Parkway Life Real Estate Investment Trust - DBS Research 2019-08-01: Healthy, Consistent Growth

PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life Real Estate Investment Trust - Healthy, Consistent Growth

PARKWAYLIFE REIT (SGX:C2PU)'s 2Q19 DPU increased 2.6% y-o-y to 3.27 Scts; 1H19 DPU rose 3% y-o-y to 6.55 Scts, in line.
Singapore hospitals’ minimum rent to grow at 1.61% vs 1.38% previously effective August 2019.
No debt refinancing needs until 2020; extended JPY net income hedge maturity until 1Q24, capitalising on strengthening of the JPY.
Maintain BUY; raised Target Price to S$3.35.

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 raised our Target Price to S$3.35.

ParkwayLife REIT (SGX:C2PU) last acquired an asset in February 2018. Its asset-recycling initiatives are still ongoing but 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:
- asset-recycling strategies,
- venturing into a new market (third pillar), and
- acquisition pipeline from its Sponsor while maintaining its defensive stance in expansion.

ParkwayLife REIT has a gearing of 37% with debt headroom of S$283m assuming a maximum gearing of 45%. In addition, ParkwayLife REIT has benefitted from lower interest rates in Japan with cost of debt now below 1%.
In addition, Singapore hospitals are set to increase rents by 1.61% effective August 2019 vs 1.38% previously.

ParkwayLife REIT reported 2Q19 DPU growth of 2.6% y-o-y to 3.27 Scts. 1H19 DPU grew 3.0% y-o-y to 6.55 Scts, in line.
ParkwayLife REIT's 2Q19 and 1H19 NPI both grew 2.3% y-o-y, led by higher rents received from the Singapore hospitals (NPI: +1.9% y-o-y). This was largely supported by the inflation-linked rental review and higher contributions from Parkway East Hospital (NPI: +11% y-o-y) as revenue outperformed its minimum guaranteed rent, receipt of one-off consumption tax refund relating to the acquisition costs of a Japan property acquired in February 2018 (Japan assets NPI +2.9% y-o-y), and appreciation of the JPY.
Gearing stayed relatively stable q-o-q at 36.9% vs 36.4% in 1Q19. As at Jun 2019, there were no long-term debt refinancing needs until FY20.
Its weighted average debt term stands at 3.1 years (2.9 years in 4Q18) and all-in cost of debt is stable q-o-q at 0.91% (0.97% in 4Q18).
In 2Q19, ParkwayLife REIT extended the JPY net income hedge maturity for another year until 1Q24, capitalising on the recent strengthening of the JPY.

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. Rental revisions are pegged to a CPI-linked formula, which underpins a steady growth profile for ParkwayLife REIT.
Upon the rollover to the 13th year lease term, the minimum rent of its Singapore hospitals are set to increase by 1.61% (CPI+1% formula), effective August 2019 vs 1.38% in the previous year.
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” of 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.

There has been a lack of asset-recycling activities since FY18. With the acquisition made in February 2018, we believe asset-recycling exercise will continue to drive growth ahead given its successful track record but 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 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.

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 raised our Target Price to S$3.35, from S$3.10 previously, based on higher rental growth and lowering the risk-free rate following expectations of Fed rate cuts. Our target price implies an upside of 9% and a potential total return of 14%.
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/ 2019-08-01

SGX Stock Analyst Report BUY MAINTAIN BUY 3.35 UP 3.100