OCBC Investment Research has initiated coverage on First Real Estate Investment Trust : AW9U 0% (First Reit) with a “buy” rating, in view of the Reit’s stable income stream and improved financial performance for FY2022.

The brokerage believes First Reit’s “valuations are undemanding” as it currently trades at 0.8 times its price-to-book ratio, which is slightly above its historical average of 0.68 times. 

OCBC has set a fair value estimate of S$0.31 for the counter, implying that the Reit is trading at its book value. 

As at Dec 31, 2022, the healthcare-focused Reit had a portfolio of 32 nursing homes and hospitals located in Singapore, Japan and Indonesia. 

Analyst Ada Lim noted on Friday (Apr 21) that these assets have a long weighted average lease expiry of 12.5 years, which allows for strong cash flow visibility. 

Furthermore, First Reit has built-in rental escalation clauses in its master leases. This provides potential rental growth and enables the Reit to share in tenants’ upside, said Lim. 

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In 2021, First Reit introduced its “2.0 growth strategy”, which entails diversifying across tenants and geographies, portfolio rejuvenation and riding on megatrends such as a globally ageing population. 

OCBC believes the Reit can benefit through upside sharing with its tenants as the demand for better quality healthcare and aged care grows. 

First Reit’s growth strategy positively impacted its financial performance for FY2022, with rental income growing 8.7 per cent year on year (yoy) to S$111.3 million, and net property income increasing by 8.3 per cent yoy to S$108.6 million. 

The Reit’s distribution per unit has risen by 1.2 per cent to S$0.0264. Based on the counter’s last traded price of S$0.26 as at 2.22 pm on Monday, this represents a distribution yield of 10.2 per cent. 

“Given an attractive forecasted distribution yield of 9.1 per cent in FY23, we think First Reit is a potential defensive addition to portfolios,” said Lim.