On long term financing post 3Q

Comment on Results

3Q08 results within expectations. Net property income ended at S$12.47m with gross revenue at S$13.35m. While property expense to gross revenue for its Singapore Portfolio reduced by 1% from 1Q08 to 3Q08, the REIT’s overall net property margins decreased slightly to 93.4% (from 93.6% in 1Q08) due to its Japanese properties. 9M NPI now forms 73.6% of our full year forecasts. A DPU of 1.71 cents was announced and to be paid on 5 Dec (book closure – 12 Nov).

Refinanced all short-term debt pursuant to 3Q. As of 3Q08, PREIT still has short-term debt of S$201.9m in its balance sheet. However, pursuant to that, management has replaced all its S$201.9m shortterm facilities into 3-year long-term facilities, which has been committed and drawn down in Oct/Nov. Weighted average costs of funds for PREIT stands at around 2.85%. They have also entered into a interest rate swap to secure 100% interest rate fixing and a long term 5 year JPY/SGD forward contract to hedge 100% of net cash flow from its Japanese investments.

Recommendation

On track to meet our FY08F forecasts. On 9 Oct, it was announced that its Singapore Hospital minimum rental rate based on the 1%+CPI formula will be revised upward by 6.25% for the period from 23 Aug 08 to 22 Aug 09. In 4Q, with a higher minimum guaranteed rental for its Singapore hospitals and full contribution from its 7 recently acquired Japanese nursing homes, we expect PREIT to meet our FY08F forecasts and DPU estimates of 6.8cents.

Maintain Buy, TP: S$1.19. We adjust our TP slightly to S$1.19, based on DCF as we factor in a higher WACC (WACC 6.7%, terminal growth 1%) as a result of a higher adjusted beta – due to recent increased share price volatility. We view PREIT as a defensive counter, providing stable gross rental revenue due to its Singapore hospital rental structure (higher of hospital revenue or 1%+CPI%), replacement of short-term debt by longer-term facilities, and the relatively resilient healthcare sector. At current price, dividend yield stands at around 9.0% and 9.7% for FY08F and FY09F.

P-Reit remains optimistic on outlook

AMID challenging market conditions, the manager of Parkway Life Reit (P-Reit) remains optimistic about its outlook and has already repositioned its finances so that it can be more flexible.

The healthcare property trust yesterday reported a third-quarter income available for distribution of $10.3 million, boosted by higher rental rates and income from recently acquired properties.

The performance brings the distribution per unit (DPU) for the three months ended September to 1.71 cents, or 0.15 cents higher than its earlier forecast of 1.56 cents.

In the same quarter last year, income available for distribution was $4.1 million. The huge disparity was because the healthcare property trust was only listed midway through Q3 last year.

‘Despite challenging market conditions, we remain optimistic about our medium and long-term prospects,’ said Justine Wingrove, CEO of Parkway Trust Management, the Reit’s manager. ‘This is due to several factors, namely, our rental lease structures that protect against downside risk while providing for good future rental growth, our low gearing, a 100 per cent occupancy across the portfolio and investment grade credit rating of BBB+.’

P-Reit, which holds the Mount Elizabeth, Gleneagles and East Shore hospitals in its Singapore portfolio, posted gross revenue of $13.3 million. It was higher than the forecast of $11.5 million due to a variable rent component pegged to the Consumer Price Index (CPI) which pushed up the minimum rental rates. After subtracting expenses of $877,000, the net property income came to about $12.5 million.

Contribution from its Japan portfolio, including nursing homes and pharmaceutical facilities, came to $1.1 million.

The quarter also saw the mainboard-listed trust diversify its credit facilities. It entered into three-year facilities worth $100.6 million in September. The facility was fully drawn last month to partially refinance short-term debt. A separate three-year revolving credit facility of $100 million has also been secured.

‘By replacing short-term credit facilities with longer term facilities, P-Reit faces no refinancing risk,’ explained Ms Wingrove. ‘In terms of future growth, adequate and diversified financing sources that have been secured will also provide us with the flexibility and acquisitive power to support our future expansion.’

P-Reit also has in place a $500 million multi-currency medium-term note programme, which may be used to fund future acquisitions. Its gearing stands at 19.7 per cent.

The trust has an asset portfolio of $1 billion. For the first nine months of this year, total distributable income came to $30.1 million, on the back of $37.7 million in gross revenue. DPU so far is five cents.

Shares of P-Reit slipped two cents yesterday to close at 76 cents.

There’s money in the bag

• Performance on track. 3Q08 results were in line with Street and our expectations. DPU of 1.71cts forms 26% of our forecast of 6.57cts for FY08. Gross revenue of S$13.3m was up 6.9% qoq on contributions from Japanese assets acquired earlier in the year. YTD DPU of 5.0cts forms 76.1% of our full-year estimate, in line.

