Parkway Life Real Estate Investment Trust - DBS Research 2018-01-29:  A ‘diamond’ Record 10th Year 

Parkway Life Real Estate Investment Trust - DBS Vickers 2018-01-29: A ‘diamond’ Record 10th Year PARKWAYLIFE REIT C2PU.SI

Parkway Life Real Estate Investment Trust - A ‘diamond’ Record 10th Year

  • Parkway Life REIT (Plife REIT)'s 4Q17 DPU rose 11% y-o-y to 3.38 Scts led by the last tranche of distribution of the divestment gain.
  • Excluding gains, 4Q17 DPU would have increased by 3.3% y-o-y.
  • Cost of debt reduced to 1.0% from 1.4% in FY16.
  • Maintain BUY; raised Target Price to S$3.15 from S$3.10.



Maintain BUY; raised Target Price to S$3.15.

  • Parkway Life REIT (Plife REIT) offers one of the strongest earnings visibility profiles among S-REITs, with a weighted average lease expiry of close to nine years. 
  • We maintain our BUY rating and raised our Target Price to S$3.15 from the previous S$3.10 to factor in upward trends in CPI forecasts and lower interest cost. 


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

  • Given that PLife REIT has been less active in the asset recycling front, the market may question its ability to outperform its commended past achievements. However, 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 36.4% with debt headroom of S$279m at 45% gearing. In addition, Plife REIT has benefitted from lower interest rates in Japan following the renewal of interest rate hedge. 


Valuation: 

  • Maintain BUY and raised our Target Price to S$3.15 to factor in upward trends in CPI forecasts and lower interest costs. 


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. 



Results Highlights


4Q17 DPU boosted by the last tranche of the distribution of divestment gains

  • Plife REIT’s 4Q17 DPU grew by 11% y-o-y to 3.38 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 3.3% y-o-y.
  • The one-off distribution of 0.88 Sct per unit, in relation to divestment gains from sale of four Japan nursing homes in December 2016, was fully paid equally each quarter in FY17 (0.22 Sct per quarter).
  • 4Q17 NPI grew 0.7% y-o-y led 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 +13% y-o-y) as revenue outperformed its minimum guaranteed rent, offset by the depreciation of JPY.
  • The lower NPI was mitigated by lower finance costs (- 21.7% y-o-y) arising from depreciation in Japanese Yen and its refinancing initiatives and taking advantage of the low interest rate environment in Japan, lowering its cost of debt to 1.0% from 1.4% in 4Q16. However, the interest expense savings from the recent refinancing which completed in late December 2017, will only kick in during FY18.
  • Gearing remains stable q-o-q at 36.4%. Plife REIT has no refinancing needs until FY2019.


Outlook


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

  • Despite the lack of asset recycling activities in FY17, Plife REIT has always delivered on its asset recycling. We believe the asset recycling exercise will continue to lead its growth given its successful track record. However, the timing of the asset recycling remains uncertain.

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 with Mount Elizabeth Novena Hospital as potential pipeline

  • 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 that 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 targeted to open up its remaining beds by FY17.


Maintain BUY; raised Target Price to S$3.15 from S$3.10

  • 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 Target Price to S$3.15 from S$3.10 to factor in the upward trend in CPI forecasts and lower interest costs. Our target price implies a potential total return of 10-11%.
  • 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/ 2018-01-29
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.15 Up 3.100



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