Healthcare REITs – OCBC

STABLE OUTLOOK FOR 2013

• Strong share price performance YTD
  
• Defensive income streams and lease structure
  
• Quality likely priced in
  

Year in review

The S-REITs sector has been a standout performer in 2012 (+34.5% YTD), buoyed by the ‘yield compression’ theory in light of the current low interest rate environment. Unsurprisingly, healthcare REITs have also delivered strong YTD price appreciation, with First REIT (FREIT) rising 36.2% and Parkway Life REIT (PLREIT) a more modest 19.0%. Both healthcare REITs also continued to showcase steady growth in their financial performance, supported by organic and inorganic growth. For 9M12, FREIT’s revenue and DPU increased 5.4% and 9.1%, while that of PLREIT climbed 8.0% and 6.8%, respectively.

Defensive play amid uncertain macro environment

In our opinion, healthcare REITs offer the most defensive attributes within the S-REITs space. This stems from the following reasons: 1) long-term master lease tenures which have significant downside revenue protection and 100% committed occupancy; 2) Singapore CPIpegged rental structure which allows for positive rental reversion (3.5-4.5% headline inflation expected in 2013, according to the Monetary Authority of Singapore); 3) triple net lease structure inherent in a substantial proportion of leases; and 4) resilient underlying cashflows from operators which enhances their ability to fulfil rental obligations. We believe that these defensive qualities would provide stability for investors amid the still-uncertain macroeconomic environment.

Maintain NEUTRAL

Moving into 2013, we believe that healthcare REITs will remain on the lookout for further acquisitions to boost their portfolios. Indonesia will likely continue to be the main focus for FREIT, while PLREIT could deepen its foothold in Malaysia (through sponsor-related or third party acquisitions), in our view. In terms of valuation, we believe that the subsector positives have already been priced in, with healthcare REITs trading at an average historical P/B ratio of 1.37x, while offering current and forward yields of 5.8% and 6.0%, respectively, based on Bloomberg consensus estimates. This is a rich premium to the S-REITs universe (ex. healthcare REITs), which are trading, on average, at 1.06x historical P/B and current and forward yields of 6.1% and 6.4%, respectively. Hence, we maintain our NEUTRAL rating on the healthcare REIT subsector. Within this space, we have a HOLD rating and RNAV-derived S$0.98 fair value estimate on FREIT.