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.

Offers revenue downside protection


Downside risk to revenue growth protected. PREIT is the only REIT that pegs its rental revenue growth to CPI, with a minimum growth of 1%. In an economic downturn where CPI is negative, PREIT’s rental revenue from its Singapore properties would still grow by the minimum 1%. Of its 10 Japanese properties, the lease structures for three nursing homes are linked to Japan’s inflation, while rental from the other Japanese assets would be reviewed every few years, to reflect market rates. The agreement with lessees is that rent revision would be only take place, if the market rates are higher. Otherwise, rentals will remain unchanged. Hence, its unique lease structure offers revenue downside protection, and provides a stable dividend payout.

No refinancing risks for the next 24 months. There is no refinancing risk in the next 24 months, as the next refinancing requirement will be in 2011. Its low gearing of 23% at end FY08 allows PREIT with headroom to take on debt to expand its portfolio through acquisitions. It would be able to take on another S$300m debt before it reaches a gearing of 40%, and S$990m before it hits 60% gearing. PREIT’s current portfolio consists of 80% of Singapore assets and 20% Japan assets. Management highlighted that Singapore will remain its core focus, but it does not rule out seeking acquisitions in countries like China, India or Australia, for mature assets that are yield accretive.

We have a target price of S$1.01 for PREIT. Our DDM value assumes no new acquisitions and cost of equity of 8.7%. At current levels, PREIT is trading at 0.6x P/B and FY09F dividend yield of 10.5%. We feel that PREIT deserves a premium over peers, for its defensive nature and the revenue downside protection that its lease structure offers. We initiate coverage with a BUY
recommendation.

Good Health, In Good or Bad Times

We initiate coverage on Parkway Life REIT (Plife) with a fair value estimate of $0.95. The unique revenue model of Plife ensures rental income is inflation protected and provides unitholders with stable and growing dividend payout.

Plife is currently trading at 0.54 times price/book and we have a forecasted FY09F 10.4% yield. Although not the highest among the S-REIT, but resiliency of earnings give it an edge over the rest.

The initial portfolio of Plife consists of three private hospitals in Singapore. It has expanded its portfolio to include one pharmaceutical products distribution facility and 9 nursing homes in Japan. Total asset value increased 35% from S$774.6 million to S$1047.8 million. Revenue contribution is approximately 80% Singapore based and 20% Japanese based.

Plife has a revenue model that ensures rental revenue will not erode with rising inflation. The Singapore properties are under a master lease agreement with an inflation-linked formula to calculate rental. For the Japanese properties, part of the rental is also inflation-linked to Japan’s inflation. As such, unitholders are assured that dividend distributions are stable and not subjected to the cyclical economic cycle.

We believe Plife’s low gearing is a reflection of the management prudence. Current gearing is 24% and it has no near term financing requirement. Total debt is $250 million and the next round of refinancing is estimated to be in 2011. In 2008, Plife made $216 million of acquisitions of properties in Japan. We do not think Plife is aggressive in its growth strategy although we believe it is a tough balance in managing overseas acquisitions and ensuring the objective of stable distribution to unitholders as there are inherent foreign exchange risks. Plife strategy is to divest into mature countries with good legal framework and healthcare system while keeping its core focus in Singapore.

4Q08 results in line

4Q DPU was 1.84 cents, bringing the year’s DPU to 6.83cents, which is within expectations. PREIT remains a defensive play as gross rentals are protected by the 1%+CPI formula. We revised TP down marginally to $1.11 on lower CPI growth assumption of 0% for 2009 versus 2.8% previously. Dividend yield of 9% is attractive with no immediate refinancing till c.2011.

4Q08 DPU 1.84 cents. FY08 gross revenue ended at S$53.9m due to higher rents from Singapore hospitals and contribution from its Japanese properties (S$5.2m). 4Q DPU was 1.84cents, bringing FY08’s total to 6.83cents. Fair value of properties dipped 0.3%, largely from writing down of capitalized acquisition costs from Japan properties. Valuation of Singapore properties remained stable at $832m on higher valuation of Gleneagles Hospital and Eastshore Hospital, offset by Mount Elizabeth Hospital.

No refinancing risks. PREIT average debt tenor is 2.8 years and they do not have refinancing risks in the next 24 months. Gearing stands at 23.3% with debt headroom of $300m before it reaches a gearing of 40%. Rental downside protected by “CPI formula”. Singapore hospitals revenue is protected by the minimum guaranteed rent, which will grow by at least 1%+CPI. In the event that CPI is negative, rental will still grow by at least 1%.

Maintain Buy, TP: S$1.11. We adjust our DPU and TP down slightly as we take into account lower CPI rate in 2009 and higher interest expense on a larger debt (than previously estimated). We have assumed 0% CPI rate in 2009, in line with DBS economists’ estimate. We like this counter for its prospective dividend yield of over 9%, with downside rental protection and limited refinancing risks till c.2011. Maintain Buy.

P-Reit expects prices of commercial property to fall

It will hold off making acquisitions until valuations are more ‘objective’

DESPITE having the capacity to do so, the manager of Parkway Life Reit said it will not be aggressive in acquisitions this year as it believes that commercial property prices will come down further.

‘If we wait out a bit longer, we will potentially be able to have a more opportunistic buy at a more objective valuation, as well as more objective yield,’ said Yong Yean Chau, the newly appointed chief executive of Parkway Trust Management, the Reit’s manager.

Revealing the strategy at its fourth-quarter results briefing yesterday, Mr Yong also said that acquisition targets are likely to be narrowed down to those in politically safer countries such as Singapore, Malaysia and Australia.

While China remains a core market, the Reit is likely to take a more cautious approach because of legal issues related with property ownership.

‘With limited gunpowder right now, we want to be more focused and more targeted rather than hitting everywhere,’ Mr Yong added.

As of Dec 31, Parkway Life Reit has a net gearing of 23.3 per cent, with a debt headroom of $300 million before reaching its optimal gearing of 40 per cent.

It also has $210 million worth of unutilised revolving credit facilities, and a $500 million multi-currency medium-term note programme which may be used to fund future acquisitions.

The Reit has secured credit facilities with an average tenure of 2.8 years. It has also hedged against fluctuating interest rates and foreign currency.

For Q4 ended December, Parkway Life Reit posted a 15.9 per cent rise in distributable income to $11.1 million, boosted by contribution from its Japanese acquisitions.

Revenue jumped 36.4 per cent to $16.2 million, of which $3.6 million came from its properties in Japan.

This brings distribution per unit (DPU) to 1.84 cents, from 1.59 cents in the year-ago period.

Property expenses went up to $1.1 million, from $762,000. Management fees rose 35.4 per cent to $1.5 million.

The Reit suffered a foreign exchange loss of $7.93 million, as a result of a loss on a foreign currency forward contract that was entered into to lock in the exchange rate for the Japanese yen.

‘However, as the foreign currency forward was locked in at the initial exchange rate at acquisition, from a net asset perspective, the loss is offset by an increase in the value of the Japan properties, as seen by a corresponding gain amounting to $8.7 million in the foreign currency translation reserve,’ it said.

Total distributable income for the full year came to $41.2 million, bringing annual DPU to 6.83 cents. There was no comparison with FY2007 as the Reit was only listed in August 2007.

For the whole year, gross revenue came to $53.9 million, the bulk contributed by the Singapore hospitals in its portfolio.

With annual rental review pegged at one per cent above the consumer price index, the rental income from the Singapore hospitals grew at 6.25 per cent.