PLife Reit Q3 DPU rises 6.7%; revenue up 4.1%

Trust cautious about acquisition prospects due to uncertainties

PARKWAY Life Real Estate Investment Trust (PLife Reit) yesterday posted a 6.7 per cent rise year on year in distribution per unit (DPU), from 2.25 cents to 2.40 cents, for the third quarter ended Sept 30.

Gross revenue for the period went up by 4.1 per cent to $22 million, on the back of full-quarter revenue contributions from its Japan properties acquired in July 2010, as well as higher rent from its Singapore properties. Net property income rose 3.6 per cent to $20 million.

As a result of the yield-accretive acquisitions in Japan, higher rent from Singapore properties and savings from lower financing costs, distributable income for Q3 2011 rose 6.8 per cent, from $13.6 million to $14.5 million.

For the quarter, earnings per unit dropped to two cents, compared to 2.09 cents in the previous corresponding quarter.

For the nine months ended Sept 30, DPU was 7.13 cents compared to 6.41 cents in the same period last year. This accounted for 74 per cent of DMG & Partners Research’s estimates, which said that PLife Reit’s results were in line with expectations.

Gross revenue was 10.9 per cent higher at $64.9 million, while net property income climbed 10.2 per cent to $59.5 million.

Income available for distribution grew 11.4 per cent to $43.1 million, up from $38.7 million in the corresponding nine months last year.

In July this year, PLife Reit completed its second Japan nursing home asset enhancement initiative, to help drive more revenue for that property. At a capital outlay of $150,000, the converted area is expected to yield an annual return on investment of at least 10 per cent.

While it remains cautious about its near to medium-term acquisition prospects due to ongoing uncertainties in the global markets, PLife Reit said that the long-term prospects of the regional healthcare industry continue to be robust due to rising demand for better quality private healthcare services, driven by growing affluence and fast-ageing populations.

DMG & Partners Research said that PLife Reit is currently trading at 5.4 per cent yield. The research house maintained its ‘buy’ call on the counter, with a target price of $2.07.

PLife Reit units closed flat yesterday at $1.79 per unit.

Assurance in tough times

• Maintain Outperform. Amid global uncertainties and persistent inflationary pressures, PLife is likely to enjoy both DPU stability and upside, owing to its CPIpegged rents and portfolio of long-dated leases. We also expect management to exercise prudence in new partnerships and acquisitions, mitigating risks from nonaccretive M&As. Although current valuations (1.3x P/BV) reflect those positives, we believe its premium pricing can be justified by the assurance of defensive, resilient yields. We maintain our assumptions and DDM-based target price of S$2.05 (discount rate 7.4%), anticipating catalysts from accretive substantially debt-funded acquisitions. We advocate PLife as an ideal inflation hedge.

• Guaranteed rent increases set the backdrop for strong, stable DPU growth. PLife has announced minimum guaranteed rent increases of 5.3% for its Singapore assets for the year commencing 23 Aug 11. We expect another 4% minimum rental increase in Aug 12-13, underpinning 3.4% and 2.7% minimum DPU growth in Aug 11-12 and Aug 12-13 respectively, stronger than for most SREITs.

• Acquisitions in core markets. Management is on the lookout for overseas acquisitions, while exercising prudence in the current environment. We expect more reasonably priced assets amid global uncertainties and 3-5% DPU accretion from acquisitions. With S$261m debt headroom to a 45% gearing ratio and its strong share price thus far, PLife should be well-positioned to finance its acquisitions.

2QFY11 Results

•2Q11 revenue 21.4million, NPI $19.6m, distributable income $14.3m

•DPU for 2Q11 at 2.37 cents

•Revised annual pro-forma DPU up by 4.0-6.9% primarily due to interest cost saving

•Maintain hold recommendation with revised target price of $1.91

2Q11 results

PLife REIT reported revenue of $21.4 million (-0.5% q-q, +14.1% y-y), net property income (NPI) of $19.6 million (-0.6% q-q, +13.3% y-y), distributable income of $14.3 million (+0.1% qq, +13.4% y-y). DPU for the quarter was 2.37 cents (+0.1% q-q, +13.4% y-y). Gross revenue for 1H11 was broadly in line with our expectations, forming 48.9% of our full year estimates. The y-y increase in revenue was primarily due to the acquisitions made from last year to January 2011 and higher rent contributions from the existing properties. DPU has stabilized over the past three quarters since 4Q 2010, sustaining in the region of 2.36 to 2.38 cents. DPU improved slightly compared to 1Q11. This was partially due to lower trust expenses.

