In the pink of health

• In line, NPI driven by 5.25% inflation rate in 2008. 1Q09 results were in line with consensus and our expectations. DPU of 1.89 cts forms 25% of our forecast of 7.54 cts, up 16.3% yoy. The minimum guaranteed rent from the Singapore hospitals is set to grow annually on a unique structure of the preceding year’s inflation rate + 1%. Net property income of S$15.2m was up 36.6% yoy driven by CPI of 5.25% in 2008. All of PLife’s asset remain 100% occupied as at 31 Mar 09.

• No refinancing issues and sufficient banking lines. PLife REIT does not have refinancing concerns until 2H10. Additionally, PLife also has sufficient funding sources which can be tapped for fund acquisitions and for general working capital purposes. This includes 1) a two-year committed S$100m multi-currency revolving credit facility, of which S$34m was drawn down in Feb 09 to refinance a maturing term loan of S$34m; and 2) a S$500m medium term note (MTN) program. Asset leverage continues to be one of the lowest in the REIT sector at 23% as at 1Q09.

• Interest rate and forex risks mitigated. The management has fixed interest rates for the whole quantum of its debt for three years via interest rate swaps. Additionally, the net income from Japan was also fully hedged for five years with foreign currency forward contracts. This creates clarity of interest expenses and income from its Japanese assets in the medium term.

• Maintain Outperform, earnings forecasts and target price of S$1.20. We continue to like PLife REIT as it remains one of the few REITs with clear visibility on earnings, and continued positive growth in the medium term based on its inflationlinked lease structure; Its strong balance sheet and the management’s tamed stance on growth via acquisitions strategy puts PLife in a favourable position to ride out the downturn. PLife offers a forward yield of 8.7% at a P/BV of 0.65x. Maintain Outperform and DDM-based target price of S$1.20 (discount 8.09%).

Parkway Life REIT reported gross revenue for 1QFY09 of $16.3 million (+37.6% y-o-y), net property income was $15.2 million(+36.6% y-o-y). Distributable income was $11.4 million(+16.6% y-o-y). DPU for the quarter was 1.89 cents (+16.7% y-o-y).

Results were largely inline with expectations as Plife REIT’s properties have strong and stable cash flow characteristics. Growth in revenue was mainly due to the annual increment in rents of 6.25% of the Singapore hospitals as well as contribution of revenue from the Japanese properties, which were acquired in 2nd and 3rd quarter of 2008.

Balance sheet remains healthy with gearing ratio of 23.0%, a slight decrease of 0.3%pt from 4QFY08, due to the depreciation of JPY. Correspondingly, asset value registered slight drop of 0.6% from the Japan properties. Plife REIT has total debt of $247.5 million, out of which $34 million denominated in S$ is due in the 2nd half of 2010. The rest are JPY denominated and due in the 2011.

Share price has run-up 20% since our previous recommendation. We maintain our positive call on Plife REIT and like it for the stable and resilient cash flows. We reiterate the defensive nature of the healthcare sector and the revenue model of the REIT whereby 93% of total portfolio (NLA) has downside revenue protection. We maintain our Buy recommendation with fair value of $0.95.

PLife Reit to distribute all taxable income

PARKWAY Life Real Estate Investment Trust (Reit) has said it will distribute 100 per cent of its taxable income and net overseas income this year, amid concerns over falling dividend yields among locally listed trusts.

The assurance came on top of strong performance in the first quarter of this year. The healthcare Reit yesterday posted a 16.6 per cent jump in Q1 distributable income to $11.4 million, boosted by higher rent from the Singapore hospitals in its portfolio.

The higher rental income resulted from a formula pegged to the CPI rate.

At the point of the last revision in August, the rental growth rate was fixed at 6.25 per cent, based on a CPI+1 per cent formula.

Distribution per unit (DPU) for the three months ended March was 1.89 cents, up from 1.62 cents. Gross revenue rose 37.6 per cent to $16.3 million.

‘Amid the current tight credit situation, PLife Reit is in an advantageous position with no refinancing requirements until the second half of 2010,’ said Yong Yean Chau, chief executive of Parkway Trust Management (PTM), which manages the Reit.

‘We are geared at 23 per cent – among the lowest in the Singapore Reit sector and well within the statutory limit of 60 per cent. Bolstered by a strong balance sheet, we are equipped with the strength and flexibility to fund future growth.’

The Reit has identified Singapore, Japan, Malaysia and Australia as its core markets for now.

Mr Yong said these are relatively mature markets with sound legal frameworks and credible healthcare facility operators. He is leaving out China and India for now.

‘We don’t want to risk buying some properties for the sake of good yield and at the end of the day, risk the overall portfolio,’ he said. Any acquisition should ‘enhance the defensiveness of the portfolio rather than increase its risks’.

Total asset value fell to $1.07 billion at end-March, from $1.08 billion. This was due to a drop in the Japanese yen.

At March 31, total debt was $247.5 million. Property expenses rose 52.4 per cent to $1.2 million, primarily due to spending related to properties in Japan.

The Reit has also issued more than 380,00 new units as payment to its manager for 20 per cent of the management fee. The rest of the fee was paid in cash.

This resulted in the deemed interest of Parkway Holdings increasing to 35.64 per cent, from 35.58 per cent, through wholly-owned subsidiary PTM.

Mr Yong said a future unit incentive scheme for staff may be taken from the pool of units issued.