Parkway Life Reit a model for India’s Fortis: analyst

2 ways to ride on India market: replicate Reit or pump in properties

EVEN as Fortis Healthcare and Parkway Holdings are pondering over the possible synergies that the healthcare partners can leverage on from their new relationship, one analyst has suggested that they look into real estate too.

Simranjit Singh, director of healthcare practice at Frost & Sullivan Asia Pacific, said that with the India property market heating up, Fortis could leverage on Parkway Life Reit (of which Parkway is a substantial unit-holder) by ‘offloading its Indian properties’ to the Reit or ‘by replicating a similar healthcare Reit model in India’.

‘In fact, many analysts speculate that there will be about three to four large-sized initial public offerings of Reits this year,’ said Mr Singh. ‘This is likely to come from India, where business parks are maturing and attracting stable, healthy income streams for property owners. It will also be hard to rule out the possibility for hospitals to join the fray.’

However, analysts that BT spoke to expressed a mixed response to that suggestion.

‘Although India is one of the markets that have huge untapped potential, an acquisition of an Indian asset in the near term is unlikely,’ said Kim Eng Research investment analyst Anni Kum. ‘Japan and Australia currently present better opportunities due to the still attractive asset yields and stable income structure that potential targets offer. I do not think India is a market that PLife Reit is seriously looking at at this moment. But the Reit may still consider opportunistic buys at compelling prices.’

Broadly agreeing, DMG Securities’ Terence Wong said that Malaysia would be more attractive to PLife Reit. ‘They’ve always mentioned that they will focus on four markets – Singapore, Japan, Malaysia, as well as Australia. So after Japan, probably it’ll be Malaysia.’

PLife Reit owns the Gleneagles, Mt Elizabeth and Parkway East hospitals in Singapore as well as 18 properties in Japan.

Another analyst from a research house based here noted that the defensive nature of a Reit model requires that the properties that PLife Reit acquires be able to generate a stable income stream. While India is a possibility, an injection of assets is unlikely in the near term, he said.

‘The management of PLife Reit is very focused on where they want to invest in,’ said the analyst. ‘Those countries that they are looking into are usually more mature in terms of regulations, like Singapore, Japan as well as Australia. Offhand, I would think India, in terms of regulations, is still behind these three countries.’

When asked what he thinks of the real estate suggestion, Parkway Trust Management CEO Yong Yean Chau said he is positive about the growing regional healthcare market but each acquisition ‘will have to be yield-accretive’.

‘As always, we remain open to opportunities for strategic partnerships with high-quality operators at the right time to enhance our business and portfolio,’ said Mr Yong, whose company manages PLife Reit.

Interestingly, Fortis Healthcare is listed as a competitor in PLife Reit’s IPO prospectus. The Indian hospital chain owner, which bought a stake in Parkway last month for close to $1 billion, operates a network of 46 hospitals, with another eight still under construction. Fortis Healthcare now owns 25 per cent of Parkway, which in turn holds a 36 per cent interest in PLife Reit.

In a statement yesterday, Frost & Sullivan’s Mr Singh also said that Fortis could tap on Parkway’s expertise in providing primary healthcare for the expatriate segment as India is also seeing a growth in its expatriate community. There are also growth opportunities for Parkway’s laboratory business and that of Super Religare Laboratories, which is owned by Fortis.

‘In fact, this could be a business unit that could be further developed and listed as a separate entity,’ said Mr Singh.

Full Year 2009 Results

• Full year revenue of $66.7 million, net property income of $61.9 million, distributable income of $46.7 million.
• 4Q09 DPU of 2.05 cents, bringing full year DPU to 7.74 cents.
• Property portfolio asset size increased 10%, backed by acquisition of 8 nursing homes in Japan
• Maintain buy recommendation with fair value of $1.56

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Results within expectations
Plife REIT reported full year revenue of $66.7 million (+23.7% y-y), net property income of $61.9 million (+23.1% y-y), distributable income of $46.7 million (+13.4% y-y). Full year DPU rose 13.3% to 7.74 cents. The results came in within our expectations (Gross revenue +2.8%, net property income +2.0%, distributable income +1.3%, DPU +1.3%). Revenue grew on the back of increased contribution from the inflation-linked rental from the Singapore hospitals as well as higher contribution from the Japan properties. Percentage revenue contribution from Singapore and Japan are 77% and 23% respectively, compared with 90% and 10% in 2008.

Portfolio asset value increased from $1,047.8 million in 2008 to $1,152.9 million in 2009. The portfolio consists of 3 Singapore hospitals and 18 Japan properties (17 nursing homes, 1 pharmaceutical products distribution facility) In the valuation as at 31st Dec 2009, the Singapore hospitals recorded 3.8% increase in valuations, while the Japan properties (excluding 8 nursing homes acquired in Nov 2009) recorded 6.5% decrease in valuations. For the full year, Plife recognized $28.9 million revaluation gain to its income statement.

