(Sept 11): When compared with real estate investment trusts (REIT), the locally listed business trusts have generally performed poorly — whether because of underperforming assets or difficult operating environments. Among the better performers is RHT Health Trust, with an annualised return of 14.4% since it was listed in 2012.
Some of that gain comes from a special distribution in October last year, when RHT sold a 51% stake in New Delhi-based hospital operator Fortis Hospotel and 100% of Escorts Heart Institute and Research Centre for a total of $198.5 million. This resulted in a special distribution of 24.8 cents per unit.
“We felt it was a good time to take money off the table because healthcare pricing in the region has accelerated and [it has] become expensive to acquire new assets. We need to be responsible enough to take money off the table and exit some opportunities. Also, it goes a long way to give comfort to our unit holders,” says Gurpreet Dhillon, CEO of RHT’s manager.
However, Gurpreet thinks RHT should continue to do well going forward as it is more of a REIT than a business trust. “We’re more like a REIT than many people realise. The reason we structure ourselves as a business trust rather than a REIT is that there is an element of healthcare services [in the trust], and also because when we went public, we had more than 10% of our portfolio in development, which changed three years ago,” he says. “I’d argue that we are as stable as the most stable REITs in the sector.”
RHT owns 12 clinical establishments and two hospitals in cities such as Kolkata, Jaipur and Bangalore. Medical specialities operating off its assets include orthopaedics, neurology, cardiac sciences, oncology, nephrology, gynaecology, gastroenterology and obstetrics. The trust currently has 2,651 beds and is looking to hit 3,046 beds in FY2018. (The trust has a March year end.)
Much like REITs, it pays out nearly all its distributable income to unitholders. In fact, the trust raised its distribution rate to 95% from 90% at the end of FY2017. RHT also has a very low gearing level of 23%. “We are one of the lowest-geared trusts in Singapore today,” says Gurpreet. And only 4% of the properties in its portfolio are greenfield or development properties. REITs are allowed to have just 10% of their portfolios under development.
Growing the portfolio
Gurpreet sees room to continue growing RHT’s portfolio, given the rising demand for private healthcare in India. “[The Indian government] wants to work alongside the private sector to increase the percentage of the population with access to healthcare,” he says. “And that’s a significant opportunity for RHT.”
This year, RHT expects to complete two major projects: It is adding 200 beds to its BG Road hospital in Bangalore and building a new hospital in Ludhiana with 70 beds. The latter will be focused on mother and child care. Over time, Gurpreet says, RHT hopes to expand its portfolio to a total of 3,500 beds. The trust will also look to asset enhancement initiatives to add medical programmes and repurpose spaces to support the services rendered at the hospitals.
“It is not always about adding capacity. It is also about adding new medical programmes,” he says. “A lot of the average revenue per operating bed (ARPOB) growth that we’ve seen is from repurposing and going up the value chain in delivery of healthcare services.”
For example, adding oncology as a specialisation to a hospital requires more than just hiring oncologists. Infrastructure such as fourinch- thick bunker walls is needed for radiotherapy treatment rooms.
RHT is focused on treating “lifestyle diseases”, Gurpreet says. These include cardiac problems, cancer and diabetes. India has experienced a change in disease profiles over the past decade, he explains. “Ten to 15 years ago, patients, when they came into the hospital, would have [tuberculosis], malaria. Today, because of the rising middle class and the move from agriculture to urban centres, patients are suffering from cardiac-related symptoms, diabetes, cancer. India has one of the fastest growing cancer rates in the world. It already is in the top five for cardiac [issues] and diabetes, which is not a good thing, but comes alongside economic growth.”
Distributions lower in recent quarter
For 1QFY2018 ended June 30, RHT reported an 8% y-o-y increase in revenue to $24.5 million. Earnings, however, declined 14% to $9.1 million due to an increase in professional fees and higher taxes incurred by an associate. This resulted in a distribution of 1.23 cents per unit, 32% lower y-o-y.
Gurpreet remains optimistic about RHT’s performance, pointing out that the variable fees continue to grow. RHT’s main source of revenue is service fees, which are payments from hospital operators that use RHT’s clinical establishments. The service fee is made up of the base fee, which grows at 3% per annum, and variable fee, which is 7.5% of the top-line revenue of each asset. In 1QFY2018, variable fees accounted for 33.3% of RHT’s revenue while base fees accounted for 48.9%.
Variable fees have grown to account for 32% of service fees in FY2017, from 21% in FY2013. “That shows the growth of this portfolio,” Gurpreet says. “So the majority of growth will be from this variable fee component... [which has done] very well over the past five years.”
Variable fees have been rising, thanks to growth at the individual hospitals, Gurpreet says. “One of the key metrics we track is ARPOB, and that’s key because that’s where the 7.5% top-line variable [fee] growth comes from. It has grown more than 50% in the past five years. When we first set up RHT, it was 10 million rupees per year. Now it is 15.4 million rupees ($324,800),” he says.
Trust may be fully valued
Units in RHT closed on Sept 6 at 86 cents each, giving the trust a yield of 5.51%. RHT is now trading at 1.02 times its book value. CIMB Research analyst Lock Mun Yee has a “hold” rating on RHT with a price target of 92 cents.
RHT’s margins have been affected recently by an increase in the cost of medical consumables, says Lock. Nevertheless, she remains optimistic about the prospects of the fast-growing healthcare market in India and sees room for RHT to expand.
“Inclusive of the capex required to complete the asset-enhancement projects, gearing was still healthy at 28%. Given its optimal gearing target of 30% to 35%, the trust has headroom to fund any potential acquisitions, including third-party assets, via debt,” says Lock.
However, she also sees the prolonged impact of the goods and services tax on the Indian healthcare market as a potential risk. The GST was introduced in India in July this year and has been seen to weigh on spending. The Nikkei India business activity index came in at 47.5 in August, its second straight month of decline.