• Borrowings refinanced on 3-year terms, cost of debt fixed. In October, management secured S$200.6m from two 3-year loan facilities that would fully refinance 99% of its total debt of S$202m previously drawn on short-term facilities. The all-in cost of debt of 2.85% is hedged for three years. Over and above current borrowings, management has in place more than S$100m of long-term facilities and S$250m of short-term facilities that could provide ammunition for potential acquisitions, when opportunities arise. Separately, net cash contributions from the Japanese assets are hedged for five years, mitigating risks of forex fluctuations.

• Changes in assumptions. As 99% of the total debt has been fixed for three years, we see limited risk for interest costs and lower our cost of debt assumption to 3.2% (from 4%) for FY09 onwards. YTD, PLife has fulfilled 70% of our acquisition forecast of S$250m for FY08. Although the company has in place funds to fulfil our acquisition target for the year, we take a conservative view and remove our acquisition assumptions for FY08-09.

• Maintain Outperform; lowered target price to S$1.30 from S$1.46. Our DPU estimates for FY08-9 increase by 9-12% on lower interest-rate assumptions, while FY10 estimate declines by 12% on the removal of acquisition assumptions. Our DDM-derived target price (discount rate 8.1%) drops to S$1.30 from S$1.46. It is laudable that management had been able to secure long-term facilities at a low cost of debt particularly on an unsecured basis. We continue to like PLife for its attractive forward yields of more than 10% with limited downside risk to earnings. Maintain Outperform.

Parkway Life Reit raises rentals in line with CPI

PARKWAY Life Reit’s manager says it has raised the rent at Singapore hospitals under its portfolio by some 6.25 per cent, in line with the rise of the consumer price index (CPI).

Parkway Trust Management, manager of the Reit, said the revised rates will be effective from Aug 23 this year to Aug 22 next.

The new rental rates are based on the CPI+1 per cent formula. ‘Based on the information obtained from the Singapore Department of Statistics, the CPI for the first year of the term has been agreed at 5.25 per cent,’ Parkway Trust Management said in a statement.

About 80 per cent of Parkway Life Reit’s revenues come from its Singapore hospitals, consisting of Mount Elizabeth Hospital, Gleneagles Hospital, East Shore Hospital as well as 40 medical suites in Mount Elizabeth Medical Centre and the Gleneagles Medical Centre.

‘With the Singapore hospital properties as the main contributor to the performance of PREIT, the long leases and annual rent review pegged to CPI+1 per cent ensure there is downside protection and that our unit holders continue to enjoy stable and sustainable returns,’ said Justine Wingrove, chief executive officer of Parkway Trust Management.

From Aug 23 last year, the day it was listed, to June 30 this year, total gross rental revenue from the Singapore hospital properties in its portfolio was $40.75 million.

Apart from the Singapore hospitals, Parkway Life Reit also owns nine nursing homes and a pharmaceutical products distributing and manufacturing facility, all in Japan. It continues to eye assets in China, India, Japan, Malaysia, Singapore, Australia and Thailand for acquisition.

On Sept 30, the Reit’s portfolio size stood at $1 billion. Shares of Parkway Life Reit ended down 2 cents at 90 cents yesterday.

7 more nursing homes in Japan

Story: ParkwayLife REIT (PREIT) has entered into a sales & purchase agreement to acquire another 7 nursing homes in Japan for a total consideration of JPY7.9bn (S$105.7m).

Point: The average net operating yield of the properties is 6.9%. Each of the nursing homes has a long term lease agreement with an operator and the average unexpired lease term of the properties is 17 years. There is also a rental guarantee provided by vendor Kenedix Inc for a period of 7 years and 3 months, capped at 5% of the purchase price, in event of any defaults and/or late payments by the tenants. The acquisition is DPU yield accretive and will be funded by a 3-year JPY fixed rate loan.

Relevance: In our view, we feel that this is positive for the REIT as it is DPU yield accretive, further diversifies its exposure to overseas markets and maximizes its gearing head- room. In addition, given the aging population and the structure of the deal (with back-up operator, rental guarantee and long leases), downside risks are minimized, in our opinion. With the latest acquisitions, our FY09F DPU forecast is raised to 7.38 cents, from 7.17 cents. At current levels, PREIT offers a net yield of 7.0% and 7.6% for FY08F and FY09F respectively.

Maintain Buy; TP: S$1.31. Our DCF-backed TP is adjusted down slightly to S$1.31 (from S$1.35) as we factor in a higher adjusted beta in lieu of recent volatility (WACC of 6.3% and terminal growth of 1%). The counter is now trading at about 30% below its NAV. Given the defensive nature of its assets and revenue stream, particularly its Singapore hospital (downside protected by 1%+CPI), we believe it is a good opportunity to accumulate the shares.