Comprehensive Analysis of First REIT: Navigating Forex Headwinds and Financial Performance

Maybank Research Pte Ltd | November 10, 2024

The financial landscape for First REIT (FIRT SP) has shown considerable resilience, despite facing forex headwinds, as evidenced by their recent performance report. This comprehensive analysis dives deep into the financial metrics, growth strategies, and operational updates of First REIT, providing a detailed overview for investors and stakeholders.

DPU Marginally Lower Than Forecasts; Maintain BUY

First REIT’s 9M24 (Nine Months of 2024) Dividend Per Unit (DPU) stood at SGD1.78 cents, reflecting a decrease of 3.3% Quarter-on-Quarter (QoQ) and 5.3% Year-on-Year (YoY). This DPU achieved 74.8% and 74.2% of consensus and forecasted values, respectively. The revenue and Net Property Income (NPI) of SGD77 million and SGD74.7 million were under pressure due to forex headwinds, primarily from a weaker Yen against the Singapore Dollar (SGD). However, impacts from a weaker Indonesian Rupiah were largely offset by built-in escalation. Adjustments in forex assumptions have led to a marginal reduction in FY24-25E DPU forecasts by 0.8-1.6%, while maintaining a BUY recommendation, reflecting a strategic approach amidst challenging conditions.

Organic Growth Offset by Forex

In local currency terms, FIRT’s Indonesia and Singapore portfolios saw a revenue increase of 4.4% and 2.0% respectively over 9M24. Excluding adjustments on rental straight-lining, rental income from the Indonesia portfolio slightly dipped by 0.3% YoY despite the local currency growth. On the other hand, rental income from the Japan portfolio declined by 10.4% YoY, with the average exchange rates for SGD/JPY depreciating by 10.9% from 101 to 112. These fluctuations necessitated updates in forex assumptions, impacting future revenue estimates.

Business Updates

Operational metrics have remained stable with a 100% occupancy rate. However, rental arrears from MPU increased to SGD7.9 million in September 2024 from SGD6.4 million in June 2024. Security deposits from MPU and Siloam Hospitals are being utilized to cover these arrears, and management is actively engaging with MPU to recover the remaining balance. Upcoming lease expiries include Imperial Aryaduta Hotel & Country Club and Siloam Hospitals Lippo Cikarang, both extended to December 2025.

Awaiting Further Interest Rate Cuts

First REIT’s gearing was at 39.3% in September 2024, with a stable Cost of Debt (COD) at 5.0%. The expectation of interest cost savings in a declining interest rate environment is high as the fixed rates hedging ratio is set to fall from 86% to below 60% by year-end. Additionally, management aims to restore IDR hedges at favorable exchange rates, maintaining strategic financial stability.

Share Price and Financial Metrics

First REIT’s share price stood at SGD 0.26, with a 12-month price target of SGD 0.28, indicating a potential 17% upside. The company invests in income-producing healthcare assets, operating in Indonesia, Singapore, and Japan. Key statistics include a 52-week high/low of SGD 0.28/0.23, a market capitalization of SGD536.5M, and a free float of 53.8%.

The financial metrics for FY22-26 show a stable outlook with revenue expected to slightly decline in FY24 but rebound in FY25 and FY26. The DPU yield remains attractive at around 9%, with a consistent debt-to-assets ratio of 0.37. Management and trustee fees, net financing costs, and core net profit are also detailed, providing a comprehensive view of the financial health and projections for First REIT.

Value Proposition

First REIT is a healthcare-focused REIT owning a mixture of hospitals and nursing homes across Indonesia, Japan, and Singapore. Operating under a net-lease model, it leaves day-to-day operations to third parties. The Indonesian lease agreement provides a fixed annual rent escalation or a higher performance-based rent. The stable management team, led by CEO Victor Tan, has restored revenue near pre-restructuring levels, maintaining a low valuation.

Price Drivers and Historical Trends

The historical share price trend highlights significant events, including the restructuring of the master lease agreement in November 2020, a rights issue in December 2020, and acquisitions and divestments in 2021 and 2022. These strategic moves have positioned First REIT for growth, despite fluctuations in revenue due to forex impacts.

Financial Metrics and Forecasts

First REIT posted 1Q24 revenue of SGD26.1 million, impacted by FX headwinds but showing growth in local currencies. The gearing remains stable, with a significant portion of borrowing hedged to fixed interest rates. The asset management strategy includes performance-based rents for three hospitals, contributing to overall revenue stability.

Environmental, Social, and Governance (ESG) Considerations

First REIT’s ESG considerations include enhancing sustainability data collection and monitoring systems, with disclosures for properties in Indonesia and Singapore. The manager encourages the installation of environment-friendly equipment and has committed capex for energy efficiency improvements. Governance metrics highlight a balanced and diverse board, active sustainability team, and strategic lease agreements.

Results Highlight and Forecast Changes

The 9M24 results show a 5.3% YoY decline in revenue due to forex headwinds. Adjusted forex assumptions have led to revised forecasts, with a slight reduction in revenue and NPI estimates for FY24 and FY25. The financial projections reflect a cautious yet optimistic outlook, balancing forex impacts with strategic hedging and cost management.

Conclusion

First REIT demonstrates resilience amidst forex challenges, maintaining stable operational metrics and strategic financial management. The comprehensive analysis highlights the REIT’s ability to navigate headwinds, offering an attractive DPU yield and potential growth opportunities. Investors can expect continued stability and strategic growth from First REIT in the coming years.