Healthcare REITs (OCBC)

Overweight

Maintain OVERWEIGHT on continued resilience

Promising 1Q11 results. First REIT (FREIT) and Parkway Life REIT (PLREIT) [NOT RATED] both reported healthy 1Q11 r e s u l t s r e c e n t l y, d r i v e n b y b o t h o r g a n i c g r o w t h a n d contributions from newly acquired healthcare properties. For FREIT, gross revenue surged 95.6% YoY to S$14.6m while total distributable income jumped 88.5% YoY to S$9.9m. PLREIT's gross revenue grew 15.2% YoY to S$21.5m and income available for distribution increased 14.4% YoY to S$14.3m. We believe that both healthcare REITs would be key beneficiaries of current inflationary pressures in Singapore. FREIT's base rental revision for its Indonesian assets are based on Singapore's CPI (albeit being capped at 2%), while 66% of PLREIT's total portfolio are pegged to a CPI-linked revision formula. This signifies the likelihood of positive rental reversions for PREIT in Aug 2011.

Acquisitions to fund growth ahead. We believe that both FREIT and PLREIT have sufficient capacity to undertake more acquisitions to boost their portfolio. This is likely to be funded by debt given the current low interest rate environment and ample debt headroom that exists for both REITs. FREIT and PLREIT are able to take on S$218.0m and S$864.6m of additional leverage before hitting their regulatory gearing limit of 35% and 60% respectively.

Maintain OVERWEIGHT on continued resilience. Besides the strong sponsor support and favourable master lease terms enjoyed by healthcare REITs as highlighted in our previous report dated 10 Mar 2011, we note that both FREIT and PLREIT have cont inued to showcase thei r resi l ience in t imes of increasing global uncertainty. The share prices of both stocks have outperformed the FTSE ST RE Invest Trust Index and broader market substantially YTD. In addition, PLREIT and FREIT have helmed the top two performing positions in the SREIT universe YTD, returning 9.7% and 9.2% respectively. For the latter, we are maintaining our BUY rating although its share price has recently inched closer to our S$0.80 fair value estimate. This is due to the still attractive 8.0% prospective distribution yield offered by the counter, resulting in projected total returns of 11.9%. PLREIT's share price has also rebounded after initial fears about the impact of the Japanese earthquake and tsunami on its nursing homes were allayed. Management h i g h l i g h t e d t h a t a l l o f i t s 3 0 J a p a n p r o p e r t i e s we r e n o t structurally affected by the disaster and continue to be in operation. Given the defensive nature of healthcare REITs and the still sanguine outlook on the private healthcare scene in both Singapore and Indonesia, we maintain our OVERWEIGHT rating on the sector.