To The Moon

The healthcare sector is often viewed as defensive with growth opportunities, supported by long-term demographic and socio-economic trends. JLL’s latest Healthcare Real Estate Outlook report also identified that healthcare-related assets remain one of the most resilient commercial real estate sectors.

Healthcare real estate investment trusts (Reits) provide access to healthcare-related properties at a more affordable quantum (think a board lot size of 100 units) and without the hassle of being a landlord (Reits have managers to manage assets, tenants and set the growth strategy).

Healthcare S-Reits stay defensive with robust fundamentals

Notably, $ParkwayLife Reit(C2PU.SI)$ $First Reit(AW9U.SI)$ are two listed healthcare Singapore Reits (S-Reits) that invest in income-producing, healthcare-related commercial properties in both Singapore and overseas markets such as Japan, Indonesia and Malaysia.

1. $ParkwayLife Reit(C2PU.SI)$

PLife is among the largest listed healthcare Reits in Asia, with 63 properties in Singapore, Japan and Malaysia and a combined portfolio size of S$2.23 billion. Its distribution per unit (DPU) grew 4% year on year (yoy) to 3.79 Singapore cents in the first quarter of this year, and will form part of H1 2024’s distribution when the Reit announces its half-year results.

PLife’s DPU has recorded a steady growth rate of 133.7% since its listing in 2007. This could be partly attributed to the defensive nature of its portfolio as all its Singapore and Japan properties are fully occupied.

In Q1 2024, the Reit recorded 2.7% and 2.8% lower gross revenue and net property income, respectively, on a yoy basis. This was mainly due to the Japanese yen’s depreciation, but it was offset by contributions from nursing homes acquired in October 2023.

In Singapore, PLife’s portfolio includes three private hospitals worth S$1.51 billion – Gleneagles Hospital, Parkway East Hospital, and Mount Elizabeth Hospital. The Reit’s master lease with Parkway Hospitals Singapore was recently renewed in 2021, with income certainty up to 2042 and an option to renew for another 10 years.

PLife also has a right of first refusal over its sponsor IHH Healthcare’s Mount Elizabeth Novena Hospital for a period of 10 years. Given its renewal lease structure, rents are guaranteed to increase until FY2025, and a formula based on either adjusted hospital revenue or consumer price index (whichever is higher) will be applicable to rents from FY2026 onwards. Some analysts are sanguine that the Reit stands to benefit from an annual rental upside of more than 3 per cent.

In Japan, PLife’s 59 nursing home properties are well-diversified across 17 prefectures and 30 nursing home operators. This part of PLife’s portfolio also has a long-term lease structure with a weighted average lease term to expiry of 11.67 years, and 95.8% of its Japan revenue with downside protection.

As part of its growth strategy, PLife plans to build a third key market, strengthen existing markets, and foster strategic partnerships.

2. $First Reit(AW9U.SI)$

First Reit has a vision to become Asia’s premier healthcare trust, having grown its portfolio from just four assets in Indonesia to 32 properties across Indonesia, Japan and Singapore worth S$1.14 billion. The Reit aims to increase its portfolio in developed markets from 25.5% to more than 50% of its assets under management by FY2027.

In its Q1 2024 business update, First Reit reported that rental and other income declined 2.7% yoy, due to the impact of a stronger Singapore dollar on the Indonesian rupiah and Japanese yen. Apart from a stronger Singapore currency, rising interest rates also led to a higher cost of debt, which led to DPU dipping from 0.62 Singapore cents in Q1 2023 to 0.6 cents in Q1 2024.

As at Mar 31, First Reit’s proportion of debt on fixed rates or hedged is over 87%, and the Reit has no refinancing requirements until May 2026.

https://www.sgx.com/research-education/market-updates/20240701-reit-watch-healthcare-s-reits-stay-defensive-robust