Asset enhancements and acquisitions coming up

• Full-year above expectations; maintain Outperform. FY09 DPU met Street expectations but exceeded our expectations (109% of our estimate) due to lowerthan-forecast interest expenses. We maintain our FY10-11 estimates and introduce FY12 estimates. Our DDM-based target price is intact at S$1.57 (discount rate 7.2%). PLife REIT trades at 0.96x P/BV and a forward yield of 6.6%. Maintain Outperform on potential acquisition catalysts.

• Full-year DPU of 7.74cts (CIMB-GK 7.11cts). This represents a dividend yield of 5.8%. Net property income of S$62m for the full year was up 23% yoy following contributions from newly-acquired Japanese nursing homes in 2009 and higher rent from Singapore hospitals as a result of a high growth rate for the inflation-linked CPI +1% formula. Distributable income of S$46.7m and full-year DPU of 7.74cts increased 13% yoy to exceed our expectations following lower-than-forecast interest expenses. PLife’s REIT’s assets were revalued at S$1.15bn in Dec 09, gaining S$29m. NAV/unit in Dec 09 increased to S$1.39 (including distributable income) from S$1.34 in Dec 08.

• Asset leverage remained low at 28%. In 2H10, S$34m (10.5% of total debt) of debt will be due for refinancing. Management guides that new interest rates are likely to remain the same, if not lower. Interest cover remained high at 6.8x. Additionally, interest rates have been fixed for 100% of its debt, which eliminates uncertainties from fluctuating interest rates.

• Asset enhancements and acquisitions in 2010. Management will commence asset enhancement work, likely to concentrate in Singapore hospitals. Additionally, it will continue to look for accretive acquisitions in the region. We anticipate more acquisitions in Japan, and possibly Australia and Malaysia.

PLife Reit racks up 11.6% growth in Q4 distributable income

PARKWAY Life Real Estate Investment Trust (PLife Reit) posted an 11.6 per cent year-on-year increase in distributable income to $12.38 million for the fourth quarter ended Dec 31, 2009.

Distribution per unit (DPU) for the quarter amounted to 2.05 cents versus 1.84 cents in Q4 2008, which translates to a full year DPU of 7.74 cents and a 6.34 per cent distribution yield. In FY08, PLife Reit achieved a full year DPU of 6.83 cents.

For Q4 2009, gross revenue rose 9.7 per cent to $17.7 million compared to the same period last year.

Both property expenses and financing costs rose during the quarter as a result of the eight nursing homes acquired in November last year. Property expenses for Q409 were $0.2 million higher at $1.3 million and finance costs rose from $2.05 million to $2.24 million.

For the full year of 2009, distributable income came in at $46.7 million, a 13.4 per cent increase from the previous year.

Gross revenue surged by 23.7 per cent year-on-year from $53.89 million to $66.68 million, on the back of revenue contributions from properties in Japan acquired in 2008 as well as from the eight new nursing homes. Higher rent from the Singapore hospital properties – comprising Mount Elizabeth Hospital, Gleneagles Hospital, and East Shore Hospital – also boosted revenue.

The acquisition of the nursing homes brought PLife Reit’s total portfolio size, as at Dec 31, 2009, to 21 properties worth $1.15 billion, up 9.5 per cent from $1.05 billion in the previous year. It has a 100 per cent occupancy rate across its entire portfolio.

Yong Yean Chau, CEO of Parkway Trust Management, said: ‘Given our strong financial position, we were able to time the market and acquire quality properties in the fourth quarter at a very attractive pricing. We also saw our maiden asset enhancement initiative (at its Japan pharmaceutical product distributing and manufacturing facility P-Life Matsudo) thereby boosting our income stream further.’

The distribution payment will be made on Feb 26.

Bulking up with Life

• Acquired 8 additional nursing homes for JPY5bn (c.$77.6m)
• NPI yield at 8.29%, favourable against existing nursing homes portfolio of 6.14% and cost of funds
at 3.22% (5 year term loan)
• Increased FY10F DPU forecast to 8.0 Scents (from 7.7 Scents), equating to c.6.6% yield
• Maintain Buy; TP: S$1.45.

8 more nursing homes. PREIT announced that it has entered into an agreement to acquire 8 nursing homes in Japan for a total consideration of JPY5bn (c.S$77.6m), which has a net property income (NPI) yield of 8.29%. This compares favourably against the 6.14% NPI of its existing nursing homes portfolio. The REIT will fund the acquisition via a 5 year unsecured term loan at a cost of 3.22%.

Gearing for the REIT will increase from 23.2% to 28.7%. Long leases with rental deficit support. The nursing homes have long-term lease agreement with the operators, with a weighted average lease term to expiry of 19.29 years. The vendors of the nursing homes are subsidiaries of Kenedix Inc, a real estate manager in Japan. Kenedix will be providing a rental deficit support for 7 years provided, capped at 5% of the purchase price (i.e. JPY250m or c.S$S$3.87m). Five of the eight properties also have backup operator agreements.

Maintain Buy, TP: S$1.45. We view this acquisition positively given that it is yield accretive, in line with the
REIT’s strategy to invest in healthcare related assets and diversify its income stream. Our DPU estimates are raised to 8.0 Scents (FY10F) and 8.2 Scents (FY11F), equating to a yield of 6.6-6.8%.