Parkway Life Real Estate Investment Trust - DBS Research 2017-11-09: Unchanging Love

Parkway Life Real Estate Investment Trust - DBS Vickers 2017-11-09: Unchanging Love PARKWAYLIFE REIT C2PU.SI

Parkway Life Real Estate Investment Trust - Unchanging Love

  • Parkway Life REIT (Plife REIT)'s 3Q17 DPU rose 10% y-o-y (in line), boosted by divestment gains.
  • AEI initiatives in Japan to boost rental income.
  • Cost of debt lowered to 1.1% from 1.4% in FY16.
  • Maintain BUY, raised TP on upward trends in CPI forecasts.

Maintain BUY; raised TP to S$3.10. 

  • Parkway Life REIT (Plife REIT) offers one of the strongest earnings visibility profiles among SREITs, with a weighted average lease expiry of close to nine years. 
  • We maintain our BUY rating and raised our TP to S$3.10 from the previous S$2.82 to factor in upward trends in CPI forecasts.

Where we differ: Potential for steady and sustainable growth in returns as promised. 

  • While the market may question its ability to outperform its commended past achievements, we continue to believe Plife REIT will be able to deliver steady and sustainable growth in returns through its three-pronged growth plans of:
    1. asset recycling strategies,
    2. venturing into a new market (third pillar), and
    3. potential acquisition pipelines from its sponsor while maintaining its defensive stance in expansion.

Potential catalysts: Potential acquisitions/asset recycling and AEIs to boost rental income.

  • Debt headroom for accretive acquisition and beneficiary of low interest rates in Japan. Plife REIT has a gearing of 37.3% with debt headroom of S$245m at 45% gearing. 
  • In addition, Plife REIT has benefitted from lower interest rates in Japan following the renewal of interest rate hedge.


  • Maintain BUY and raised our TP to S$3.10 to factor in upward trends in CPI forecasts.

Key Risks to Our View

  • Currency risks. Plife REIT derives c.40% of its earnings from healthcare assets in Japan. Thus, foreign exchange volatility could hit earnings as distributions are based on SGD.

WHAT’S NEW -  Unchanging love 

Results Highlights – 3Q17 DPU boosted by distribution of divestment gains

  • Plife REIT’s 3Q17 DPU grew 10% y-o-y to 3.37 Scts, in line. The strong growth was contributed by the distribution of divestment gains of S$5.4m over four quarters in FY17. Excluding the one-off distribution, DPU would have grown 2.8% y-o-y.
  • A one-off distribution of 0.88 Sct per unit in relation to divestment gains from sale of four Japan nursing homes in December 2016 will be paid equally each quarter in FY17 (0.22 Sct per quarter).
  • 3Q17 NPI fell 1.2% y-o-y mainly impacted by the depreciation of JPY, offset by higher rents received from the Singapore hospitals (NPI +1.3% y-o-y) largely led by the inflation-linked rental review and higher contributions from Parkway East Hospital (NPI +11% y-o-y) as revenue has outperformed its minimum guaranteed rent.
  • The lower NPI was mitigated by lower finance costs (- 23.9% y-o-y) arising from its refinancing initiatives and taking advantage of the low interest rate environment in Japan, lowering its cost of debt to 1.1% from 1.4% in 3Q16. 
  • Gearing remains stable q-o-q at 37.3%. Plife REIT has no refinancing needs until FY2019).


Recycling of Japanese assets continue to deliver growth; AEI initiatives to improve rental income

  • Plife REIT continues to deliver on its asset recycling strategy as seen in its recent acquisitions and divestments of its Japan assets. We believe the asset recycling exercise will lead to growth given its successful track record. However, the timing of the asset recycling remains uncertain.
  • In addition, Plife REIT has completed two AEIs at its Japan properties and rents will increase by 0.63% and 1.07% respectively for the remaining lease of 29.2 years effective 1 August 2017. The estimated ROI for the AEIs is 8%. 
  • As part of its AEI initiatives, Plife REIT has initiated three AEIs this year, including the above AEIs.

Building a third pillar for the next phase of growth

  • As its Japan assets have grown to a decent size; contributing c.40% of the group’s gross revenue, management believes it is quite timely to look into building a third pillar for Plife REIT (in addition to asset recycling and acquisition pipelines from its sponsor) for its next phase of growth.
  • Management continues to explore opportunities in developed countries with a mature healthcare market and believes that there could be potential opportunities in Australia and Europe.
  • However, management remains cautious on new ventures and hence, the timing of a potential entry remains uncertain.

Singapore hospitals provide steady returns

  • Plife REIT continues to deliver steady returns with a high degree of income visibility from its Singapore hospitals, which contribute c.60% of top line, and rental revisions are pegged to a CPI-linked formula, which underpins a steady growth profile for Plife REIT.
  • Marginal potential upside from its Singapore hospitals if they exceed their minimum guaranteed rents, such as seen with Parkway East Hospital.
  • Mount Elizabeth Novena Hospital remains a potential pipeline from its sponsor. While it is unknown when the “passion” from both parties would be synchronised, we note that Mount Elizabeth Novena Hospital will open up its remaining beds by this year.

Maintain BUY; raised TP to S$3.10 from S$2.82

  • We continue to like Plife REIT for its strong earnings visibility, which is a positive attribute given the current volatile and uncertain market conditions.
  • We maintain our BUY rating and raised our TP to S$3.10 from S$2.82 to factor in the upward trend in CPI forecasts. 
  • Our target price implies a potential total return of 11-12%.
  • We believe further potential upside to our forecasts stems from rollout of its asset recycling exercise in Japan which we have yet to include in our estimates, and acquisitions of earnings-accretive hospital assets in Singapore or overseas.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-11-09
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.10 Up 2.820