Parkway Life REIT - DBS Research 2016-04-27: Steadyship

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PARKWAYLIFE REIT C2PU.SI 

Parkway Life REIT - Steadyship 

• DPU (ex one-off gain) +5% y-o-y; in line 
• 1Q16 NPI recorded strong growth of 9% y-o-y mainly from Japan assets (asset recycling) and increase in rental for Singapore assets 
• Maintain Buy; raise TP to $2.65 from $2.50 

Steady ship 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. 
• Revenue from Singapore (c.63% of total revenues) is forecast to grow at CPI + 1%, ensuring that rental income keeps pace with inflation growth. The remaining 36% 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. 
• We believe investors should continue to add at current levels. BUY! 

Optimism returns from Japan; acquisitions to grow portfolio. 

• After a portfolio recycling exercise in Japan, we continue to see positive growth momentum for Plife REIT in the country. The manager is aiming to acquire and bulk up its exposure in Japan. 
• Given a relatively low gearing ratio of c.35%, we see opportunities to grow via debt-funded acquisitions. 
• We have priced in S$45m of acquisitions @ 6.5% yield in our forecast. 

Conservative balance sheet profile. 

• Plife REIT has been proactively refinancing its maturing debts in advance to prevent any near-term refinancing risks. As a result, there is no refinancing until 2017, with a weighted average debt to maturity of 3.5 years and a low 1.6% cost of debt which is fully hedged. 

Valuation: 

• We raise our target price to S$2.65 from S$2.50, by reflecting the negative interest rates in Japan. 
• Our target price implies a potential total return of 13%. 
• We believe further potential upside to our forecasts stems from positive roll-out of its asset recycling exercise in Japan which we have yet to include in our estimates. 

Key Risks to Our View: 

• Currency risks. 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.

Rachel Lih Rui Tan DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-04-27

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.65 Up 2.50