Parkway Life REIT - DBS Research 2018-10-26: No Debt Expiry Until 2020

PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life REIT - No Debt Expiry Until 2020

Parkway Life REIT’s 3Q18 and 9M18 DPU were 4.1% and 3.7% lower y-o-y respectively due to absence of one-off divestment gains distributed in FY17.
Excluding gains, 3Q18 and 9M18 DPU were 2.7% and 3.2% higher led by contribution from newly acquired asset in Feb18.
No debt refinancing needs until 2020; cost of debt relatively stable q-o-q at 0.94%.
Maintain BUY; Target Price lowered to S$3.10 from 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 9 years.
We maintain our BUY rating but lowered our Target Price to S$3.10 from S$3.15 as we roll forward our DCF valuation.

Parkway Life REIT acquired an asset in Feb18. Its asset initiatives are still uncertain.
We continue to believe that Parkway Life REIT will be able to deliver steady growth in returns through its three-pronged growth plans:
1. asset strategies,
2. venturing into a pillar, and
3. potential acquisition its Sponsor while maintaining expansion.

Debt headroom for accretive acquisitions, beneficiary of low interest rates in Japan. Parkway Life REIT has a gearing of 38% with debt headroom of S$241m assuming 45% gearing.
In addition, Parkway Life REIT has benefitted from lower interest rates in Japan following the renewal of interest rate hedge, with cost of debt now below 1%.

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

Parkway Life REIT’s reported 3Q18 DPU fell 4.1% y-o-y to 3.23 Scts, in line. The decline was due to the absence of one-off distribution of divestment gains over 4 quarters in FY2017. Excluding the one-off distribution, DPU grew 2.7% y-o-y.
Parkway Life REIT’s reported 9M18 DPU fell 3.7% y-o-y to 9.59 Scts. Excluding the one-off distribution, DPU grew 3.2% y-o-y.
3Q18 and 9M18 NPI grew 2.5% y-o-y and 2.3% y-o-y respectively, led by acquisition of a nursing home in Japan in Feb 2018, higher rents received from the Singapore hospitals (NPI +1.3% y-o-y and NPI + 1.4% y-o-y from 23 Aug 18 onwards) largely supported by the inflation-linked rental review, higher contributions from Parkway East Hospital as revenue outperformed its minimum guaranteed rent, offset by the depreciation of JPY.
3Q18 and 9M18 interest expenses reduced by 7.6% y-o-y and 16% y-o-y respectively. The successful refinancing initiatives, taking advantage of the low interest rate environment in Japan, lowered its cost of debt to 0.94% from 1% in FY2017.
Gearing increased to 38% from 36.4% as at end FY2017 mainly due to the acquisition of a new nursing home in Japan in Feb 2018. PLife REIT has refinanced all its debt due in 2019 and has no refinancing needs until FY2020.

Despite the lack of asset recycling activities in FY17, Parkway Life REIT has always delivered on its asset recycling. With the acquisition made in Feb 2018, we believe the asset recycling exercise will continue to lead its growth given its successful track record. However, the timing remains uncertain.

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

Parkway Life 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 Parkway Life REIT.
There is 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 is a potential acquisition target from its Sponsor’s pipeline. While it is unknown when the “intention” from both parties would synchronise, we note that Mount Elizabeth Novena Hospital has opened up all its beds. With the acquisition of Fortis Healthcare now underway, the injection of Mount Elizabeth Novena Hospital could be expedited if sponsor IHH Healthcare (SGX:Q0F) requires additional funding.

We continue to like Parkway Life REIT for its volatile and uncertain market conditions.
We maintain our BUY rating and lowered our Target Price to S$3.10 from S$3.15 as we rolled forward our potential total return of 21%.
Further potential upside to our exercise in Japan which we have yet to include in our estimates, and acquisitions of earnings-accretive Singapore or overseas.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-10-26

SGX Stock Analyst Report BUY MAINTAIN BUY 3.10 DOWN 3.150