HealthCare Reits

OCBC on 13 Mar 2012

Both Healthcare REITs reported an improved financial performance during the recently concluded 4QCY11 results period, driven by both organic and inorganic growth. In addition, First REIT (FREIT) and Parkway Life REIT (PLREIT) also expanded their geographical footprint by penetrating into new markets recently. We expect further acquisitions to come as both REITs seek to leverage on the robust fundamentals in the regional healthcare scene. As the macroeconomic environment remains uncertain and volatile, we opine that Healthcare REITs would provide a safe shelter for investors. This is underpinned by their long-term defensive lease structures with substantial downside revenue protection and strong sponsor support. Maintain OVERWEIGHT on Healthcare REITs. Under our coverage, we have a BUY rating on FREIT with a fair value estimate of S$0.89.

Improved performance driven by organic and inorganic growth
First REIT (FREIT) and Parkway Life REIT (PLREIT) both exhibited similar growth characteristics during the recently concluded 4QCY11 results period. Their improved financial performance was underpinned by organic and inorganic growth as a result of contributions from recent acquisitions. Due to the triple net lease structure inherent in most of the master leases of Healthcare REITs, FREIT and PLREIT were able to command high net property income margins of 98.9% and 91.5%, respectively as at FY11.

Expanding their regional footprint
PLREIT recently stepped up its acquisition drive, purchasing three nursing homes in Japan (JPY3.0b, or ~S$50m); and marked its maiden foray into Malaysia with the acquisition of strata titled units (RM16.0m, or ~S$6.45m) within Gleneagles Medical Centre, Kuala Lumpur. FREIT’s last acquisition came in Aug last year, with the purchase of Sarang Hospital in South Korea. This too represented a venture into a new geographical market. These events suggest that both Healthcare REITs are seeking to expand their footprint in the regional healthcare scene, which is a sound move, in our opinion. This would raise their profiles and diversify their operations. Moreover, healthcare fundamentals in the region remain resilient, bolstered by rising income levels, growing demand for quality healthcare services and changing demographics towards a greying population.

Maintain OVERWEIGHT
We reiterate our OVERWEIGHT rating on Healthcare REITs. With the still uncertain and volatile macroeconomic environment, we opine that Healthcare REITs would provide a safe shelter for investors. This is underpinned by their long-term defensive lease structures with substantial downside revenue protection, thus providing strong income visibility. PLREIT has also benefited from the high inflationary pressures in Singapore last year with its CPI + 1% rent revision formula (positive rental reversion of 5.3% for its Singapore hospitals commencing Aug 2011). Moreover both REITs are backed by strong sponsors. Under our coverage, we have a BUY rating on FREIT with a fair value estimate of S$0.89.

First Reit

OCBC on 30 Jan 2012

First REIT (FREIT) reported its 4Q11 results which were within our expectations. For FY11, gross revenue increased 78.4% to S$54.0m and was just 0.2% higher than our full-year projection. Distributable income to unitholders rose 105.8% to S$43.9m, in line with our forecast of S$41.9m if we exclude a special S$2.2m distribution in 4Q11. DPU for FY11 was 7.01 S cents, versus 6.63 S cents in FY10, and translates into an attractive yield of 9.1%. We believe that FREIT could acquire new hospitals in FY12. This would likely be debt funded given its ample debt headroom. Maintain BUY with a revised RNAV-derived fair value estimate of S$0.89 (previously S$0.84) as we roll forward our valuations and update our terminal capitalisation rates and Indonesian asset discount rates assumptions.

4Q11 results within expectations. First REIT (FREIT) reported its 4Q11 results which were within our expectations. Gross revenue surged 82.0% YoY to S$13.9m while distributable amount to unitholders jumped 122.9% to S$12.1m. This was partly due to a special distribution of S$2.2m arising from FREIT’s recent divestment of the Adam Road property. For FY11, gross revenue increased 78.4% to S$54.0m and was just 0.2% higher than our full-year projection. Distributable income to unitholders rose 105.8% to S$43.9m, in line with our forecast of S$41.9m if we exclude the special S$2.2m distribution in 4Q11. DPU for FY11 was 7.01 S cents, versus 6.63 S cents in FY10 due to additional distributions from the asset divestment as highlighted earlier and a 5-for-4 rights issue in Dec 2010. This translates into an attractive yield of 9.1%. We think that the remaining S$4.4m from the S$8.7m gain on the divestment could be distributed to unitholders in two tranches in 1Q12 and 2Q12, although usage of these funds would be at the full discretion of FREIT’s Manager.

Acquisitions likely in FY12. Management has reiterated its focus on Indonesia, given rising demand for quality healthcare services there and visibility from the strong pipeline of hospitals from its sponsor Lippo Karawaci. We reckon that any acquisitions in the near term are likely to be debt funded, since FREIT’s gearing ratio of 14.8% (end FY11) provides ample debt headroom of S$89.8m-S$143.4m before reaching its comfortable gearing ratio range of 25%-30%.

Maintain BUY. We opine that FREIT has showcased its resilience amid the current volatile economic environment, underpinned by healthy industry fundamentals and its stable master lease structure. Maintain BUY with a revised RNAV-derived fair value estimate of S$0.89 (previously S$0.84) as we roll forward our valuations and lower our terminal capitalisation rate inputs for some of its properties. We also apply a smaller discount rate to its Indonesian assets given improving fundamentals of the country.