Defensive yields

• In line; maintain Outperform. 2Q11 DPU of 2.37cts meets Street expectation and our expectation (23% of FY11 estimates). 2Q11 DPU was up 13.3% yoy on revenue contributions from Japanese properties acquired in 2010-11 and higher rentals for Singapore assets. Management announced a minimum guaranteed rent increase of 5.3% (1.73% in previous year) from Aug 11, and a lower all-in cost of debt of 1.65% (from 1.96%). We retain our assumption of S$200m acquisitions, but defer the bulk to FY12. Factoring in higher rental growth and lower interest costs, we adjust our FY11-13 DPU estimates by -2/+5%. Accordingly, our DDM target price rises to S$2.11 (discount rate: 7.2%) from S$1.98. We continue to like PLife for its defensive qualities and good inflation hedge. We anticipate stock catalysts from asset enhancement and earlier-than-expected acquisitions.

• Increase in minimum guaranteed rent. Under its CPI + 1% rental revision formula for Singapore assets, their minimum guaranteed rent has been increased by 5.3% for the year commencing 23 Aug 11. This is higher than the prior year’s increase of 1.73%, on the back of rising inflation in the preceding 12 months.

• Lower all-in cost of debt. Management has extended interest-rate swap hedges for an average of 3.5 years on 45% of its loan portfolio to lock in low interest rates. Annual interest savings are estimated at S$1.5m (S$0.6m for FY11), or 2% of distributable profit. This lowers the REIT’s all-in cost of debt to 1.65%, the lowest among SREITs.

• Still awaiting acquisition catalysts. Management has identified Malaysia as a place for acquisitions, but remains cautious because of global uncertainties. We expect more headway in its negotiations with sponsor Khazanah on the potential acquisition of Pantai’s healthcare assets towards late 2011. We understand that management is still looking out for assets from the sponsor and third parties and thus defer part of our assumed acquisitions to 2012. Low asset leverage of 34% still offers debt headroom of S$261m to management’s mid-term gearing target of 45%.

PLife Reit’s distributable income up 14.4% in Q1

PARKWAY Life Reit (PLife Reit) has reported a 14.4 per cent rise year on year in distributable income to $14.3 million for the first quarter ended March 31, 2011.

Gross revenue for 1Q11 came in at $21.5 million, up 15.2 per cent, on the back of revenue contributions from new nursing homes in Japan acquired over the last 12 months as well as higher rent from its Singapore properties.

Distribution per unit (DPU) for the quarter is 2.36 cents per unit, versus 2.07 cents in 1Q10, while annualised DPU is 9.44 cents per unit for 1Q11 compared to 8.28 cents for 1Q10.

Earnings per unit for the quarter were 2.45 cents, up from 2.01 cents previously.

During the quarter, property expenses for 1Q11 rose 22.8 per cent to $1.77 million, in line with the bigger portfolio, while net property income was 14.6 per cent higher at $19.72 million.

Meanwhile, finance costs fell by 11.1 per cent to $2.27 million despite the enlarged portfolio, mainly due to interest cost savings from refinancing and re-pricing exercises, though this was offset by higher financing costs incurred to finance the Japan properties acquired in the middle of last year and January this year.

Gearing stands at 34.3 per cent.

In an update on its Japan properties, business continues as usual at all its 30 Japan properties with none of them located within the evacuation zone of the Fukushima nuclear plants, PLife Reit said.

It owns 33 properties in the Asia Pacific, including three hospitals in Singapore and 30 healthcare and healthcare-related assets in Japan. Its portfolio size stood at $1.3 billion as at March 31, 2011.

Yong Yean Chau, chief executive officer of Reit manager Parkway Trust Management, said: ‘The regional healthcare industry remains robust due to the persistent rise in demand for better quality private healthcare, driven in no small part by growing affluence, fast-ageing populations and increasing social acceptance of nursing homes. PLife Reit’s enlarged portfolio of healthcare assets places us in a good position to capture the demand of the resilient and growing healthcare industry in the Asia Pacific.’

