Parkway Life REIT - CIMB Research 2015-12-09: Offering resilience and growth

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PARKWAYLIFE REIT C2PU.SI 

Parkway Life REIT - Offering resilience and growth 

• Organic income growth and divestment gains lifted 3QFY15 results. 
• Resilient portfolio with long WALE and downside risk protection. 
• Healthy balance sheet with balance sheet capacity to make acquisitions. 
• Successful capital recycling unlocks value. 
• Maintain Add with DDM-based target price of S$2.56. 

■ Boosted by organic income growth 

• PREIT reported a 2.5% rise in 3QFY15 revenue to c.S$26m, driven by higher-yielding properties and higher rent from Singapore properties. 
• Distribution to unitholders was 15.6% higher yoy, with a divestment gain distribution of S$2.3m from asset recycling activities. 

■ Resilient portfolio 

• PREIT’s portfolio remains one of the most resilient among the S-REITs, with a long weighted lease expiry of 9.39 years and downside protection for 93% of its leases by gross revenue. 
• While its revenue growth is relatively muted, c.1.05% for the Singapore hospitals till Aug 16, due to lower inflation, this is compensated by the lower downside risk. 

■ Healthy balance sheet 

• PREIT’s balance sheet remains healthy, with a net gearing of 35.2%. An estimated 78% of its interest rate exposure is hedged and there are no refinancing requirements till 2017. 
• Additionally, there is still room for inorganic growth given its debt headroom of S$118m and S$281.4m, which correspond with gearing levels of 40% and 45% respectively. 
• Management had previously highlighted Malaysia, Australia, Japan and China properties as potential targets. 

■ Successful capital recycling 

• Management has successfully created value via its recent capital recycling in Dec 14. The sale, at an exit yield of 5.9%, is 16% and 8% above the assets’ book values and independent valuations respectively. 
• Aside from financial gains, the portfolio also benefited from reduced tenant concentration risks with an improved WALE. 
• At the same time, PREIT acquired seven other Japan nursing homes at 6.4% yield. This has unlocked value for unitholders, while the new purchases added to income visibility. 

■ Maintain Add 

• We maintain our Add call on PREIT, which offers an FY15 dividend yield of 5.9%. 
• We continue to like its resilient portfolio and management’s ability to add value via asset recycling despite the competitive acquisition landscape in Japan. 
• Further yield accretive acquisitions could catalyse the stock.

LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2015-12-09

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 2.56 Same 2.56