Parkway Life REIT - Expanding funding base

The first S-REIT to diversify its sources of funding through Islamic finance. Parkway Life’s low gearing enables it to grow via acquisitions. Reiterate BUY with a target price of S$1.65.

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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Parkway Life REIT has no short term refinancing concern

The growth in revenue comes mainly from the contribution of Japanese properties that were acquired in 3Q08 and also the annual revision of rental from the Singapore hospitals that took effect from August 2008. It can be seen that from 4Q08 onwards, revenue and DPU were fairly stable. The REIT manager further announced that the Singapore hospitals rental is set to increase by 4.36% beginning 23 August 2009. Revenue is also expected to get a boost from the increase in rental of the P-Life Matsudo property following completion of an asset enhancement initiative (AEI) to maximize plot ratio.

Plife REIT has no short term refinancing concern with a gearing of 22.7%. Total debt is $242 million with $34 million coming due in 2nd half 2010 and the rest in 2011. Plife has in place a $500 million multicurrency MTM programme as well as a newly secured $50 million Islamic revolving credit facility.

Being exposed to the relatively stable healthcare sector, Plife REIT has shown resiliency in the recession. The inflation linked revenue model ensures revenue is downside protected. We revised up our revenue forecast to factor in the growth from the annual revision of the Singapore hospitals and from the Matsudo property. Our FY09F DPU remains unchanged at 7.59 cents while FY10F DPU rises from 7.56 cents to 7.71 cents. Fair value revised upward from $1.19 to $1.21.

Parkway Life - Steadily Improving

PLife is one of a handful reits / business trusts to report a useful y-o-y increase in DPU: +13.9% to 1.89 cents from 1.66 cents a year ago, albeit unchanged from Q1. On an annualized basis, which is being conservative given the adjustment to revenue from the 3 Singapore hospitals for the next 12 months from Aug 23 rd , the yield is still an attractive 7%.

(The minimum guaranteed rent form Mt Elizabeth, Gleneagles and East Shore is set to increase by 4.6%, albeit lower than 6.25% for the current 12 months to Aug 22nd, following the 3.36% CPI in the past 12 months. The 3 Singapore hospitals presently account for 80% of total revenue of PLife.)

Gearing remains among the lowest at 22%, ie to reach 40%, debt headroom is $308 mln. (PLife was one of the few smart enough to make good use of the initial low gearing to make acquisitions in Japan via borrowings, specifically P-Life Matsudo for S$35 mln in May ’08, and at which it has just completed the first round of asset enhancement initiatives , converting a utility space to device manufacturing room for sub-lessee Inverness Medical Japan, at a cost of S$2.56 mln.)

We maintain BUY.

ParkwayLife REIT: 2Q briefing highlights

Earnings highlights. ParkwayLife REIT (PLIFE) posted S$30.2m in 1H09 net property income, up 32.1% YoY. 1H DPU increased 15.1% YoY to 3.78 S cents. For 2Q09, NPI was up 27.9% YoY to nearly S$15m while DPU rose 13.7% YoY to 1.89 S cents. The manager says at least 96.0% of PLIFE's total portfolio has downside revenue protection.

Uplift from rent review & completed AEI. PLIFE has secured a minimum rent review of +4.36% for Singapore hospital properties (CPI + 1%) for 23rd Aug 2009 to 22ndAug 2010. All else equal, this translates to an uplift of at least 3.5% for the total portfolio according to the manager. PLIFE has completed its maiden asset enhancement initiative on a Japanese asset. It spent roughly S$2.56m on the works, which are expected to add 0.042 S cents to overall DPU.

Growth plans. After the manager's reorganization, PLIFE says it has a renewed focus on asset management and investments. It expects to launch more AEI projects and is already in discussions with operators. PLIFE says it has a new "clustering" approach to investments. The manager wants to build scale and depth in one or two countries rather than haphazardly investing everywhere at the same time. Four core target markets currently are: Singapore, Malaysia, Japan and Australia.

