Parkway Life REIT - UOB Kay Hian 2019-08-01: 2Q19 Resilient & Defensive; Sound Financial Management

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PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life REIT - 2Q19: Resilient & Defensive; Sound Financial Management

• PARKWAYLIFE REIT (SGX:C2PU) delivered consistent and steady growth with 2Q19 DPU expanding 2.6% y-o-y. It reduced interest expenses by 2.5% y-o-y due to astute refinancing of yen-denominated term loans at a lower cost of 0.91%.
• ParkwayLife REIT is on the lookout for acquisitions in Japan and Europe. It could also tap on its sponsor pipeline in Singapore and Malaysia. ParkwayLife REIT is a beneficiary of an ageing population and growth in healthcare services.
• ParkwayLife REIT is a defensive anchor with WALE at 6.7 years. Maintain BUY. Target price: S$3.25.

2Q19 RESULTS

• PARKWAYLIFE REIT (SGX:C2PU) reported DPU of 3.27 S cents (+2.6% y-o-y) for 2Q19, bringing 1H19 DPU to 6.55 S cents (+3.0% y-o-y). The results were in line with our 2Q19 DPU forecast 3.33 S cents.

Steady, resilient and sustainable growth.

• Revenue grew 2.9% y-o-y due to:
  1. revenue contribution from a Japan property (Konosu Nursing Home Kyoseien) acquired in Feb 18,
  2. upward revision of minimum guarantee rent for Singapore hospitals, namely Mt Elizabeth Hospital, Gleneagles Hospital and Eastshore Hospital, by 1.38% effective 23 Aug 18, and
  3. appreciation of the Yen. NPI grew in tandem at 2.3% y-o-y.

Interest expenses dropped by 2.5% y-o-y.

• ParkwayLife REIT successfully refinanced and termed out all its Yen-denominated loans due 2020 in 1Q19, using the proceeds from two 6-year term loan facilities amounting to ¥7,898m (S$96.6m). It has lowered its effective all-in cost of debt from 0.97% to 0.91% despite extending its debt maturity profile to 2025.
• Distributable income grew 2.6% y-o-y after retaining S$0.75m for future capex.

Proactive management of interest rate risk and forex risks.

• ParkwayLife REIT has entered into additional Yen forward contracts to extend the Yen-denominated net income hedge for another year till 1Q24. The extension of Yen-denominated net income hedge capitalises on the recent strengthening of the Yen and shields ParkwayLife REIT against currency volatility.

Ample debt headroom.

• ParkwayLife REIT’s interest cover ratio remains high at 13.8x. ParkwayLife REIT’s gearing remained healthy at 36.9%. It has debt headroom of S$283.2m to finance acquisitions before gearing hits the regulatory limit of 45%.
• ParkwayLife REIT has no long-term debt refinancing needs till 2020.

STOCK IMPACT

• ParkwayLife REIT continues to demonstrate a steady increase in DPU driven by organic growth and new acquisitions. The REIT will explore opportunities to grow via acquisitions, while recycling capital to optimise returns.

Organic growth from rental escalation for Singapore properties.

• For the 13th year of lease term commencing from 23 Aug 19 to 22 Aug 20, the minimum guaranteed rent for the Singapore properties is set to increase by 1.61% over the preceding year based on the CPI + 1% rental revision formula.

Growth through acquisitions.

• ParkwayLife REIT is scouting for opportunities to acquire assets in developed and mature healthcare markets:
  • Deepen presence in core Japan market. Management will scout for opportunities to acquire more nursing homes in Japan during 2H19. Cap rates are attractive at above 5%, while funding cost is low at a sub-1%. Thus, Japan offers good prospects for yield-accretive acquisitions.
  • Tap on sponsor pipeline. Management will explore opportunities to acquire hospitals from sponsor IHH in Singapore (Mount Elizabeth Novena Hospital) and Malaysia (IHH’s subsidiary Parkway Pantai operates 10 Pantai hospitals and four Gleneagles medical hospitals).
  • Europe beckons. France, Germany and the UK have developed and mature healthcare markets. These markets benefit from an aging population. Government policies are also supportive of growth in the healthcare market. Funding costs for the euro is low as well.
  • Strong defensive qualities.
• ParkwayLife REIT is resilient due to its long weighted average lease expiry (WALE) of 6.7 years. Its Japan assets have long lease structures with WALE of 11.9 years. Income visibility is highly valued, given the current uncertain macro outlook.

EARNINGS REVISION/RISK

• We maintain our earnings forecasts.

VALUATION/RECOMMENDATION

• Maintain BUY. Our target price of S$3.25 is based on DDM (required rate of return: 6.25%, terminal growth: 2.2%).

SHARE PRICE CATALYST

• Yield-accretive acquisitions and renewal of lease for Singapore hospitals.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-08-01

SGX Stock Analyst Report BUY MAINTAIN BUY 3.250 SAME 3.250