Healthcare REITs – OCBC

Robust outlook underpinned by strong growth drivers

Positive 4QFY10 results. Currently, there are only two healthcare REITs listed on SGX. They are First REIT (FREIT) [BUY, FV: S$0.80] and Parkway Life REIT (PLREIT) [NOT RATED]. FREIT and PLREIT both reported a respectable set of 4QFY10 results recently. FREIT’s growth was largely driven by higher rental income from its Indonesian properties; while PLREIT registered a 16.1% YoY increase in DPU to 2.38 Scents as a result of higher rent from its Singapore hospitals and contribution from the 11 Japan nursing homes acquired in 2010.

Favourable stable and long master leases. Both healthcare REITs function on long-term master leases that offer downside revenue protection, hence providing investors with stability. Moreover, there is also potential upside rental reversion that can be reaped. These master leases are important because the operations for healthcare REITs are specialised. Hence having the right operator/master lessee is critical as frequent turnover of operators would be very disruptive to operations.

Healthcare services as growth driver. Growth for Singapore’s healthcare REITs is driven by demand for healthcare and nursing home services. According to the Department of Statistics, Singapore’s private consumption expenditure on healthcare has increased at a CAGR of 8.8% to S$8.29b from 2006 to 2010. On the other hand, statistics from WHO revealed that Indonesia’s private expenditure on health grew at a CAGR of 12.7% to Rp45.3t from 2000 to 2008. We believe that such healthy growth trends are likely to continue, underpinned by strong fundamentals. These include Singapore’s aging population and influx of medical tourists; and Indonesia’s rising affluence which has increased demand for higher quality healthcare services. This would lend support to the rental income growth of PLREIT and FREIT.

OVERWEIGHT on healthcare REITs. We are OVERWEIGHT on healthcare REITs given their favourable master lease structure, strong sponsor support and optimistic outlook on the healthcare sector in Singapore and Indonesia. As seen from Exhibit 5, healthcare REITs on average command a higher yield and have a lower leverage ratio than their S-REIT peers, although their price-to-book ratio is higher. We believe this premium is justified due to the quality of assets owned and defensive nature of earnings which result in increased stability.

In terms of recent share price performance, PLREIT has increased 5.5% YTD while FREIT has risen 5.0% YTD, ranking them first and second respectively in the entire S-REIT universe (FSTREI Index has declined 2.1% YTD and STI Index has dropped 3.0% YTD). This corroborates the defensiveness of healthcare REITs in times of current market uncertainty.