Stable earnings

Comment on Results
2Q and 1H FY08 results were within expectations. 2Q gross revenue was S$12.49m, exceeding its IPO forecast by 8.8%. Singapore hospitals contributed S$11.97m gross revenue, while its three Japanese assets that were acquired in May contributed S$0.5m. Total expenses was S$2.92m, 22% higher than forecast due to higher contribution expenses for management & sinking fund for Mt Elizabeth Hospital, and higher trust level expenses following the addition of the Japan properties. 2Q net property income (NPI) was S$11.7m. DPU for 2Q is 1.66 Scts. Ex-date is 31 Jul and payment is expected on 27 Aug.

1H gross revenue and NPI are make up 49.7% and 47.7% of our full year forecasts. We expect PREIT to meet our forecasts with full contribution from its three Japanese assets in 2H.

Recommendation

Portfolio valued at S$902.2m. This includes its three assets in Japan – a pharmaceutical products distributing and manufacturing facility and two nursing homes. Singapore accounts for 92% of total assets, and Japan the rest.

Low gearing of 10% offers room for more debt funded acquisitions – it can borrow up to S$570m before reaching its 45% target gearing level. We are expecting more acquisitions as management has indicated its ambition to grow asset base to S$1.6bn.

Maintain Buy, TP S$1.35 based on DCF (WACC: 6.3%, Terminal growth: 1%). With Jun CPI soaring to 7.5%, MAS recently raised 2008 CPI forecast to 6%–7%. We like PREIT in today’s inflationary environment because its Singapore hospital gross revenue is pegged to the higher of adjusted hospital revenue or 1%+CPI. We have assumed CPI of 6.4% for 2008 in our forecasts. At current price of S$1.12, PREIT offers attractive net dividend yield of 6.1% and 6.4% for FY08F and FY09F, respectively.

Parkway Reit Q2 income beats forecast

PARKWAY Life Real Estate Investment Trust (P-Reit) yesterday announced a distributable income of $10.0 million for the second quarter ended June 30, 2008, beating its forecast of $9.4 million by 6.4 per cent.

Distribution per unit (DPU) for the three months was 1.66 cents, also 6.4 per cent higher than the forecast DPU of 1.56 cents.

Net property income for Q2 was $11.7 million, 8.1 per cent higher than the trust’s forecast of $10.8 million.

There is no comparable period for 2007 as P-Reit was only listed on the Singapore Exchange in August last year.

The trust benefited from higher gross rental revenue in Q208 as a result of better-than-expected revenue from its Singapore hospital assets, as well as additional income from three new Japanese assets.

Q2 gross rental revenue was $12.5 million. The bulk of it came from the trust’s Singapore hospitals, where total gross rental revenue was $12.0 million, a 4.3 per cent increase from the forecast figure of $11.5 million.

For the first six months of 2008, the trust’s distributable income was $19.8 million while the DPU was 3.29 cents – both 5.1 per cent higher than the forecast.

Justine Wingrove, chief executive of P-Reit’s management team, said that the private healthcare sector continues to remain robust even in the current volatile market conditions.

‘As a result, P-Reit will not only enjoy strong growth from its current portfolio, but will also benefit from attractive asset acquisition opportunities,’ she noted. Target markets for acquisitions include Australia, China, India, Japan, Malaysia, Singapore, Taiwan and Thailand, Ms Wingrove added.

The Reit’s total portfolio size now stands at $902.2 million, following acquisition of its latest assets earlier this year. In May 2008, P-Reit bought a pharmaceutical products distributing and manufacturing facility as well as two nursing homes in Japan for $70 million in all.

P-Reit lost three cents to close at $1.12 yesterday. The stock has shed 0.9 per cent since the start of the year.

Best hedge against inflation

Story: With surging inflation on the back of rising energy, fuel and food prices, ParkwayLife REIT (PREIT) looks to be the best hedge against inflation.

Point: In the latest review in May, MTI and MAS has raised the CPI forecast for 2008 to 5.0 – 6.0%, from 4.5% – 5.5% previously. DBS Economics Research expects inflation pressure to remain high in the near term. CPI is expected to peak at 8.1% yoy in Jun 08, with full year inflation at 6.4%, up slightly from previous forecast of 6.0%. We re-looked into our gross revenue assumptions for PREIT and raised CPI assumption for 2008 to 6.4% and 2009 to 2.8% (from our previous assumptions of 4% and 1.5%, respectively) pegging it in line with our economists’ forecasts. This means that PREIT’s gross revenue for its Singapore Hospitals should grow by at least 7.4% (=1% + 6.4%) in FY09. Consequently, our FY09F DPU forecast is
raised marginally to 7.17 Scts, from 6.99 Scts. Based on a last traded price of S$1.19, this translates into a net dividend yield of 5.7% and 6.0% for FY08F and FY09F respectively.

Relevance: PREIT still remains a Buy as it offers investors potential upside from higher hospital revenue. In this inflationary environment, investors can rest assured that growth is supported by 1%+CPI rate. Furthermore, PREIT has low net gearing and there is no major debt refinancing risk in the near future. Catalysts should come from further yield accretive acquisitions, in addition to the last three investments in Japan.

Maintain Buy, TP adjusted slightly to S$1.47 (from S$1.51 previously) to account for a higher risk-free rate of 3.9%, from 3.0% previously.

Protected against inflation

Strong defensive qualities. Parkway Life REIT provides strong defensive qualities as the minimum rent increase for Gleneagles Hospital, Mount Elizabeth Hospital and East Shore Hospital is set at CPI + 1%. Assuming that CPI is 5.5% in 2008 (mid-point of CPI inflation forecast by MAS), the minimum rent increase for the three hospitals in Singapore would be 6.5% in 2009. Where CPI is negative for any given year, then it is deemed to be zero. This ensures that rental income from hospitals in Singapore is always increasing.

Diversification from acquisitions in Japan. Parkway Life REIT has acquired a pharmaceutical production and distribution facility in Japan for a total cash consideration of ¥2.59b, or S$35m. The two-storey freehold building is located in Matsudo City, Chiba prefecture with a net lettable area of 34,875sf. Tenant Inverness Medical Japan utilises the facility to manufacture and distribute medical test kit devices. The acquisition provides an initial net yield of 5.3%. There is potential to redevelop the site as the ratio of the building’s floor area to the land area is about 40% compared with the allowable ratio of 200%.

Parkway Life REIT will be acquiring two nursing homes located in Yokohama City and Ibaraki City, Japan for S$34.9m. Nursing home operator ZECS Community Co Ltd will lease back the properties for 15 years with option to extend for an additional five years. The Yokohama facility has lettable area of 35,230sf and provides net operating income yield of 6.1%. The Ibaraki facility has lettable area of 39,890sf and provides net operating income yield of 6.7%. Rental income is index-linked to inflation with rent reviews every five years.

The acquisition in Japan will be funded by debt. We estimate that gearing will increase from 4% to 10.8% after the acquisitions are completed. The acquisitions allow Parkway Life REIT to gain exposure to Japan where population is aging rapidly. It is estimated that one in every three Japanese will be above 65 years of age by 2050.

Reiterate BUY. We like Parkway Life REIT for its healthcare focus. It provides strong defensive qualities as rental income from hospitals in Singapore and nursing homes in Japan is linked to inflation. The company also has a low level of gearing. Our target price is S$1.52 based on the discounted dividend model (required rate of return: 7.68%; terminal growth: 2.8%).