Parkway Life REIT 2Q20 - UOB Kay Hian 2020-07-29: Oasis Of Serenity Amid The COVID-19 Storm

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PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life REIT 2Q20 - Oasis Of Serenity Amid The COVID-19 Storm

• Healthcare assets, such as hospitals and nursing homes, provide essential services. As such, Parkway Life REIT’s 53 assets in Singapore and Japan remain fully operational and provide stable income contributions.
• Parkway Life REIT is a beneficiary of ageing populations and growth in healthcare. A defensive anchor with WALE at 6.1 years, Parkway Life REIT deserves to trade at a decent premium due to uncertainties created by a prolonged COVID-19 pandemic.
• Maintain BUY. Target price: S$3.80.

Parkway Life REIT's 2Q20 Results

• Parkway Life REIT (SGX:C2PU) reported DPU of 3.36 S cents (+2.5% y-o-y) for 2Q20, bringing 1H20 DPU to 6.68 S cents (+1.9% y-o-y). The results included retention of S$850,000 for COVID-19 related relief measures and were in line with our expectations.

Steady and sustainable growth despite COVID-19 pandemic.

• Gross revenue and NPI increased 4.9% and 5.3% y-o-y respectively due to contribution from three Japan nursing rehabilitation facilities acquired in 4Q19, higher rent from Singapore properties (minimum guaranteed rent increased 1.61%) and appreciation of the Japanese yen.

Substantial savings in interest expenses.

• Interest expenses declined by 23.4% y-o-y due to refinancing completed in 1Q19 and lower interest costs for Singapore dollar debt, partially offset by the appreciation of the Japanese yen.
• All-in cost of debt declined by 0.31ppt y-o-y to 0.60% due to the extension of yen-termed interest rate hedge at lower costs, and an overall drop in interest rates.

Prudent capital management.

• Parkway Life REIT’s gearing remained healthy at 38.3%. It has debt headroom of S$250m and S$479m respectively before reaching the limit on aggregate leverage of 45% and 50%. Its interest coverage ratio stood at 15.8x. 88% of its interest rate exposure is hedged. Parkway Life REIT has pre-emptively refinanced its loans due in 3Q20 with a 6- 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 requirements to refinance till Jun 21.
• Parkway Life REIT has capitalised on the recent strengthening of the yen and entered into yen-termed forward contracts to extend its yen-termed net income hedge maturity till 2Q25, which protects Parkway Life REIT against yen currency volatility and enhances income stability.

Setting aside buffer for potential relief to affected tenants.

• Parkway Life REIT has set aside S$1.7m (1Q20: S$750,000, 2Q20: S$850,000) in 1H20 to provide targeted assistance and support measures for affected tenants. The buffer allows Parkway Life REIT to smooth out earnings should it decide to provide relief to affected tenants.
• Parkway Life REIT does not intend to retain any distributable income during 2H20.

Healthcare is an essential service.

• Parkway Life REIT’s 53 assets are fully operational with its tenants implementing strict measures to ensure safety of employees and patients.

Singapore hospitals continue to attend to acute cases.

• In Singapore, foreign patient volumes are affected by travel restrictions (foreign patients accounted for about 25% of total revenue). However, the number of acute cases, which generate higher revenue intensity per inpatient due to their complexities, remains stable. Semi-elective cases initially had been deferred but have recently resumed. Its Singapore hospitals have also taken in COVID-19 patients decanted from public hospitals.

Revenue contribution from Japan not affected by COVID-19 pandemic.

• One of Parkway Life REIT’s nursing homes in Japan, Palmary Inn Shin Kobe, reported three confirmed COVID-19 cases in late-April, involving one resident and two staff. The resident has since passed away. The two staff and individuals in close contact with the three confirmed cases were placed under quarantine. Precautionary measures were taken to minimise contact between patients and staff, while all communal activities and visitations were suspended. The nursing home was disinfected by the local health authority but remains in operation. Thus, there is no material financial impact on Parkway Life REIT.

CPI + 1% formula provides protection against inflation.

• Based on the CPI + 1% rental revision formula, the minimum guaranteed rent for Parkway Life REIT’s Singapore properties for the 14th year of lease term (23 Aug 20 to 22 Aug 21) is set to increase by 1.17% over the total rent payable for the preceding year.

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.
• Negotiations between Parkway Life REIT and Parkway Hospital are ongoing. The lease structure with rental escalation of CPI + 1% would be maintained. Improved profitability for private healthcare operators provides an opportunity for Parkway Life REIT to negotiate for higher base rents. The extension of lease could 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 6.1 years. Its Japan assets (48 nursing homes and one pharmaceutical product distribution & manufacturing facility), which accounted for 41% of portfolio valuation, have long lease structures with WALE of 11.5 years.
• Income visibility from resilient healthcare assets is highly valued, given current uncertainties created by a prolonged COVID-19 pandemic.

Parkway Life REIT - Valuation & Recommendation

• We increase our 2020 DPU forecast by 1.5% as Parkway Life REIT does not intend to retain any distributable income in 2H20. We kept our 2021 and 2022 DPU forecasts unchanged.
• Maintain BUY. Our target price of S$3.80 is 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:
  • Extension of leases for Singapore hospitals.
  • Yield-accretive acquisitions.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-07-29

SGX Stock Analyst Report BUY MAINTAIN BUY 3.80 UP 3.780