DBS Group Research has initiated coverage on First REIT with a "buy" call and 30 cents target price, on the premise that it has put in place a sustainable rental model for its portfolio of healthcare properties, according to a June 30 report by Elizabelle Pang, Rachel Tan and Derek Tan.

First REIT owns hospitals and nursing homes in Indonesia, Japan and Singapore. it has a total of 32 assets, valued at $1.15 billion.

Sustainable rental income model including upside-sharing with Siloam International Hospitals (Siloam).

Under a revised master lease agreement of 2021, First REIT has ensured achieved long-term cash flow visibility by ensuring a minimum rental escalation of 4.5% per annum for Indonesian assets.

In addition, its nursing home assets in Singapore and Japan are relatively stable, with a long weighted average lease expiry (WALE) of >12 years.

As part of the revision of the master lease, the new, lower rental rates are now deemed more aligned with the industry and therefore more sustainable.

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"Furthermore, there is a potential upside in rental income via performance-based rents in tandem with Siloam’s stronger growth, with consensus Siloam’s FY23F/24F revenue growth at +15%/11%," the analysts state, referring to the hospital operator.

Having observed a positive correlation between First REIT’s and Siloam’s share prices, First REIT could be a beneficiary to Siloam’s improving performance, they add.

Meanwhile, there's possible capital recycling and expansion activities down the road. Potential divestment of non-core and/or Indonesian assets will help the REIT build sufficient firepower for future expansion activities in markets such as Japan and Australia, they say.

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DBS' 30 cents target price is based on a forward price-to-book ratio of 0.98x, which is -1 standard deviation below the historical average of 1x.

At current level, First REIT is offering a forward dividend yield of around 10%, which is 1 sd above the historical average of 8.2%.

The target price implies a forward P/B ratio and dividend yield of 1.0x and 8%, aligned with the historical average.

Key risks include weaker-than-expected operations from Siloam Hospitals due to the macroeconomic slowdown, rising competition, and more.

Other risks include forex risks relating to rupiah and yen, two key operating currencies, versus the Singdollar, the reporting currency.

First REIT changed hands at 26 cents as at 2.17pm, unchanged for the day, and down 3.7% year to date.

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