Parkway Life Real Estate Investment Trust - DBS Research 2016-10-27: Strong and Steadfast

Parkway Life Real Estate Investment Trust - DBS Vickers 2016-10-27: Strong and Steadfast PARKWAYLIFE REIT C2PU.SI

Parkway Life Real Estate Investment Trust - Strong and Steadfast

  • 3Q16 DPU (ex one-off gains) up 2.7% y-o-y to 3.06Scts.
  • 3Q16 NPI recorded strong growth of 8% y-o-y.
  • Parkway East Hospital surpassed minimum rent.
  • No refinancing until 2H18, interest cost flat at 1.4%.


Holding steady amid uncertainty. 

  • 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.
  • The bulk of revenue is from Singapore (c.60% of revenues), and is forecast to grow at CPI + 1%, at a minimum of 1%. 
  • The remaining 40% is derived from its nursing homes and healthcare facilities in Japan which offer long-term certainty given a weighted average lease expiry of 13 years.


3Q16 DPU (ex one-off gains) grew 2.7% y-o-y, in line. 

  • 3Q16 DPU fell 8.8% y-o-y to 3.06 Scts due to a one-off distribution of divestment gains in 3Q2015. Excluding the one-off distribution, DPU grew 2.7% y-o-y. 
  • Net property income (NPI) recorded strong growth of 8% y-o-y, supported by Singapore hospitals (+1.8%) following a marginal increase in revenue from Parkway East Hospital as it outperformed its minimum rent, and Japanese assets (+19%). 
  • Plife REIT has no refinancing needs until 2H18, average debt to maturity is 3.4 years, and cost of debt was stable q-o-q at 1.4%.


Optimism returns for acquisition opportunities in Japan. 

  • We continue to see positive growth momentum for Plife REIT from its Japan asset recycling strategy. Management continues to look for acquisition opportunities to bulk up its exposure in Japan. 
  • Given a relatively low gearing ratio of c.38%, we see opportunities to expand via debt-funded acquisitions. 
  • We have priced in S$45m of acquisitions @ 6.5% yield in our forecast.


Valuation

  • Maintain BUY and TP of S$2.75. Our target price implies a potential total return of 11%. 
  • Key catalysts includes positive roll-out of its asset recycling exercise in Japan and potential acquisitions of earnings accretive hospital assets.


Key Risks to Our View

  • Currency risks. Plife REIT derives c.40% of its earnings from healthcare assets in Japan. Thus, foreign exchange volatility could hit earnings as distributions are based on SGD.




Rachel Lih Rui Tan DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-10-27
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.75 Same 2.750



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