2HFY23: DPU growth continues
- 2H/FY23 DPU of 7.48/14.77 Scts were in line with our expectations, at 51%/99.7% of our FY23F forecasts.
- Strong Singapore, Japan revenue in 2HFY23 impacted by forex weakness.
- Reiterate Add rating, with an unchanged DDM-based TP of S$4.50.
2HFY23 results highlights
Parkway Life REIT (PREIT) reported a 4.7% yoy increase in 2H23 gross revenue to S$73.1m, due to contributions from five Japan nursing homes acquired in Sep 2022, two nursing homes added in Oct 2023, and higher rent from Singapore hospitals under the new master lease agreement in Aug 2022, but partly offset by the depreciation of the yen vs. S$. 2H23 income available for distribution of S$45.3m was 2.1% higher yoy, due to higher interest expense from funding of capex and new acquisitions and increased funding costs, resulting in 2H23 DPU of 7.48 Scts (+2.1% yoy). FY23 DPU was 14.77 Scts (+2.7% yoy).
Singapore revenue lifted by higher rent under new lease agreement
PREIT’s Singapore revenue/NPI accounted for 69.5%/71.1% of its total 2H23 revenue/ NPI. Singapore revenue/NPI rose 8.8% yoy in 2H23 to S$50.8m/S$49m, due to higher rent from the Singapore hospitals under its 20-year lease agreement, which started Aug 2022.
Weak yen vs. S$ curtailed revenue, but offset by income hedge
Despite contributions from properties acquired in 3Q22 and Oct 23, Japan operations reported 3.6%/3.9% yoy declines in 2H23 revenue/NPI to S$22.1m/S$19.9m, impacted by the yen’s depreciation vs. S$. That said, PREIT remains well hedged at the distribution income level, in our view. In addition to fully funding its yen acquisitions, it also extended its yen net income hedge for another two years until 1Q29F, which provides income stability to unitholders, in our view.
Strong balance sheet to tap growth opportunities
Gearing stood at 35.6% at end-FY23. Its interest coverage ratio (ICR) of 11.3x as at endFY23 remained the highest amongst SREITs, while all-in interest cost averaged 1.27% in 2H23. As part of its capital management strategy, PREIT executed several interest rate swaps that will lift the proportion of its fixed rate debt from 74% to 90% by end-1Q24F. In addition, it also put in place six new debt facilities, with tenors of 3 to 6 years, largely to finance the renewal capex works at Mt Elizabeth Hospital and refinance maturing loan facilities due in FY24F-25F. This will extend its weighted average debt term from 2.8 years to 3.9 years, when the facilities are drawn down, according to management.
Reiterate Add rating
We tweak our FY24-25F DPU estimates marginally post results. Our DDM-based TP of S$4.50 is maintained. We like PREIT for its stability, backed by its defensive income structure with in-built rent escalation features. Re-rating catalysts include accretive acquisitions. Downside risks include deflationary periods, whereby its Singapore rent revisions would revert to 1% when PREIT’s annual rent formula kicks in again, or potential cost overruns from its asset enhancement initiatives under its capex renewal exercise.
