Tuesday, September 10, 2013

Healthcare REITs: Trading on rich valuations (OCBC)

Healthcare REITs: Trading on rich valuations
(Maintain NEUTRAL)
2H13 to be boosted by contribution from new acquisitions
Within the healthcare REITs space, both First REIT (FREIT) and Parkway Life REIT (PLREIT) recently reported 2Q13 results which were in-line with market expectations. Looking ahead, we expect 2H13 DPU to be boosted by new acquisitions. FREIT completed the purchase of two Indonesian hospitals from its sponsor Lippo Karawaci on 22 May this year, with an initial NPI yield of ~9.9%. A full quarter of contribution will kick in from 3Q13. For PLREIT, it completed the acquisition of two nursing homes in Japan on 12 Jul 2013, with the assets expected to generate an initial NPI yield of ~7.1%. Organically, PLREIT will also be able to obtain a higher rental increase of 4.44% (effective 23 August 2013 to 22 August 2014) for its Singapore hospitals, which is based on a CPI + 1% lease formula.

FX volatility has minimal impact on healthcare REITs
Although there has been heightened volatility in the IDR and JPY vis-àvis the SGD in recent months, this has minimal impact on healthcare REITs. For FREIT, the base rental for its Indonesian properties is denominated in SGD, while the variable rental component is pegged to a fixed SGD/IDR rate throughout the entire lease tenure. Although PLREIT’s 1H13 revenue fell 1.2% due to a weaker JPY, DPU still grew 4.5% as management had extended its JPY denominated net income forward hedge in 1Q12 for another five years until 1Q17. It also adopts a natural hedge strategy for its operations in Japan.

Mitigating Interest rate risks
Both healthcare REITs are cognizant of the negative impact that would result from a rising interest rate environment. Approximately 75% of PLREIT’s borrowings have been hedged as fixed rate debt. For FREIT, it announced on 28 Aug 2013 that it has successfully refinanced S$92m of its floating rate debt to a 4-year fixed-rate secured Transferable Term Loan Facility (TLF). We estimate that this would lower FREIT’s floating rate exposure from 72% to 46% of its total debt.

Debt maturity profile still healthy
Following this successful refinancing exercise, FREIT’s next refinancing need will only come in 2016, thus providing stability to its unitholders. Meanwhile, PLREIT recently secured a five-year committed and unsecured JPY bank loan to refinance 65% of its debt (S$95.1m) due in 2014. With this exercise, only 11.4% of its total borrowings will mature in 2014, although management would still have to address S$182.1m of debt (40.6% of total borrowings) which is due in 2015.

Maintain NEUTRAL
We maintain NEUTRAL on the healthcare REITs sub-sector given its pricey valuations (P/B of 1.30x, versus S-REITs universe’s 0.97x average) and negative sentiment surrounding interest rate sensitive instruments given concerns that the tapering of quantitative easing may be announced at the next FOMC meeting in mid-Sep.

Source/Extract/Excerpts/来源/转贴/摘录: OCBC-Research,
Publish date: 09/09/13

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