Shares in PLife Reit closed at $1.72 yesterday, unchanged.

Removing covert dilution

• In line; maintain Outperform. 1Q11 DPU of 2.36cts meets consensus (24%) and our expectations (23% of FY11 estimate). Our above-consensus estimate assumes S$200m of acquisitions, to be realised in 2H11. 1Q11 DPU grew 14% yoy on the back of contributions from Japanese assets acquired in 2010-11 and higher rentals from Singapore assets boosted by inflation (CPI-pegged rental formula). We maintain our estimates and DDM-based target price of S$1.98 (discount rate 7.2%). PLife REIT trades at 1.22x P/BV and a forward yield of 6%. We expect stock catalysts from earlier-than-expected announcements of accretive acquisitions. In our view, PLife is the best inflation hedge in Singapore and is well positioned to acquire accretively. It also has a clear acquisition pipeline from sponsor Khazanah’s Pantai healthcare chain in Malaysia.

• Taking 100% of manager’s fees in cash. 1Q11 DPU dipped 0.7% qoq despite a flat topline as management had decided to take 100% of the manager’s fees in units from this quarter. Previously, it used to receive 80% in cash and 20% in units. Despite the dip, we are positive on the switch to full cash payment. We believe this removes covert dilution for unitholders, and presents clean DPUs which fully reflect portfolio performances.

• Asset leverage was 34%, unchanged from 4Q10. Debt headroom was about S$270m, assuming asset leverage of up to 45%. We believe any sizeable acquisitions in excess of this would likely be funded by debt and equity.

Life’s resilient even after the earth shook

At a Glance

• 1Q11 DPU of 2.36 Scts (+14% yoy) within expectations

• Assets unaffected and operations continued in Japan; in fact, crisis may open up acquisition opportunities

• High CPI in Singapore bodes well for minimal rental growth rates in Year 5 of lease that will start in Aug’11

• Raised TP marginally to S$1.95 on higher CPI rates expected; Maintain Buy

Comment on Results

1Q11 DPU 2.36 Scts within expectations. 1Q11 DPU of 2.36 Scts (+14.4% yoy) was within our expectations, forming 24% of our full year estimates. Gross revenue grew 15.2% yoy to S$21.5 m, driven by contributions from the 12 new nursing homes acquired from Jun’10 till Jan’11, and higher rents from its Singapore properties due to minimal rent revision (+1.73%). NPI margin moderated slightly to 91.8% arising from expenses related to the 12 new nursing homes. Book closure for dividends is on 13 May, and will be paid on 8 Jun. The REIT manager has elected to receive 100% of its fees in cash, which will have minimal impact on DPU. In fact, we believe this could be positive in the longer term with payout matching the distributable income, and removing dilution, albeit minor.

No damage from earthquakes in Japan. None of its 30 properties in Japan is structurally affected, as all are located outside of the earthquake-affected areas. Operations are also unaffected by the nuclear situation as its nearest asset is 200km from the nuclear plant site. In our view, the uncertainties may present attractive opportunities for asset accumulation.

Poised to benefit as Singapore’s CPI stays up. With Singapore’s CPI rate averaging at c.4.17% since Jul’10, this bodes well for PREIT’s rental reversion in its Year 5 of lease commencing in Aug’11, and will provide a boost to revenues from 4Q11. Our economist forecasts Singapore’s 2011 CPI at 4.2%.

Recommendation

Maintain Buy, TP raised marginally to S$1.95 on higher CPI. Due to the election to receive fees in cash, our FY11F DPU is lowered marginally by c.2%. We raised our DCF-backed TP marginally to S$1.95 to reflect higher CPI rate of 4.2%/3% (prev. 3.2%/ 1%) for 2011/ 12 in our assumptions. Gearing remains healthy at 34.3%. We believe the REIT will continue to provide organic growth, while exploring portfolio expansion opportunities going forward. We have assumed S$200m worth of acquisitions in 2011, funded 70%/30% by equity/debt to maintain its existing gearing ratio of c.35%, empowering PREIT to undertake opportunistic acquisitions.