Parkway Life Reit says Q1 DPU up 8.5% to 2.56 cts

Parkway Life Real Estate Investment Trust (Reit) on Thursday posted a 8.5 per cent rise in distribution per unit (DPU) of 2.56 cents for the first quarter ended March, up from 2.36 cents in the year-ago period.

This works out to an annualised distribution yield of 5.70 per cent, based on Parkway Reit's closing price of $1.795 per unit on March 30, 2012.

Distributable income for Q1 gained 8.5 per cent year-on-year to $15.51 million as a result of the yield-accretive Japan acquisitions, higher rent from the Singapore properties and interest cost savings.

Parkway Life Reit's gross revenue increased 6.0 per cent to $22.78 million from new acquisitions and higher contribution from its Japanese properties, while net property income for the quarter was $20.83 million, up 5.6 per cent from last year.

Breaking new ground

Company Overview

PLife REIT is one of the largest listed healthcare REITs in Asia by asset size. Its mandate is to invest in income producing real estate and/or healthcare-related assets primarily used for healthcare and/or healthcare-related purposes in Singapore and Asia.

• Acquisition of three Japan nursing homes at S$53.3mn and Malaysia medical centre at S$6.45mn

• DPU accretive resulting from debt and cash financing

• Maintain ACCUMULATE with a higher target price of $1.950

What is the news?

PLife REIT started the year with a bang. The trust strengthened its foothold in Japan with three nursing homes and in tandem penetrated into Malaysia private healthcare sector by acquiring a medical centre. The three nursing homes will be on 20-year master lease, lengthening the weighted average lease term to expiry for PLife REIT’s Portfolio to approximately 12.35 years. Akin to other acquisitions made in Japan, the properties are secured with backup operators and protected with rental income guarantees. The acquisition is expected to be wholly funded by a fresh term loan facility of S$53.3mn at an estimated all in cost of 1.8% and to be concluded by March 2012.

Making inroads into Malaysia, the trust acquired strata titled units within Gleneagles Medical Centre Kuala Lumpur at S$6.45mn and the transaction is expected to complete by August 2012.

How do we view this?

We like the management approach when in comes to venturing into uncharted waters and would attempt to label this as “start small and finish big” approach which they have demonstrated by expanding their presence in Japan in the past four years. From unitholders’ standpoint, the purchases are DPU accretive as no equity is raised. The Japan properties offer income stability with downside protection while Malaysia property provides organic growth potential with shorter lease term. Based on our model, the leverage ratio is likely to be c.36.8% and this leaves the trust with debt headroom of S$80mn and S$220mn with respect to 40% and 45% gearing respectively.

Investment Actions?

With latest acquisition, DPU is anticipated to elevate by 3.6% on average over the next five years and resulting to higher price target of $1.950. We are confident that the management will continue to deliver sustainable DPU with its growth model and therefore maintain our call to Accumulate.

Full Year Results

Company Overview

PLife REIT is one of the largest listed healthcare REITs in Asia by asset size. Its mandate is to invest in income producing real estate and/or healthcare-related assets primarily used for healthcare and/or healthcare-related

purposes in Singapore and Asia.

• 4Q11 (FY11) revenue $22.8mn ($87.8mn), NPI $20.8mn ($80.3mn), distributable income $14.9m ($58.1mn)

• DPU for 4Q11 (FY11) at 2.47 cents (9.60 cents)

• Incorporate 95% payout ratio from 2012 to2016

• Upgrade to ACCUMULATE though with a lowered target price of $1.880

What is the news?

PLife REIT delivered another spectacular report card for FY11, with DPU grew 9.2% from 8.79 cents to 9.60 cents. The key performance indicators – gross revenue, net property income, and distributable income for FY11,

together rose in the range of 9.1%-9.6% to $87.8mn, $80.3mn and $58.1mn respectively compared to the preceding year.

How do we view this?

DPU was largely in-line with our expectations, amounting to 99.5% of our full year estimates. The increase in DPU was mainly due to: (1) yield-accretive acquisitions made in 2010/11, (2) upward rental revision of Singapore properties and (3) lower financing costs.

Investment Actions?

