Parkway Life REIT - DBS Research 2020-02-12: Safe & Sound

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PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life REIT - Safe & Sound

• Parkway Life REIT (SGX:C2PU) offers one of the strongest earnings offers one visibility profiles among Singapore REITS (S-REITs) with a weighted average lease expiry of 6.5 years.
• Despite Parkway Life REIT trading at below 4% yield, it is still attractive relative to the SREIT sector which has compressed to below 5% following the low interest rate environment and re-rating of SREITs in the past couple of years.
• We maintain our BUY rating and raised our target price to S$4.00.

Almost borrowing for free

Results highlights: FY19 DPU grew 2.5% y-o-y contributed by higher rents and appreciation of Japanese Yen (JPY); cost of debt declined further to 0.8%.

• Parkway Life REIT (SGX:C2PU) reported 4Q19 DPU growth of 1.8% y-o-y to 3.34 Scts. FY19 DPU grew 2.5% y-o-y to 13.19 Scts, in line.
• 4Q19 and FY19 net property income (NPI) both grew 2.3% y-o-y and 2.7% y-o-y respectively, led by higher rents received from the Singapore hospitals (4Q19 NPI: +1.9% y-o-y; FY19 NPI: +1.6% y-o-y). This was largely supported by the inflation-linked rental review and higher contributions from Parkway East Hospital (FY19 NPI: +2.6% 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, and appreciation of the JPY (Japan assets 4Q19 NPI: +3.8%; FY19 NPI +4.8% y-o-y).
• The NPI growth was marginally offset by lower NPI from its Malaysian assets (FY19 NPI: -38% y-o-y) due to lower rent arising from a strata unit that remained vacant after its lease expiry in end-Feb 2019 and depreciation of the Malaysian Ringgit (MYR).
• Gearing stayed relatively stable q-o-q at 37.1%. As at end-2019, c.10% of total debt expiring in FY2020 comprises largely of a S$75.2m 6-year long term loan in 3Q2020.
• Its weighted average debt term stands at 2.8 years (2.9 years in 4Q18) and all-in cost of debt remained relative stable q-o-q at 0.8% (0.97% in 4Q18).

Outlook

Singapore hospitals to grow at a minimum of 1.61% vs 1.38% in the previous year; Mount Elizabeth Novena Hospital a potential acquisition target

• 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. Rental revisions are pegged to a CPI-linked formula, which underpins a steady growth profile for Parkway Life REIT.
• Upon the rollover to the 13th year lease term, the minimum rent of its Singapore hospitals is 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 Parkway Life REIT 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. In a recent media interview, the new CEO of IHH Healthcare (SGX:Q0F) (Parkway Life REIT’s sponsor) said that IHH Healthcare will conduct a portfolio review and may consider asset recycling and divestments of assets in areas that they do not foresee good cluster growth and utilise the capital to grow other assets. While this does not directly imply that Mount Elizabeth Novena Hospital is up for divestment, at least its sponsor is now open to asset recycling and divestments.

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

• In December 2019, Parkway Life REIT acquired 3 nursing rehabilitation facilities in Japan for S$46.3m at net property yield of 6.8%.
• Asset-recycling activities have been sporadic. With the acquisition made in December 2019, we believe asset-recycling exercise will continue to drive growth given its successful track record but the timing 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, Parkway Life REIT’s management believes it is timely to look into building a third pillar for the company (in addition to asset recycling and acquisition pipeline from its sponsor) for its next growth phase.
• Its management continues to explore opportunities in developed countries with mature healthcare markets and believes that there could be potential options in Australia and Europe.
• However, its management remains cautious on new ventures and the timing of potential entries is uncertain.

Maintain BUY; raised Target Price to S$4.00 from S$3.35 previously

• We continue to like Parkway Life 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$4.00, from S$3.35 previously, pricing in the recent acquisition and roll forward our discounted cash flow (DCF) valuation. Our Target Price implies an upside of 11% and a potential total return of 15%.
• See Parkway Life REIT Share Price; Parkway Life REIT Target Price; Parkway Life REIT Analyst Reports; Parkway Life REIT Dividend History; Parkway Life REIT Announcements; Parkway Life REIT Latest News.
• 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 TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-02-12

SGX Stock Analyst Report BUY MAINTAIN BUY 4.00 UP 3.350