First REIT’s new growth strategy, which saw it acquire 14 nursing homes in Japan this year, is executing well, says SAC Capital analyst Yeo Peng Joon.
“We are optimistic about the prospects of First REIT. The restructuring in 2020 marked a significant milestone in its next chapter and set the stage for its 2.0 growth strategy,” writes Yeo.
In a Nov 16 note, Yeo maintained his “buy” call on First REIT with a target price of 33 cents. This prices First REIT at FY2022 P/B of 0.8x and distribution yield of 10.4%.
This year, First REIT made its maiden foray into the developed world. In Japan, First REIT owns a total of 14 nursing homes, which takes up 24% of their total assets under management (AUM). It intends to lift that number to more than 50% by 2027.
In addition, it has the balance sheet to do so, says Yeo. “Currently, the gearing for First REIT is 36%. If the Group gears up to 40% and 45%, it will give them about $100 million and $200 million headroom respectively to acquire more properties.”
The yield from these Japanese properties are less than Indonesia and Singapore. However, due to the low cost of funding from the Japanese yen, the yield spread is similar, hence contributing to distribution per unit (DPU) positively, says Yeo.
The 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.
$225.7 million of the term loan is set to be refinanced in March 2023 where negotiations are ongoing. After refinancing the term loan, First REIT need not worry about future refinancing of bonds and loans as the next debt maturing will be about two years later, in May 2025, writes Yeo.
The strategic divestment of Surabaya, completed in September 2022, partially funded First REIT to buy back 45% of the $60 million 4.98% perpetual notes. This tender offer generated an interest saving of $1.3 million.
The REIT’s weighted average debt to maturity has increased to two years.
First REIT reported its 3QFY2022 business update on Nov 8. 3QFY2022 net property income (NPI) increased to $24.1 million, up 26% q-o-q while distributable amount rose to $13.7 million, up 31% q-o-q.
DPU rose to 1.98 cents in 9M2022, up 1.5% from 1.95 cents this time last year.
As at 10.24am, units in First REIT are trading flat at 25 cents.