Excerpts from analysts' report
DBS Vickers analyst: Derek Tan
Parkway Life REIT (Plife REIT) offers one of the strongest earnings visibility profile among SREITs, with a weighted average lease expiry of close to 9 years.
Capital recycling strategy to fund acquisitions
In 2014/2015, the REIT divested seven Japan properties at S$88.3m with an exit yield of 5.9% and acquired seven Japan properties at S$126.1m with a yield of 6.4%, disposing of its lower-performing assets to acquire higher-yielding ones. The changes in portfolio are in line with management’s previously stated rebalancing strategy to enhance the quality and diversify the REIT’s exposure within Japan, and keep its portfolio contemporary. Thus, we expect the REIT to continue to record steady earnings going forward. The manager has also taken a 5-year hedge to lock in cash flows from the new acquisitions.
FY16F-18F 3-year NPI CAGR growth of c.5%
Top-line and net property income grew by 5% CAGR during the last 5 years and we continue to estimate stable growth in the next 3 years on the back of higher-yielding properties in Japan post asset recycling and higher rents from its Singapore properties due to the increase in the variable lease structure. We have also forecasted S$45m worth of acquisitions in our forecasts.
Distributable income has been growing at 5-year CAGR of 6%, excluding the divestment gain of S$9m in FY15. We assume a conservative 3-year CAGR of 1.2% in FY16F-FY18F, excluding any potential divestment gain from its asset recycling strategy.
|"We reduce our target price to S$2.50 from S$2.56, taking into account a lower CPI assumption and smaller acquisitions. Maintain our buy rating on an attractive yield of >5%."
- Analyst Derek Tan (photo)
Ample debt headroom
A gearing of 35% provides the REIT with greater financial flexibility and headroom to acquire opportunistically and to fund the acquisitions via debt.
At an assumed management’s optimal gearing target of 40-45%, there is additional headroom of S$130-300m for acquisitions that could boost asset value by 8-18%.
No refinancing needs in the near term
Plife REIT has been proactively refinancing its maturing debts in advance to prevent any near-term refinancing risks. As a result, the REIT has no need for refinancing until 2017, with a weighted average debt to maturity of 3.5 years and a low 1.6% average cost of debt. Close to 95% of its interest rate exposure has been hedged.
More opportunities for accretive acquisitions
Given that medical tourism in Singapore is expected to double from S$1bn by 2020, there would be rising demand for medical services. We anticipate Plife REIT to leverage on its specialisation in medical care properties as it acquires opportunistically to meet the growing demand which would provide higher distributions to buoy its share price. We have priced in S$80m worth of acquisitions in our forecasts.
Safe haven in uncertain times
We expect Plife REIT’s strong income visibility to be a valued trait in the current uncertain economic climate. The stock offers attractive yields in excess of 5.0%.
Interest rate risks
Any increase in interest rates will result in higher interest payments (if it coincides with a loan maturity) that the REIT has to make annually to service its loan. This reduces the income available for distribution, which will result in a lower distribution per unit (DPU) for unitholders.
Plife REIT derives c.36% of its earnings from its healthcare assets in Japan. Thus, foreign exchange volatility could hit earnings as distributions are based on SGD. However, we note that the trust has conservatively hedged its foreign income exposures on a long-term basis.