Debt. PLIFE is currently geared at 22.7% debt-to-assets. Its long-term target gearing is 40% but in the current environment, it says it is comfortable gearing up to 35% at most. PLIFE has secured a S$50m three year revolving Islamic credit facility from Islamic Bank of Asia. The amount is small but this is a way "for them to get to know us and our assets better". The facility is a 'back-up' in case the S$34m loan due in 2H 2010 is unable to be refinanced. If the refi is successful, these funds would be used towards building a war chest for opportunistic acquisitions. The credit market seems to have improved and the manager says it is getting several reverse enquiries. The cost of the new S$50m facility is at "sub 200 basis points" (margin only) versus existing loans priced at +160 basis points.

Parkway Life REIT - Inflation linked revenue model provides resiliency

Inflation linked revenue model provides resiliency. Over 80% of revenue is derived from hospitals in Singapore while the rest are from nursing homes and healthcare facilities in Japan. Plife REIT collects rental from its tenants based on an inflation linked formula. In August 2008, rental for the Singapore hospital was revised up 6.25% (average CPI over the 12 preceding months plus 1%). Although we have seen CPI reading sliding off from 6.7% in Sep 08 to register a negative reading of – 0.3% in May 09, unless CPI continuously register a monthly reading of –9.5% for the next four months to offset the positive readings in the prior nine months, the CPI + 1% formula ensures that rental revenue grows at the minimal rate of 1%. In our forecast, we have assumed a 2% growth and maintain our projections at the moment, though we think surprise may be on the upside.

Credit rating downgrade a non-issue. Fitch Ratings downgraded Plife REIT long-term issuer default rating from BBB+ to BBB with a stable outlook. We view the rating cut as a non-issue as fundamentals remain sound. Gearing is currently 23% and Plife REIT has total debt of $247.5 million with interest cover of 6.7. $34 million of loan is due in the 2nd half of 2010 while the rest are due in 2011.

We maintained our forecast numbers and reassert our optimism in Plife REIT. Plife REIT is not subjected to the cyclicity of the economic cycle unlike other REITs. We raised our fair value estimate to $1.18 due to lower risk premium input in our DCF model.

Risk factors. Risk includes a prolong deflation scenario, which will cause our revenue estimates to be excessive. However the variance is not significant as changes to our forecasted DPU is less than 1%. We think the main risk would be a further credit downgrade as the maturity of the loans draw near and Plife REIT has not announced its refinancing plans.

ParkwayLife REIT – Setting the stage for growth

PREIT has appointed Mr. Tan Seak Sze as the new Vice President of Investment with effect from 15 June. Mr Tan Tee Meng, who previously held dual roles as VP of Asset Management and Investment, had been re-designated to VP of Asset Management. We read this as PREIT being ready to take a more active stance on acquisitions and asset enhancements initiatives (AEI).

The management stated its intention to reduce tenant concentration risk from PHL from the current 80% to about 40-50% in the long term and is open to investing in more nursing homes, medical units or funds in Japan, Australia, Singapore and Malaysia, possibly adopting the similar inflation-linked leasing structures. AEIs are also advancing, with indicative yield of more than 10%.

Fitch ratings downgraded PREIT’s long-term issuer default rating and $500m MTN program to ‘BBB’ to ‘BBB+’ on weak credit profile of sponsor, Parkway Holdings (PHL), despite PREIT’s good interest coverage, low debt cost and refinancing risk, and stable rental mechanism. PHL owns Parkway Hospital Singapore Pte Ltd, the operator of PREIT’s hospitals in Singapore. However, we believe the negative has been priced in.

The credit-rating downgrade centres on whether PHSPL is able to service rental payments to PREIT, should credit quality of PHL deteriorate. We believe that such concerns are overplayed as the master lease agreement confers PREIT the right as a creditor to claim the rental guaranteed for the remaining lease period in the event PHL goes into financial distress.

