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Defensive REIT at 6.5% yield

Some REITs are by nature defensive.


I like to call these reits the Zettai Bogyo REITs. Naruto fans would know what I am talking about. Offensively, these REITs may be nothing to crow about but defensively, they are analogous to Gaara's Shukaku.



Healthcare REITs are one example.

Commercial REITS with office/malls in their portfolio are constantly experiencing risk of non-renewal of leases, and/or the exit of an anchor tenant . Recall the impact of HP not renewing their technopark lease on Frasers Commercial Trust.

Industrial REITS tend to have short 30 year leases and tenant fluidity is relatively higher due to business volatility. Recall how Soilbuild was dragged down by Technics Oil going belly up.

On the other hand, it is difficult to imagine a hospital terminating their lease to save a few psf in rent.

For this reason, healthcare REITs are highly defensive.  But the whole world knows this. As a result, for this safety buffer, investors have to overpay significantly over NAV for healthcare REITs and have to be content with anaemic yields

Two healthcare reits come to mind:

Parkwaylife REIT
First REIT

At the time of writing, Parkwaylife REIT is trading at $2.8 a share. Which is nearly 1.62 times NAV (around 1.72)!! You are basically overpaying to the tune of 62% for its assets. And for what type of return you may ask? It's trailing yield at $2.8 is around 4.7% (Distribution per unit around $0.132 per share).

To put that in context, Singtel recently traded around S3.03 for a $0.175 yield - i.e., 5.77%.

Translation: Plife REIT is cray-cray expensive. That said, this REIT has a fantastic track record of growing dividends.  Given its defensive portfolio, this can be a good "hold-until-retirement" REIT for people with lower risk appetite or simply wish to diversify their portfolio.


What about First REIT?

At the time of writing, First Reit is trading at a $1.29-1.31 XD band.  It's price to NAV is around 1.3 times, i.e., overpaying 30% above net asset value per share.   Based on the trailing yield of 8.57 cents per unit, the yield is around 6.6%. 

Accordingly, on a purely financial ratio perspective, First REIT is more attractive than PLife REIT. However, investors should note the reasons why First REIT has to be priced more attractively and dish out a higher yield:

1) Concentration Risk

16 out of its 20 properties are based in Indonesia. 15 of which are hospitals operating under the Siloam name, which are majority owned by its sponsor PT Lippo Karawaci. Any changes to the operating environment, e.g, political instability, anaemic economic growth, could disproportionately affect the income stream of First Reit.

2) Sponsor Risk

There are persistent rumors (unsubstantiated) that the Sponsor may seek to divest its stake in First Reit. This may lead to leases not being renewed when they expire or are renewed at an unfavorable rate.  Furthermore, any divestment by PT Lippo Karawaci will also mean that First Reit loses a good pipeline of hospital assets to be added to its current portfolio.


I have a reasonably healthy risk appetite due to the stability from my earned income.  Accordingly, all things considered, I may take a small nibble at First REIT to diversify my REIT holdings. 





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