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.
REITs – DBSV
S-REITs still a growth story
• No surprises in 4Q10 results; weaker earnings from Office REITs
• Hospitality REITs offer strongest organic growth while Industrial & Sponsored REITs have portfolio growth visibility
• BUY FCT, P-Life, Cache, MLT, CDL HT
S-REITs collectively delivered 11% y-o-y distribution growth in 4Q10. 4Q10 results were a continuation of the strong showing in 3Q10 with the sector reporting topline, net property income and distributable income growth of 10%, 13% and 11% respectively. Hospitality REITs continued to outperform with strong organic driven growth while acquisitions completed during the course of 2010 lifted distributions for the remaining S-REITs. While retail & industrial S-REITs continue to deliver single digit growth, Office REITs reported weaker results both y-o-y and q-o-q, as passing rents remained below the peak rents signed in 2007-2008. We expect this trend to continue in the coming quarters, only to reverse in 2012.
The forward picture – Growth strongest in Hospitality REITs. We believe that S-REITs are good inflation hedges given their ability to grow rental income above inflation, which is expected to average 4.2% in 2011. Except for office REITs, which could see topline pressure in 2011, S-REITs generally are forecasted to deliver FY10-12F DPU CAGR of 5.5%- 9.2%, which is above inflation. We maintain our view that Hospitality REITs will continue to exhibit the strongest earnings potential (+9.2% FY10-12F CAGR, +5ppts above inflation) stemming from expectations of strong tourists arrivals in 2011. CDL HT (BUY, TP S$2.30), with over 82% of its income from its Singapore hotels, remains our pick to leverage on the robust growth from this sector. In addition, P-Life REIT (BUY, TP S$1.90) offers downside protection as higher inflation bodes well for rental reversions going forward.
Industrial & Sponsored REITs have potential for further accretive acquisitions. Acquisitions will likely feature in 2011 given the current low interest cost environment and relatively low leverage of S-REITs of 34%. In fact, since the beginning of 2011, cS$880m worth of deals have been tied up by S-REITs. We prefer S-REITs with ability to grow accretively and believe that the Industrial REITs and Sponsored REITs can deliver on this front. We like MLT (BUY, TP S$1.07), Cache (BUY, TP S$1.11) and FCT (BUY, TP S$1.73) given their visible pipelines from their respective sponsor, which could be tapped in the medium term.
Industrial REITs – OCBC
Sanguine outlook; maintain OVERWEIGHT
Increasing rentals. Singapore’s industrial property market closed the year on a positive note, with 4Q10 rental values experiencing their fastest pace of growth since recovery. According to Colliers International, average monthly gross rents of factories and warehouses rose by 4.1%-5.0% QoQ, the fastest pace of growth since their recovery a year ago. YoY, rentals grew by a healthy 8.1%-11.9%. There was also increased demand for business parks and high-specs industrial space. Companies that are not sensitive to CBD locations are increasingly looking at high-specs space as office alternatives because of rental savings as well as the narrowing gap in terms of offerings between the two spaces.
Acquisition spree continuing. In 4Q10, we also witnessed the acquisition spree continuing from early quarters, with the economy awash with liquidity and low interest rates. MLT acquired three more properties in Singapore at a total consideration of S$85.6m. A-REIT made its foray into Shanghai with the forward-purchase of a Jinqiao business space property at S$117.6m. AAREIT also completed its acquisition of 27 Penjuru Lane at S$161m and recently announced the acquisition of Northtech (S$72m) in Feb 2011. CIT completed its acquisition of 1 & 2 Changi North Street 2 and 511 & 513 Yishun Industrial Park A. These acquisitions were in line with the manufacturing sector growing at a brisk pace. Manufacturing output increased 10.5% YoY in Jan 2011, while PMI was 50.5-52.3 from Oct 2010-Feb 2011, which indicated an expanding manufacturing sector for the fifth straight month.
