Parkway Life Real Estate Investment Trust - DBS Research 2019-01-29: Steady Growth Outlook

PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life Real Estate Investment Trust - Steady Growth Outlook

ParkwayLife REIT's 4Q18 and FY18 DPU were 2.9% and 3.5% lower y-o-y respectively due to absence of one-off divestment gains distributed in FY17.
Excluding gains, 4Q18 and FY18 DPU were 3.9% and 3.4% higher respectively, led by contribution from asset acquired in Feb18.
No debt refinancing needs until 2020; cost of debt was marginally higher at 0.97% vs 0.94% in 3Q18.
Maintain BUY; Target Price of S$3.10.

PARKWAYLIFE REIT (SGX:C2PU) offers one of the strongest earnings visibility profiles among S-REITs, with a weighted average lease expiry of seven years. We maintain our BUY rating and Target Price of S$3.10.

ParkwayLife REIT acquired an asset in Feb18. Its asset recycling initiatives are still ongoing however, the timing is uncertain. We continue to believe that ParkwayLife REIT will be able to deliver steady DPU growth through its three-pronged growth plans:
1. asset recycling strategies,
2. venturing into a new market (third pillar), and
3. acquisition pipeline from its Sponsor while maintaining its defensive stance in expansion.

Debt headroom for accretive acquisitions, beneficiary of low interest rates in Japan. ParkwayLife REIT has a gearing of 36% with debt headroom of S$305m assuming 45% gearing. In addition, ParkwayLife REIT has benefitted from lower interest rates in Japan following the renewal of its interest rate hedge, with cost of debt now below 1%.

Currency risks. ParkwayLife 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.

ParkwayLife REIT’s reported 4Q18 DPU fell 2.9% y-o-y to 3.28 Scts, in line. The decline was due to the absence of one-off distribution of divestment gains over four quarters in FY2017. Excluding the one-off distribution, DPU grew 3.9% y-o-y.
ParkwayLife REIT’s reported FY18 DPU fell 3.5% y-o-y to 12.87 Scts. Excluding the one-off distribution, DPU grew 3.4% y-o-y.
4Q18 and FY18 NPI grew 3.7% y-o-y and 2.7% 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.
4Q18 and FY18 interest expenses reduced by 12.7% y-o-y and 15.3% y-o-y respectively. The successful refinancing initiatives, taking advantage of the low interest rate environment in Japan, lowered its cost of debt to 0.97% from 1% in FY2017.
Gearing fell q-o-q to 36.1% as at 4Q18 from 37.7% as at 3Q18 partially led by revaluation of its assets. On y-o-y basis, gearing was stable vs 36.4% as at end FY2017. ParkwayLife REIT has refinanced all debt due in 2019 and has no refinancing needs until FY2020.

There was a lack of asset recycling activities in FY18. With the acquisition made in Feb 2018, we believe asset recycling exercise will continue to drive growth ahead given its successful track record but 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 ParkwayLife 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.

ParkwayLife 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 ParkwayLife 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 BERHAD (SGX:Q0F) requires additional funding.

We continue to like ParkwayLife REIT for its strong earnings visibility, which is a positive attribute especially in the current volatile and uncertain market outlook.
We maintain our BUY rating and Target Price of S$3.10. Our target price implies an upside of 11% and a potential total return of 16%.
Further upside to our forecasts stems from the rollout of more asset recycling exercise in Japan, and acquisitions of earnings-accretive hospital assets in Singapore or overseas.

Rachel Lih Rui TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-01-29

SGX Stock Analyst Report BUY MAINTAIN BUY 3.100 SAME 3.100