Minimum guaranteed rents for Singapore hospitals to escalate by 5.3%

5Th year minimum guaranteed rent is set to escalate by 5.3% for the period between 23 August 2011 and 22 August 2012. Singapore hospital properties contribute c.63% of total revenue and thus the rental escalation is a considerable increase to the overall portfolio revenue. On the other hand, high inflation in Singapore does not translate to lower net property income as the rising property expenses will be incurred by the head tenant thanks to the triple net lease arrangement.

Interest cost saving enhanced DPU growth

PLife REIT extended interest rate swap hedges with notional amount of S$208.6m (c.45% of its loan portfolio) for an average 3.5 years to capitalize on the low interest rate environment. This will bring about a reduction of effective all-in cost of debt from 1.96% to 1.65% with effect from August 2011. The interest cost saving will improve on the DPU.

Well-positioned to sail through the choppy wave

Long-term master lease structure, ample debt funding from diversified sources and downside revenue protection will serve as the defensive lines to ride through the global turmoils.

Valuation

We revised our model by taking into consideration of finance cost reduction and potential higher rental review for Singapore hospital properties for 2012 in relation to our previous estimates. The revision raised our annual pro-forma DPU across the board by 4.0 to 6.9%. Our target price is therefore lifted to $1.91. Maintain hold recommendation.

PLife Reit’s Q2 DPU rises 13.4%; revenue up 14.1%

PARKWAY Life Real Estate Investment Trust (PLife Reit) posted a 13.4 per cent rise year on year in distribution per unit (DPU) to 2.37 cents for the second quarter ended June 30.

Gross revenue strengthened 14.1 per cent to $21.38 million on the back of contributions from its nursing home properties in Japan as well as higher rentals from existing properties, while net property income rose 13.3 per cent to $19.6 million and income available for distribution was 13.4 per cent higher at $14.32 million.

For the quarter, earnings per unit were 2.28 cents, compared to 2.01 cents in the previous corresponding quarter.

For the six months ended June 30, the DPU was 4.73 cents compared to 4.16 cents in the same period last year. Gross revenue was 14.7 per cent higher at $42.87 million, while net property income climbed 14 per cent to $39.33 million and income available for distribution grew 13.9 per cent to $28.6 million.

PLife Reit also said that its Singapore properties – Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital – will enjoy a 5.3 per cent increase in minimum guaranteed rent for the fifth year of lease term (Aug 23, 2011, to Aug 22, 2012) over the previous year as its revised rental formula sees annual rental increments in line with Singapore’s inflation rate.

Meanwhile, PLife Reit has extended interest rate swap hedges with the principal amount of $208.6 million – 45 per cent of its loan portfolio – for an average of 3.5 years to leverage on the low interest rates. Therefore, the group will secure annual cost savings of $1.5 million, and a 15.8 per cent reduction of effective all-in cost of debt from 1.96 per cent to 1.65 per cent from August.

PLife Reit’s weighted average term to debt maturity was 3.45 years as at June 30, while its gearing stood at 34.3 per cent.

‘PLife Reit remains cautious about its near-term to medium-term acquisition prospects, in view of ongoing uncertainties in the global markets. Nonetheless, the long-term prospects of the regional healthcare industry continues to be robust due to rising demand for better quality private healthcare services,’ it said in its results release to the Singapore Exchange.

The DPU will be paid out on Sept 8.

Shares in PLife Reit closed at $1.895 yesterday, down half a cent.

• What likely justifies yesterday’s new high for the hospital reit is disclosure that the minimum guaranteed rent from the 3 hospitals (Mt E, Gleneagles and East Shore) will rise 5.3% in the Aug 23’11 – Aug 22’12 period over the previous lease period.

• This is as provided under the arrangement with Parkway Holdings when PLife was first set up (and which we would not rule out Khazanah Nasional which now owns Parkway Holdings, “hoping / wanting” to undo at some point). And this in turn makes PLife an “inflation play“.

• Otherwise, there is little new in the June quarter numbers released this morning: Distributable Income rising 13.4% y-o-y (reflecting contributions from acquisitions in 2010) but 0.1% q-o-q. DPU is 2.37 cents or 9.48 cents annualized. Gearing is 34%, allowing for more acquisitions, last being in Japan, where PLife now has 29 nursing homes and 1 healthcare production facility.

• Based on DPU of 9.37 cents for the 12 months to Jun’11, and annualized DPU of 9.48 cents, yield is 4.9% and 5% respectively.

• Given PLife’s unique structure, a BUY can still be justified.