Singapore Land Acquisition Act. The last quarter also saw some REITs affected by SLA’s compulsory land acquisition for the construction of the Tuas West MRT extension and road works along PIE. CIT has three properties affected to varying degrees by the acquisition, which will be possessed by the government by Jan 2013, affecting 58,439 sqm (12.8% of portfolio) of total land area. Sabana REIT’s property at 1 Tuas Avenue 4 is also affected, with 691.7sqm (5.04% of total land area of property) to be possessed by the government by 25 Nov 2011. Both REITs are entitled to receive compensation based on the market value of the acquired land.
Sanguine Outlook. The outlook for industrial segment remains sanguine on the back of strong economic fundamentals, as well as the government’s continued commitment to stimulate growth in the manufacturing sector. Demand for high-specs space is expected to trend upwards as companies move up the value chain from manufacturing and assembly activities to innovation-related development works. At 1.04x P/B versus a historical P/B of 1.10x, valuations remain compelling. Maintain OVERWEIGHT for the industrial-REITs subsector.
PCRT – BT
Perennial trust may cut IPO size in deferred listing
It cites volatile market, HPH Trust offering as reasons for shelving IPO
PERENNIAL China Retail Trust (PCRT), which on Saturday announced the deferment of its proposed initial public offering, is looking to cut the amount of equity to raise.
‘We are tweaking the deal to adapt to the current market conditions and hope to bring the deal to the market soonest possible,’ said Pua Seck Guan, CEO of the trustee-manager Perennial China Retail Trust Management, which is a wholly-owned subsidiary of Perennial Real Estate.
Mr Pua spoke to BT yesterday, a day after PCRT said it was shelving plans for an IPO. The business trust was expected to raise some $1.1 billion in gross proceeds, by issuing units at an indicative price of $1 each.
PCRT cited volatile global market conditions as a reason behind the move. The local stock market has been on shaky ground of late, pressured by political crisis in the Middle East and a reversal of funds from emerging to developed markets.
‘We started to plan the offering at the end of last year, but the market in the last two months has changed so much,’ Mr Pua said. ‘We have also bumped into the big offering of Hutchison Port Holdings Trust (HPH Trust).’
HPH Trust could raise as much as US$4.91 billion to US$5.83 billion in its proposed listing, potentially setting a new IPO record in Singapore. It issued its preliminary prospectus just days after PCRT did so.
PCRT had attracted a fair amount of interest, and managed to secure a cornerstone tranche amounting to 39.2 per cent of the proposed size of the IPO. CB Richard Ellis Global Real Estate Securities, Henderson Global Investors and Lion Global Investors were some of the participants.
The trust secured ‘strong cornerstones’ which ‘indicated that they will stay in the deal for the re-launch’, Mr Pua said.
Nevertheless, PCRT could be making some changes to its listing to draw more demand. It might raise less equity, meaning that the offer price could be less than $1 per unit.
‘At the moment for example, we have close to nil leverage. We can therefore explore taking on a bit of leverage to make the size of the equity fund-raising smaller,’ Mr Pua said.
PCRT’s aggregate leverage was to be 1.8 per cent post-listing, after paying down part of a loan. According to its preliminary prospectus, it has voluntarily adopted an aggregate leverage limit of 60 per cent.
PCRT was to start off with an initial portfolio size of $1.1 billion with four properties in China, and there was to be another $3 billion worth of assets in the pipeline. ‘We want to assure that our stock will do well post-listing,’ Mr Pua said.
A number of market watchers BT spoke to were surprised by news of PCRT’s deferred listing. But a banker reckoned that the trust’s projected distribution yields – lower than HPH Trust’s – could have affected investors’ interest.
‘We are a growth story, we are not a yield story,’ Mr Pua said in response to this suggestion. ‘We offer good total returns to investors.’
HPH Trust – BT
Hutchison port units’ sale here from March 7
HUTCHISON Whampoa Ltd will start the Singapore public offering of its Chinese port-asset trust on March 7 and close it at 10am local time on March 14, according to a filing with the Hong Kong stock exchange yesterday.
The Hong Kong preferential offering will start on March 7 and end at 4.30pm on March 11, Hutchison said.
The port units will start trading in Singapore on March 18. The company is offering up to 3.9 billion units at 91 cents to US$1.08 each. — Bloomberg