Brokers' take: SAC Capital initiates 'hold' on First Reit with S$0.32 target

SAC Capital initiated coverage on First Real Estate Investment Trust (First Reit) with a "hold" call and a S$0.32 target price.

The target price is derived using the dividend discount model and assumes a cost of equity of 12.5 per cent.

In a research report on Thursday (Feb 24), analyst Lam Wang Kwan said that the restructured master lease agreements (MLAs) of 14 of First Reit's Indonesian properties provide the trust with more sustainable income.

With the new terms, healthcare operator Siloam saw direct rental contribution increase and this is expected to continue to rise.

Lam believes that having Siloam as a counterparty provides more assurance for the Reit against future defaults as Siloam has more stable earnings and has remained profitable over the past 2 fiscal years.

With the revised MLAs, Lam expects top line to remain relatively constant as base rental escalation is brought up to 4.5 per cent. The performance-based rent term was revised to 8 per cent of gross operating revenue which the analyst sees as a potential growth driver in the future as well.

Additionally, First Reit's acquisition of 12 Japan nursing homes from OUE Lippo Healthcare is expected to provide higher income and cash-flow stability to the trust, Lam said. The analyst expects the acquisition to be completed by H1 FY2022 and projects the Japan portfolio to contribute about 15 per cent of future rental income and provide a slight uplift to distribution per unit (DPU).

According to Lam, gearing is estimated to rise about 36.4 per cent after the acquisition as well. This leaves ample debt room for the Reit to pursue after the acquisition, Lam said.

The analyst also sees potential for First Reit to benefit from lower interest Japan currency debt to finance future growth.

The Reit is due to receive exceptional income of around S$30.6 million in settlement amount over the termination of development work in Surabaya, Lam added.

"We believe that with the restructured MLA terms and the addition of the Japan portfolio, First Reit will be able to sustain a similar DPU payout in the medium term," the analyst said.

Although exchange rate of Indonesian currency could pose a risk to the Reit's DPU, Lam believes the Japan acquisition is expected to provide some "natural hedge" against the rupiah.

Future acquisition and the performance of Indonesian hospitals are potential growth drivers for the Reit as well, Lam added.

Units of First Reit were trading down 3.3 per cent or S$0.01 at S$0.295 as at 2.28 pm on Thursday.