Parkway Life REIT 1Q20 - UOB Kay Hian 2020-04-23: Buffer Set Aside For Rainy Days; Sound Financial Management.

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PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life REIT 1Q20 - Buffer Set Aside For Rainy Days; Sound Financial Management.

• Parkway Life REIT reported good 1Q20 results with gross revenue and net property income expanding 5.2% and 4.5% y-o-y respectively on organic growth of 1.6% for hospitals in Singapore and contributions from three nursing homes acquired in 4Q19. It has set aside S$1.7m to provide targeted assistance and support measures for tenants affected by the COVID-19 pandemic.
• Parkway Life REIT is a beneficiary of an ageing population and growth in healthcare. It is a defensive anchor with WALE at 6.4 years.
• Maintain BUY. Target price: S$3.78.

Parkway Life REIT 1Q20 Results

• Parkway Life REIT (SGX:C2PU) report DPU of 3.32 S cents (+1.4% y-o-y) for 1Q20, in line with our 1Q20 DPU forecast 3.46 S cents.

Steady and sustainable growth despite COVID-19 pandemic.

• Gross revenue grew by 5.2% y-o-y, largely attributed to additional contributions from the three Japan properties acquired in 4Q19, upward revision of minimum guaranteed rent for Singapore hospitals by 1.61%, as well as appreciation of the yen (JPY). Property expenses also correspondingly increased by S$0.275m or 14.9% y-o-y. Overall, NPI grew by 4.5% y-o-y.
• Interest expenses declined 15.3% y-o-y due to cost savings from the refinancing initiatives completed in 1Q19 and lower interest costs for the Singapore dollar debt, partially offset by the appreciation of the JPY.
• All-in cost of debt declined to 0.63% (-0.17ppt q-o-q), due to extension of JPY interest rate hedge at lower cost, and overall drop in interest rates.

Enhanced debt headroom with leverage limit raised to 50%.

• Parkway Life REIT’s gearing remained healthy at 38.5%, and it has a debt headroom of S$240.4m and S$469m before reaching the limit on aggregate leverage of 45% and 50% (new regulatory limit lifted on 16 Apr 20). Weighted average term to maturity is 2.6 years.
• Parkway Life REIT has also pre-emptively refinanced its remaining loans due in 3Q20 with a six-year committed loan facility of up to S$82m, which will extend its debt maturity profile to 2026. Parkway Life REIT has no near-term refinancing need till Jun 21.

Proactive management of interest rate risk and foreign exchange risks.

• Parkway Life REIT has entered into additional JPY forward contracts to extend the JPY net income hedge for another year till 2Q25. The extension of JPY net income hedge capitalises on the recent strengthening of the JPY and shields Parkway Life REIT against currency volatility.

Set aside buffer for rainy days.

• Parkway Life REIT has set aside S$1.7m (retained for capex: S$750,000, COVID-19 related relief measures: S$850,000) to provide targeted assistance and support measures for affected tenants. The buffer allows PREIT to smooth out earnings should it decide to provide relief to affected tenants in the subsequent quarter.
• We estimated payout ratio at 92.6% for 1Q20.

Stable operations undisrupted by COVID-19 pandemic.

• Parkway Life REIT’s portfolio of 53 assets are in operation with its tenants putting in place strict measures to ensure safety of their employees and patients. Healthcare is an essential service. All properties continue to be in stable operations despite the COVID-19 outbreak.

Anticipate positive outcome from extension of lease.

• The initial lease term of 15 years for Parkway Life REIT’s Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital ends in Aug 22. Master leasee Parkway Hospital Singapore (subsidiary of Parkway Pantai, the largest private healthcare operator in Singapore) has the option to extend the leases for another 15 years.

Dialogue between Parkway Life REIT and Parkway Hospital has commenced.

• Improved profitability for private healthcare operators provides a conducive environment for Parkway Life REIT to negotiate for higher base rents. The lease structure with rental escalation of CPI + 1% would be maintained. We expect initial framework for the extension of lease to be finalised by end- 20/early-21.

Strong defensive qualities.

• Parkway Life REIT is resilient due to its long weighted average lease expiry (WALE) of 6.4 years. Its Japan assets (48 nursing homes and one pharmaceutical product distribution & manufacturing facility), which accounted for 38% of portfolio valuation, have long lease structure with WALE of 12.4 years.
• Income visibility from resilient healthcare assets is highly valued, given the current uncertain macro outlook.

Relying on organic growth in 2020.

• Acquisitions have been put on a back burner due to the current uncertain macroeconomic environment. Parkway Life REIT will benefit from full-year contribution from three Japan properties acquired in 4Q19.
• 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.

EARNINGS REVISION

• We maintain our earnings forecasts.
• Maintain BUY and target price of S$3.78, based on DDM (required rate of return: 5. 5%, terminal growth: 2.0%).
• 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.
• 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/ 2020-04-23

SGX Stock Analyst Report BUY MAINTAIN BUY 3.780 SAME 3.780