First REIT - Near-term headwinds while awaiting strategic review outcome

Healthcare REIT with assets mainly in Indonesia

First REIT is Singapore's first healthcare real estate investment trust (REIT), with a S$1.12 billion portfolio comprising a diversified mix of 32 income-producing real estate assets across Indonesia, Japan and Singapore which are primarily used for healthcare purposes. 

Breakdown of First REIT’s revenue and NPI

Siloam International Hospitals and PT Lippo Karawaci Tbk in Indonesia represent the two largest tenants for the REIT, at 41.1% and 33.5% of rental income in 2024 respectively, with Indonesia representing about 85% of Net Property Income for the REIT in 2024.

Tenant mix by 2024 rental income

Downside risks from MPU arrears

We think the rental arrears from PT Metropolis Propertindo Utama (MPU), which contributed 6% in group rental income in 2024 could continue to overshadow the growth prospects of First REIT in the near term. 

A full write-down of such rent arrears outstanding could imply a 1% decline in DPU should the security deposits be used to offset rent arrears, and a 8% decline in DPU assuming a full writedown of rent arrears.

DPU scenario analysis based on MPU outcomes

Impact from Rupiah and Yen weakness

While First REIT pays its DPU in Singapore Dollars, weaknesses in the Indonesian Rupiah and Japanese Yen have impacted rental income, even as rental income from its Indonesian assets grew 4.7% and Japan nursing homes were stable in local currency terms. 

In our view, continued weakness in the Indonesian Rupiah year-to-date may erode any organic rent growth in-built in the leases of the Indonesia Hospital.

Indonesian rupiah has weakened against Singapore Dollar since 2020

Strategic review may provide upside surprise

On 13 January 2025, First REIT announced that it has received a preliminary non-binding letter of intent (LOI) from Siloam to acquire its portfolio of hospital assets in Indonesia. 

The Board has since decided to undertake a strategic review to assess the LOI and explore all strategic options for First REIT. 

We note from precedent transactions for REIT take-over and merger transactions that the average implied price to net asset value (NAV) ratio stands at 1.04x.

Initiate coverage with NEUTRAL

We derived a target price of S$0.26 per unit based on a three-stage dividend discount model, on a cost of equity of 11.4% and terminal growth rate of 1%. 

First REIT is now trading at 0.87x P/NAV, and offers a potential FY25E distribution yield of 9.2%. 

Key risks include foreign currency risks, proposed strategic review not yielding significant outcome, amongst others. 

Mixed DPU track record

If you are interested to learn more about the outlook of Singapore REITs amidst the current market volatility, join us for our upcoming free webinar on 16 April, where we will discuss if the share prices of Singapore REITs will recover with falling bond yields. Register for free here.

Related links:

• First REIT share price history and share price target
• First REIT history and dividend forecasts

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