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Author: simonsg   |   Latest post: Wed, 15 Jan 2020, 5:25 PM

 

Parkway Life REIT 3Q19 - Resilient Growth From Singapore & Japan

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  • Parkway Life REIT registered stable growth with DPU of 3.30 S cents in 3Q19, up 1.9% y-o-y. NPI from the Japan portfolio increased 9.9% y-o-y due to one-off insurance proceeds of S$0.9m.
  • Minimum guaranteed rent for the Singapore properties has increased 1.61% starting 23 Aug 19. Management has further reduced its all-in cost of debt from 0.91% to 0.81% after extension of interest rate hedges in Oct 19.
  • Parkway Life REIT’s healthcare assets are defensive and resilient. Maintain BUY. Target price: S$3.58.

3Q19 Results

  • PARKWAYLIFE REIT (SGX:C2PU) report DPU of 3.30 S cents (+1.9% y-o-y) for 3Q19, bringing 9M19 DPU to 9.85 S cents (+2.6% y-o-y). The results are in line with our 3Q19 DPU forecast of 3.36 S cents. See Parkway Life REIT Announcements; Parkway Life REIT Dividend History.

Steady, resilient and sustainable growth.

  • Revenue grew 5.4% y-o-y, driven by growth of 12.7% y-o-y from its Japan portfolio. For the 13th year of lease term commencing from 23 Aug 19 to 22 Aug 20, the minimum guaranteed rent for the Singapore properties, namely Mt Elizabeth Hospital and Gleneagles Hospital, has increased 1.61% over the preceding year based on the CPI + 1% rental revision formula. Parkway East Hospital had outperformed its minimum guaranteed rent during the 12th year lease.
  • Parkway Life REIT received one-off insurance proceeds of S$0.9m for the reimbursement of repair expenses incurred by four Japanese properties. Property expenses also correspondingly increased by S$0.5m or 26.8% y-o-y. Parkway Life REIT also benefitted from appreciation of the Japanese yen as well. Overall, NPI grew 3.9% y-o-y.

Interest expenses dropped by 8.9% y-o-y.

  • The reduction in interest expense was achieved by refinancing its JPY loans due 2020 using the proceeds from two 6-year term loan facilities amounting to JPY7,898m (S$96.6m), which was completed in 1Q19.
  • Distributable income grew 1.9% y-o-y after retaining S$3m for future capex.

Cost of debt reduced further to 0.81%.

  • Parkway Life REIT has lowered its all-in cost of debt from 0.91% to 0.81% after extension of interest rate hedges in Oct 19. It has put JPY net income hedges in place till 1Q24 to guard against exchange rate volatility. Parkway Life REIT’s interest cover ratio has further improved to 14.3x.

Ample debt headroom.

  • Parkway Life REIT’s gearing remained healthy at 37.2%. It has debt headroom of S$274.9m to finance acquisition before gearing hits regulatory limit of 45%. Weighted average term to maturity is 2.8 years. Parkway Life REIT has no long-term debt refinancing needs till 2020.

Stock Impact

Pure play on healthcare and aging population.

  • Parkway Life REIT continues to demonstrate steady increase in DPU driven by organic growth and new acquisitions. The REIT will explore opportunities to grow via acquisitions, while recycling capital to optimise returns.

Enhancing scale through acquisitions.

  • Parkway Life REIT is scouting for opportunities to acquire assets in developed and mature healthcare markets:
    1. Deepen presence and expand footprint in Japan. Parkway Life REIT has built scale in Japan with portfolio of 46 private nursing homes and one pharmaceutical product distribution & manufacturing facility. Management will scout for opportunities to acquire more nursing homes in Japan. Cap rates are attractive at above 5%, while funding cost is low at sub-1%. Thus, Japan offers good prospects for yield accretive acquisitions.
    2. Tap on sponsor pipeline. Management will explore opportunities to acquire hospitals from sponsor IHH HEALTHCARE (SGX:Q0F), including Mount Elizabeth Novena Hospital in Singapore.
    3. Europe could become the third leg. France, Germany and the UK have developed and mature healthcare market. These markets benefit from an ageing population. Government policies are also supportive of growth in the healthcare market. Funding cost for the EUR is low as well.

Strong defensive qualities.

  • Parkway Life REIT is resilient due to its long weighted average lease expiry (WALE) of 6.5 years. Its Japan assets have long lease structure with WALE of 11.6 years. Income visibility from resilient healthcare assets is highly valued given current uncertain macro outlook.

Earnings Revision / Risk

  • We maintain our earnings forecast.

Valuation / Recommendation

Maintain BUY.

  • Our target price of S$3.58 is based on DDM (required rate of return: 5.5%, terminal growth: 1.8%). We lowered our risk-free rate from 2.5% to 2.0% due to the environment of persistently low interest rates.
  • See Parkway Life REIT Share Price; Parkway Life REIT Target Price.

Share Price Catalyst

  • Yield-accretive acquisitions.
  • Renewal of lease for Singapore hospitals.

Source: UOB Kay Hian Research - 1 Nov 2019

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