Diversifying sources of funding by tapping Islamic finance. Parkway Life REIT was offered a S$50m three-year Islamic revolving credit facility by The Islamic Bank of Asia, a subsidiary of DBS Group Holdings. Parkway Life is recognised as Shariah-compliant based on preliminary review. Islamic finance provides financial flexibility as Parkway Life can now tap funding from traditional commercial banks and diversification from Islamic banking facilities. Funding provided by Islamic finance is usually at a lower cost compared with traditional sources from commercial banks. The Islamic revolving credit facility was priced at an attractive spread of 195bp.
Parkway Life’s current gearing of 22.7% and all-in cost of borrowings of 2.89% is among the lowest in the S-REIT sector. Its interest cover ratio is a healthy 6.9x. It has debt headroom of S$308.3m for acquisitions before reaching gearing of 40%. Parkway Life has established a S$500m multicurrency medium term note (MTN) programme, which is currently untapped.
Embarking on maiden AEI. Parkway Life has completed asset enhancement initiatives (AEI) for PLife Matsudo, a pharmaceutical production and distribution facility in Matsudo City, Chiba prefecture, by converting existing utility space into a device manufacturing room. The enhancement work costs S$2.6m and increases gross rent by 19.4% with effect from Jul 09. The modification to the facility is customised to sub-lessee Inverness Medical’s operational requirements.
Hedging against inflation. The minimum rent payable from Singapore hospitals, Mount Elizabeth Hospital, Gleneagles Hospital and East Shore Hospital, is set at CPI + 1% above rents paid in the preceding year. CPI for First Year was 5.25%, thus minimum increase in rents for Second Year (23 Aug 08 to 22 Aug 09) was set at 6.25%. CPI for Second Year was 3.36%, thus minimum increase in rents for Third Year (23 Aug 09 to 22 Aug 10) would be set at 4.36%. The downside protection ensures that rents from Singapore hospitals, which accounted for 78.3% of group revenue in 2Q09, will always be increasing.
Parkway Life has strong defensive qualities due to the long-term leases for healthcare assets. Its low gearing enables it to grow via acquisitions. We have raised 2010 DPU forecast by 2.6% to 8.0 cents due to AEI for the PLife Matsudo facility and growth from Singapore hospitals.
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