First REIT - SAC Capital 2022-11-16: 2.0 Growth Strategy Executing Well


First REIT - 2.0 Growth Strategy Executing Well

  • First REIT (SGX:AW9U)'s 3Q22 NPI increased to S$24.1m (+26% q-o-q) while distributable amount rose to S$13.7m (+31% q-o-q) fuelled by the acquisition of 12 nursing homes in Mar22 and 2 more in Sep22 in Japan. The acquisitions are partially funded by JPY1.66b non-recourse social loan.
  • These acquisitions have brought about:
    1. Increase of AUM in developed markets to 25.6% (target: >50% by 2027), thereby improving the risk profit of First REIT.
    2. Decrease in all-in cost of debt to 4.0% in 9M22 from 4.2% in Dec 21.
    3. Diversification of funding sources including, S$ debt, JPY debt and social loans.
    4. Diversification of tenants with 5 different independent tenants in Japan.
    5. Ride on megatrends of the greying population in Japan.
  • First REIT's DPU rose to 1.98 cents in 9M22. (+1.5% from 1.95 in 9M21). See First REIT's dividend history.
  • The strategic divestment of Surabaya (completed in Sep22) partially funded First REIT to buy back 45% of the S$60m 4.98% perpetual notes. This tender offer generated an interest saving of ~S$1.3m of the 3.0m.
  • First REIT has hedged against the volatility in borrowing cost through swaps and caps, bringing the fixed portions to 61.7% as compared to 22.5% if without. Also, 26.9% of the debt is at relatively stable rates in JPY compared to none before the Japan acquisitions. S$225.7m of the term loan is set to be refinanced in Mar23 where negotiations are ongoing.
  • First REIT's gearing stands at 35.6% in 9M22. This gives headroom of ~S$97.4m for future acquisition of properties. We can expect the cost of debt to lower further as they take advantage of the JPY lower interest to fuel expansion.

We are optimistic about the prospects of First REIT.

  • We held a non-deal roadshow for First REIT a day after the release of its 3Q22 results.
  • The restructuring in 2020 marked a significant milestone in its next chapter and set the stage for its 2.0 growth strategy. This year, First REIT made its maiden foray into the developed world - Japan.
  • In Japan, First REIT owns a total of 14 nursing homes which takes up 24% of their total AUM. It intends to lift that number to more than 50% by 2027. And it has the balance sheet to do so. Currently, the gearing for First REIT is 36%. If the Group gears up to 40% and 45%, it will give them about $100m and $200 headroom respectively to acquire more properties.
  • Japan's properties yield are less than Indonesia and Singapore. However, due to the low cost of funding from JPY, the yield spread is similar, hence contributing to DPU positively.
  • After refinancing the term loan that will be expiring on Mar 22, First REIT need not worry about future refinancing of bonds and loans as the next debt maturing will be about 2 years later, in May 2025. The Group’s weighted average debt to maturity has increased to 2 years.

Valuation & Recommendation

  • We maintain BUY rating on First REIT with target price of S$0.33. This prices First REIT at FY22E P/B of 0.8x and distribution yield of 10.4%.

Yeo Peng Joon SAC Capital Research | https://www.saccapital.com.sg/ 2022-11-16
SGX Stock Analyst Report BUY MAINTAIN BUY 0.330 SAME 0.330