Thursday, December 19, 2013

Healthcare S-REITs: Operationally stable (OCBC)

G. Healthcare REITs: Operationally stable
(Maintain NEUTRAL)
Year in review
Both healthcare REITs started the year positively in terms of share price performance, with Parkway Life REIT (PLREIT) and First REIT’s (FREIT) price returns hitting peaks of 29.8% and 36.3% in May and Apr, respectively. However, this was short-lived, as concerns over the possible tapering of QE by the US Federal Reserve sent the prices of SREITs tumbling, and both healthcare REITs were also affected by the market sell-down. YTD, PLREIT’s share price is down slightly by 0.5%, but this still ranks it as the second best performer in the S-REITs universe (excluding REITs which were listed this year). FREIT’s price has declined 2.4% YTD.

Minimal impact from FX volatility
There has been increasing concern over the FX risks of S-REITs in recent months, underpinned by the outflow of capital from emerging markets and monetary easing policies. Examples include the recent sharp depreciation of the IDR and JPY vis-à-vis the SGD, which are closely associated with FREIT and PLREIT, respectively. Nevertheless, we reemphasise that this FX volatility 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 9M13 revenue fell 1.6% due to a weaker JPY, DPU still grew 4.2% to 7.93 S cents as management had extended its JPY denominated net income forward hedge in 1Q12 for another five years until 1Q17. PLREIT also adopts a natural hedge strategy to match its JPY assets with its JPY liabilities for operations in Japan. This provides stability to its unitholders.

Alleviating interest rate risks
During the year, both healthcare REITs have sought to reduce their interest rate risks as they are cognisant of the negative impact that would result from a rising interest rate environment. Approximately 79% of PLREIT’s borrowings have been hedged as fixed rate debt. For FREIT, although 72% of its debt is based on a floating rate structure (as at 30 Sep 2013), management secured a 4-year ~S$92m fixed-rate transferable term loan in Aug this year to refinance part of its existing floating rate debt. As FREIT is still in the process of completing the documentation of this loan, this has not been reflected on its books. Upon completion, FREIT’s floating rate exposure would be lowered to ~46%.

Mitigating risk by lengthening debt maturity profile
This refinancing exercise would also allow FREIT to lengthen its debt maturity profile, as it would not have any debt maturing until 2016. PLREIT has also been proactively trying to strengthen its balance sheet and eliminate near-term refinancing risks ahead of time by stretching its debt maturity profile. By 30 Sep 2013, PLREIT had successfully completed a pre-emptive refinancing exercise of all its debts which was previously due to expire in FY14, amounting to JPY11.4b (~S$146.3m). Of this amount, S$51.2m is now due in 2017 and the remaining S$95.1m is due only in 2018.

Gearing ratio still manageable; FREIT has higher chance of raising equity
As at 30 Sep 2013, FREIT and PLREIT’s debt-to-assets ratios stood at 32.9% and 35.2%, respectively. As FREIT does not have a credit rating, its aggregate leverage limit is capped at 35%. This leaves it with debt headroom of approximately S$34.7m. As FREIT’s last four acquisitions were purchased at prices ranging from S$59.3m to S$97.3m, we believe any near-term acquisitions would likely have to be funded by a combination of debt and equity. For PLREIT, it has a BBB investment grade rating by Fitch Rating (affirmed on 16 Jul 2013). Hence PLREIT’s maximum leverage ratio is 60%. PLREIT has debt headroom of S$122.3m, S$272.6m and S$948.9m before hitting the 40%, 45% and 60% gearing mark, respectively.

FREIT to depend more strongly on sponsor than PLREIT
Looking ahead, we like FREIT’s strong sponsor support and are expecting FREIT to maintain its focus on expanding its footprint in Indonesia. Siloam International Hospitals (majority owned by FREIT’s sponsor Lippo Karawaci), which operates FREIT’s hospitals, underwent an IPO exercise in Sep this year to raise funds to support its aggressive expansion plans. Hence we believe this will provide FREIT with a robust pipeline of possible acquisition targets in the future. We expect FREIT to remain as an important vehicle for Lippo Karawaci to implement its asset-light strategy via a sale and leaseback business model. FREIT has a right-offirst- refusal (ROFR) on Lippo Karawaci’s healthcare assets.

IHH Healthcare Berhad, which wholly-owns Parkway Holdings, the sponsor of PLREIT, has not indicated any intention to divest its assets into PLREIT in the near future. Recall that the right-of-first-refusal granted previously by Parkway Holdings to PLREIT expired on 22 Aug 2012. Nevertheless, PLREIT has been more active embarking largely on non-sponsor related acquisitions, especially in Japan. It made purchases of seven nursing home properties in Japan in 2013 thus far for an aggregate amount of JPY6.3b (~S$82.3m).

Singapore CPI projected to come in at 2-3% for 2014
One of the key underlying drivers of the gross rental of healthcare REITs is the Singapore CPI. For FREIT, the annual base rental change for its Indonesian hospitals is pegged to two times the Singapore CPI, capped at a ceiling of 2% and protected by a floor of 0% (i.e. no negative rental reversion possible). For PLREIT, its Singapore portfolio contributed 65.7% of its 9M13 revenue, and the annual rental revision of these Singapore assets is based either on a Singapore CPI + 1% formula or a formula based on the hospital’s adjusted revenue, whichever is higher. Since PLREIT’s listing, its annual rental revision has always been based on the Singapore CPI + 1% formula. The Ministry of Trade and Industry (MTI) highlighted that Singapore’s CPI-All Items inflation is projected to come in at 2.5-3% in 2013 and 2-3% in 2014. According to Bloomberg consensus, Singapore’s CPI for 2014 is forecasted to be 3%, at the upper end of MTI’s projection.

Maintain NEUTRAL on healthcare REITs
Going into 2014, although the operational performance of both FREIT and PLREIT will continue to be supported by their defensive master leases and positive underlying fundamentals of the healthcare industry, we remain cautious on the negative sentiment arising from expectations of the eventual QE tapering in the US, which may materialise early next year. As valuations also do not appear compelling, with an average P/B ratio of 1.25x, versus S-REITs universe’s 0.94x average (excluding healthcare REITs), we maintain our NEUTRAL rating on healthcare REITs. However, we have a BUY on FREIT with a fair value estimate of S$1.18 given its relatively decent FY14F dividend yield of 8.1%.

Source/Extract/Excerpts/来源/转贴/摘录: OCBC-Research,
Publish date:13/12/13

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