Our target price has been raised to $1.17 as we roll forward our DDM valuation to FY10F. The stock price has increased 24% over the last three months since our initiation despite the premium over S-REITs but has lagged the FSTREI by 14%. Entry of new shareholders from Europe, US and Asia observed by the management during this period affirms our belief in the long term growth potential of PREIT. Reiterate Buy.

Plife rating lowered

Fitch has lowered its rating for Plife’s “Long Term Issuer’s Default” and its $500 mln multi-currency “Medium Term Note Program”, by one notch to BBB from BBB+ , despite the latter’s healthy financials: gearing of 23% at end Mar ’09 vs MAS’ 60% guideline.

The downgrade is likely because of Plife’s sponsor Parkway Holdings’ massive hospital / medical centre project in Novena. Note the tender was secured in mid February ’08, at land cost of $1.246 bln, and development costs estimated at $300-500 mln.

(Note also the persistent concern over Plife’s “single customer exposure”, given its heavy dependence on lease income from the 3 Singapore hospitals, which are managed by Parkway Holdings: Mount Elizabeth , Gleneagles , and EastShore . Parkway Holdings owns 35.6% of PLife.)

Note that Parkway Holdings had on 31/3/08 announced a 7-for-15 rights issue at $2.18 to raise $760 mln to part finance the Novena acquisition. (30% of the 779,000 sf gross floor area is intended for medical suites, 36% for in-patient beds, 20% for diagnostic services , and the balance for retail & ancillary services.)

However, Parkway’s gearing remains high: at end Mar ’09, borrowings totaled $1,220.63 mln against shareholders funds of $1,370.68 mln. Cash amounted to $553.64 mln.

Any knee-jerk reaction, to say below 90 cents, would be an opportunity to buy more PLife units. BBB is still investment grade, albeit borderline case. At 95¢, annualised yield based on Q1 ‘09 payout is 8%.

ParkwayLife REIT: Higher rent from Singapore properties boosts 1Q09 results

1Q09 results in line with expectations. PREIT achieved 1Q09 DPU growth of 16.6% YoY to 1.89 S¢. Topline rose 37.6% YoY to S$16.3m, boosted by higher rental from its Singapore properties and contribution from its Japan assets (S$3.7m) which it had acquired in 3Q08. Its Singapore properties enjoyed higher rentals due to the higher rental growth rate of CPI+1% in the second year of the lease. Although it incurred higher property expense for its Japan properties, 1Q09 NPI grew 36.6% YoY to S$15.2m. The committed occupancy for its properties remained at 100% across its portfolio.

Low gearing of 23.0% and no immediate refinancing risks. PREIT is cushioned against immediate refinancing risks, as the next refinancing requirement will be in 2H10. Its low gearing of 23% means it has the flexibility to take on some more debt for future acquisitions (about S$300m debt before it reaches a gearing of 40%, and about S$990m before it hits 60% gearing).

Management had indicated that Singapore will remain its core focus, but it does not rule out seeking acquisitions in countries like China, India or Australia, for mature assets that are yield Positive over long term prospects. Despite the current economic recession and the expected contraction in Singapore’s GDP, the long term prospects for PREIT is positive, underpinned by the expected continued growth in demand for premium healthcare in Asia.

Maintain BUY with target price of S$1.01. We are keeping our DDM value assumptions of no new acquisitions and cost of equity of 8.7%. Although PREIT’s dividend yields are not as attractive as the other REITS in the sector (~ 9% vs sector of ~ 11%), we remain positive on PREIT, for its defensive nature and the revenue downside protection that its lease structure offers. Maintain BUY.

Parkway Life REIT – No major refinancing risks until 2HFY11

PREIT posted a 16.6% rise in 1Q09 DPU to 1.89 cts (annualized yield of 8.7%). Gross revenue jumped 37.6% yoy to $16.3m, with the additional rent from the Japan properties contributing to 83% of the growth. Revenue growth was also driven by an upward revision of rents at the Singapore hospitals by 6.25% for the 2nd year of the lease, which started from Aug 08.

