PLife Reit Q4 distributable income up 16.6%

Trust also acquires another nursing home property

PARKWAY Life Reit (PLife Reit) has registered $14.4 million in distributable income for the fourth quarter ended Dec 31, 2010. This is a 16.6 per cent increase from $12.4 million a year ago.

Accordingly, distribution per unit (DPU) for the period increased to 2.38 cents, from 2.05 cents.

This is despite higher financing costs due to 100 per cent debt funding of Japanese properties acquired in 2010.

Net property income rose 19.5 per cent to $19.68 million and gross revenue increased 21.1 per cent to $21.49 million.

Parkway Trust Management Limited (PTML) puts the positive results down to its ‘yield-accretive acquisitions, interest cost savings from a refinancing exercise and higher rent from the existing properties’.

The full quarter revenue contribution from 19 Japan nursing home properties acquired in 2009 and 2010 was $3.4 million.

The re-pricing of a five-year 5.3 billion yen (S$84.0 million) loan facility maturing in H2 2014 resulted in total interest cost savings of about $3.45 million for the remaining loan term.

‘With the re-pricing, the weighted average all-in cost of debt for PLife Reit has been reduced from 2.13 per cent to 1.94 per cent,’ said PTML chief executive Yong Yean Chau.

For the financial year ended Dec 31, 2010, gross revenue increased 20 per cent to $80 million. Distributable income grew 13.8 per cent to $53.17 million. The DPU for 2010 is 8.79 cents, compared with 7.74 cents in 2009.

The DPU for Q4 is payable on Feb 28.

Commenting on the results, Mr Yong said: ‘Building on our solid fundamentals, we are delighted to have grown from strength to strength, with DPU registering an increase of 49.7 per cent since IPO.’

PTML also announced the acquisition of another nursing home property in Fukuoka, Japan for 564 million yen.

This represents an 8.2 per cent discount to its 614 million yen valuation by Colliers Halifax, said PTML.

The acquisition is expected to be completed by Jan 31, 2011, and will be fully funded by a long-term unsecured committed term loan facility due June 2015.

The property will have a fresh 20-year master lease and has an expected net property yield of 8.0 per cent.

The counter gained two cents yesterday to close at $1.80.

A strong finish for 2010

At a Glance

• 4Q10 DPU of 2.38 Scents (+16% yoy) within expectations

• Effective borrowing costs lowered further to 1.94% (from 2.13% in 2Q10) with recent re-pricing of a JPY5.3bn loan

• Buy, S$1.90 TP assumes S$200m acquisitions in 2011

Comment on Results

4Q10 DPU 2.38 Scts within expectations. 4Q10 DPU of 2.38 Scts (+16% yoy; 6% qoq) was within our expectations. Gross revenue grew 21% yoy to S$21.5 m, driven largely by additional contributions from a total of 19 nursing homes acquired (Nov’09-Jul’10) and higher revenue from Singapore properties. NPI margin moderated slightly to 91.5% arising from expenses related to the 19 new nursing homes. PREIT recognized a fair value gain of S$18.7m (FY09: S$28.9m) on its investment properties, equating to a 1.45% gain on total portfolio value.

Interest savings from lower effective borrowing costs of 1.94%. As part of actively managing its debt, PREIT successfully re-priced an existing JPY5.3bn (S$84m) loan with effect from 1 Jan’11. This lowers its all-in cost of debt further to 1.94%, from 2.13% previously. The interest cost savings amounts to c.S$800k/yr. Debt weighted term to maturity is 3.95 years, with only S$50m (10.7%) debt due in 2013. Gearing at 34.6% provides headroom of S$122m and S$256m before reaching 40% and 45% gearing.

Acquired another Jap nursing home for S$8.9m at 8% yield. PREIT acquired another Japanese nursing home for S$8.9m, or at a NPI yield of 8% from Sawayaka Club, the same operator as the 6 homes acquired in Jun’10. Going forward, we believe management will still continue to deliver on inorganic growth, though this could also come from other countries, such as Malaysia and Australia, in our view.

Recommendation

Maintain Buy, TP: S$1.90. We like PREIT for its stable and defensive portfolio; 88% of portfolio revenue with downside rental protection. We believe the REIT will continue to provide organic growth, while exploring portfolio expansion opportunities going forward. We have assumed S$200m worth of acquisitions in 2011, funded 70%/30% by equity/debt to maintain its existing gearing ratio of c.35% while still empowering PREIT to undertake further opportunistic acquisitions.

Still going strong

• Management shared updates and growth plans at our well-attended conference in Singapore last week

• Affirmed our beliefs that management will deliver growth through acquisitions and AEI

• Separately, we expect 4Q10 DPU to be at least 2.28 Scts (+11% yoy); results due on 24 Jan

• Raised FY11F/12F DPU by c.2%/3%; Maintain Buy, TP: S$1.90

Growth through acquisitions and AEI. PREIT’s investor meetings during our Pulse of Asia conference last week were very well attended by almost 40 fund managers/analysts. The meetings reaffirmed our views that PREIT’s growth will be from acquisitions in Japan and Malaysia, as well as higher rentals in Singapore amid higher CPI. Management has been evaluating possible entry into Australia but has yet to finalize any suitable deal. Asset enhancement will also be part of management initiatives going forward. With its active debt management, further lowering of their funding cost is possible. We believe many investors were pleased to hear from management that fund raising, if any, will be timed with acquisition, rather than pre-emptively to the market.

4Q results preview; we expect 2.28 Scts DPU. Separately, PREIT will announce their 4Q/FY10 results on 24 Jan. We do not expect any surprises. Based on our estimates, we are expecting 4Q DPU to be at least 2.28cts (+11% yoy, +3% qoq), totaling 8.7 cts for FY10 (FY09: 7.74cts).

Maintain Buy, TP: S$1.90. At current price, shares are trading at a premium c.1.3x P/NAV. This, in our view, arises from a scarcity of quality healthcare assets, as well as expectations on management to deliver on acquisitions. We are confident that management will meet market expectations. We raised our FY11F/ 12F DPU by 2%/ 3% on higher CPI assumption of 3.2% for 2011, lower all-in interest costs and lower potential dilution from equity raising due to the higher share price since our last report on 6 Oct’10. We are still assuming acquisition of S$200m around mid-2011, funded by 70%/30% equity/debt.

Stepping up organic growth

• Maintain Outperform. We met investors during a week-long non-deal roadshow with PLife REIT’s CEO, Mr Yong Yean Chau and CFO, Mr Loo Hock Leong in the UK and Europe in December. Management elaborated on plans to expand organically and through acquisitions. We retain our assumptions of S$200m of acquisitions with half-year contributions for 2011, fully funded by debt. Our DPU estimates and DDM-target price of S$1.96 (discount rate 7.2%) are intact. Despite being pricier than the REIT sector’s average of 1.2x P/BV, we believe PLife’s ability to hedge against inflation justifies its premium pricing. We anticipate near-term price catalysts from announcements of accretive acquisitions and firm assetenhancement plans for its Singapore portfolio.

• Asset enhancement to start in Singapore. Management had been exploring asset-enhancement possibilities for Singapore hospitals and due diligence is in progress. Although the scale of the work cannot be ascertained for now, we believe with the Singapore portfolio contributing 64% of net property income, there would a material impact on distribution by 2H11.

• Market rent reviews at Japanese nursing homes. The first round of market rent reviews since acquisition is due this year and we estimate that up to 10% of PLife’s revenue would be subject to rental revisions on an annual basis.