmark” and switch to performance-based rent.

She also projects favourable growth prospects for the Reit in view of its potential capital recycling of its assets in Indonesia in the long term.

The analyst also noted that a bulk of the Reit’s leases will expire in 2035 and 2043. She added that it is unlikely for healthcare providers to relocate as their equipment is already built in and “considerable capital expenditure” has been spent on the buildings.

Units of First Reit were trading down 2 per cent or S$0.005 at S$0.24 as at 11.23 am on Thursday.