The net property income (NPI) margin remained stable at 93% despite higher expenses incurred for the Japan properties. This is a result of its properties being leased on a triple net basis, in which the lessees bear all property operating expenses. Distributable income grew a milder 16.6% to $11.4m as a result of higher financing cost due to acquisitions of the Japan properties in 2Q08 and 3Q08 being debt-funded.

Major refinancing risks will not kick in until Sep/Oct-2011. PREIT’s entire debt portfolio of $247.5m has a weighted average tenor of 2.4 years. Its effective interest cost of 2.89% is one of the lowest in the sector and is fixed for the next three years. Its low gearing of 23.3% leaves a debt headroom of $305.m before the 40%-gearing level is reached.

There is still potential for asset enhancement initiatives at its under-optimized pharmaceutical product distribution and manufacturing facility in Japan, which would not burden its balance sheet while providing a little upside to earnings. Otherwise, we should expect flatter yoy growth from the next quarter on, given the diminished effect of inorganic growth.

We believe PREIT is on track to deliver our forecast DPU of 7.1 cts as 93% of its leases are structured with downside protection to rent revenues. Our earnings estimates remain intact while target price has been raised to $1.09 from $0.94 to reflect the easing equity risk premium over the past 6 weeks. Maintain BUY.

Parkway Life REIT - Results were largely inline

Parkway Life REIT reported gross revenue for 1QFY09 of $16.3 million (+37.6% y-o-y), net property income was $15.2 million(+36.6% y-o-y). Distributable income was $11.4 million(+16.6% y-o-y). DPU for the quarter was 1.89 cents (+16.7% y-o-y).

Results were largely inline with expectations as Plife REIT’s properties have strong and stable cash flow characteristics. Growth in revenue was mainly due to the annual increment in rents of 6.25% of the Singapore hospitals as well as contribution of revenue from the Japanese properties, which were acquired in 2nd and 3rd quarter of 2008.

Balance sheet remains healthy with gearing ratio of 23.0%, a slight decrease of 0.3%pt from 4QFY08, due to the depreciation of JPY. Correspondingly, asset value registered slight drop of 0.6% from the Japan properties. Plife REIT has total debt of $247.5 million, out of which $34 million denominated in S$ is due in the 2nd half of 2010. The rest are JPY denominated and due in the 2011.

Share price has run-up 20% since our previous recommendation. We maintain our positive call on Plife REIT and like it for the stable and resilient cash flows. We reiterate the defensive nature of the healthcare sector and the revenue model of the REIT whereby 93% of total portfolio (NLA) has downside revenue protection. We maintain our Buy recommendation with fair value of $0.95.

Parkway Life REIT - On the road

PLife REIT Management elaborated on its acquisition rationale and strategies, and has assured investors that lease arrangements in future acquisitions will strengthen, and not erode the defensiveness of PLife. In the longer term, tenant concentration risks in PWAY are likely to be reduced. An acquisition this year looks increasingly likely. Yields have been compressed to 7.9%. Offers from cash-strapped healthcare operators have increased, and capital markets seem to be opening up once again. We expect acquisitions to be a kicker for PLife. Maintain Outperform and target price of S$1.20 (discount 8.1%), based on DDM valuation.

Parkway Life REIT - In the pink of health

PLife REIT's 1Q09 results were in line with consensus and our expectations. DPU of 1.89 cts forms 25% of our forecast of 7.54 cts, up 16.3% yoy. Net property income of S$15.2m was up 36.6% yoy driven by its CPI-linked lease structure for the Singapore hospitals. Refinancing issues are cleared until 2H10 and funding remains available from a S$100m revolving credit facility and a S$500m MTN programme. We like PLife REIT as it remains one of the few REITs with clear visibility on earnings, and continued positive growth in the medium term based on its inflation-linked lease structure; Its strong balance sheet and the management's tamed stance on growth via acquisitions strategy puts PLife in a favourable position to ride out the downturn. PLife offers a forward yield of 8.7% at a P/BV of 0.65x. Maintain Outperform and DDM-based target price of S$1.20 (discount 8.09%).