High inflationary environment has prompted us to raise our CPI rental review assumption for FY12 from 2.5% to 6% with respect to Singapore properties. While the retention distributable income to take effect in FY12 will net off the gains in the rental growth. FY12 DPU is expected to dip first before heading north in the following years. We rollover our estimates to FY16 and arrive a lower target price of $1.88. Nevertheless, it would be good to accumulate PLife REIT against the backdrop of global uncertainties and high inflationary environment given its resilient and sustainable model.

PLife Reit’s distributable income for Q4 up 3.2% at $14.9m

PARKWAY Life Real Estate Investment Trust’s distributable income for Q42011 increased 3.2 per cent to $14.9 million from a year ago, as a result of yield-accretive acquisitions made in Japan, higher rent from existing properties and savings from lower financing costs.

Accordingly, distributable income per unit (DPU) for Q42011 rose to 2.47 cents from 2.38 cents in the previous year, Parkway Trust Management Ltd, the Reit’s manager, said yesterday. Distribution payment is expected on Feb 29, 2012. Distributable income for FY2011 increased 9.2 per cent to $58.1 million, while DPU for the year grew to 9.60 cents from 8.79 cents.

Said Yong Yean Chau, chief executive officer of the manager: ‘Amid ongoing market uncertainty, we are glad to be able to consistently deliver DPU growth to our unitholders.

‘As we focused on consolidating our Japan business during the year, we remained steadfast in strengthening PLife Reit’s financial position and generating organic growth across the portfolio to sustain earnings stability.’

For Q42011, PLife registered gross revenue of $22.8 million, an increase of 6.3 per cent. This was primarily due to revenue contribution from the Japan nursing home acquired in January 2011 and appreciation of the Japanese yen. Revenue growth was further driven by higher rent from the Singapore hospital properties.

For FY2011, gross revenue increased 9.6 per cent to $87.8 million, mainly due to full year revenue contribution from the properties acquired in 2010 and 2011, and higher rent from existing properties.

Stable and strong earnings stream

At a Glance

• 3Q11 DPU of 2.4 Scts in line

• AEI completed; looking forward to acquisitions

• Maintain HOLD, TP lowered to S$1.96

Comment on Results

3Q results in line. Parkway Life REIT (PREIT) reported a 4.1% and 3.6% hike in gross revenues and net property income to S$22.0m and S$20.1m respectively. The improved performance was attributable to (i) acquisition of Japanese nursing properties in Jul’10 and Jan’11; and (ii) higher rental income from Singapore on the back of annual rental adjustment (5.3% increase beginning 23r Aug’11). Distributable income increased by a higher 6.8% to S$14.5m (DPU of 2.4 Scts) benefiting from interest savings from its refinancing activities (all-in cost of 1.63%). 3Q11 results formed 74% of our FY11 estimates.

Optimizing yields – creating value from asset enhancement initiatives (AEI). PREIT has completed its 2nd AEI at Sawayaka Nokatakan, which involved the conversion of an underutilised pool into an income producing Day Service facility area, that increased its maximum day service capacity from 39 to 70 people. While impact on distribution is estimated to be small, returns are decent in our view – estimated ROI of 10% on capital of S$0.15m.

Financial position remains strong. Weighted average debt maturity is 3.19 years and interest cover remains a healthy 7.7x. Gearing is a comfortable 36%, empowering the trust with additional headroom of up to S$815m (to reach 60% gearing ratio). We believe that opportunities to acquire are aplenty in our view, with healthcare assets in Malaysia, Australia and Japan that PREIT is reportedly keen on. We have assumed S$200m worth of acquisitions but now expect these to be completed in 1H12 (previously 2H11).

Recommendation

Maintain HOLD. Our DPU estimates and TP have been adjusted to reflect the delay in new acquisitions. However , we like PREIT’s defensive metrics – 87.9% of portfolio revenue with downside rental protection and 98.4% with rent review provision. We believe that the market has priced in these positives, with its premium valuation of 1.3x P/BV and forward FY11-13F yields of 5.4-6%, vs S-REIT peers (0.95x P/BV, FY11-13F yields of 6.7-7.1%). Re-rating catalysts in our view will hinge on the REIT executing on its acquisition growth strategy.