Parkway Life REIT - CIMB Research 2016-07-26: Resilience priced in

PARKWAYLIFE REIT C2PU.SI

Parkway Life REIT - Resilience priced in

2Q16 results as expected; DPU accounts for 25% of our FY16 forecast.
Driven by Japan acquisition growth and Singapore upward rental guarantee.
Debt maturity profile extended, with refinancing of FY17 and part of FY18 loans.
Gearing of 37.8% provide good headroom for inorganic growth.

PREIT reported a 6.8% yoy rise in revenue to S$27.4m, while NPI grew 6.4% yoy to S$25.5m driven by the acquisition of a nursing home in Sapporo, Japan in Mar 16, higher contributions from Singapore hospitals, and appreciation of the ¥ vs previous period.
Although reported 2Q16 DPU slipped 10.2% yoy to 3.01 Scts, this was due to distribution of divestment gain in 2Q15. Excluding this, DPU would have risen 1.2% yoy.
At half time, DPU of 6 Scts, makes up c.50% of our full-year forecast.

2Q Singapore contributions of S$15.5m made up 61% of NPI and were bolstered by an upward minimum guarantee rent revision of 1.05%.
Mt Elizabeth hospital continued to perform well, with a 21% yoy improvement in NPI.
PREIT indicated that the annual rent escalation for the Singapore hospitals for the period 23 Aug 16 to 22 Aug 17 has been set a 1% increase in minimum guaranteed rent above the total rent payable.

Japan NPI grew 15.1% yoy to S$9.9m for 2Q, thanks to contributions from the S$140m worth of acquisitions made between Dec 14 to Mar 16.
2Q figures include a S$0.3m of realised foreign exchange gain due to the stronger ¥. Excluding this, the growth would have been a still impressive 11.6% due to the better yielding assets acquired from its asset recycling initiative. These purchases should add c.S$9m of additional income to PREIT’s portfolio NPI on a full year basis.

To capitalise on the low interest rate environment, PREIT refinanced and extended its loans due in FY17 and about 27% due in FY18 for another five years. This has extended its weighted debt maturity to 3.73 years and lowered its overall funding cost to 1.4%. About 98% of its interest rates are hedged into fixed rates.
Gearing remains healthy at 37.8%. This positions the REIT well to tap more inorganic growth potential.

We raise our DDM-based target price to S$2.68 as we assume a lower blended cost of equity due to the reduced Rf in Singapore and Japan.
Whilst we continue to like PREIT for its resilient rent structures with a long lease expiry profile of 8.9 years, the stock is trading above its +1s.d. forward DPU yield and P/BV valuations following the recent share price surge. Hence, we downgrade our call from Add to Hold on valuation and would re-look at the stock when prices dip below the +1s.d. level.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-07-26

CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 2.68 Up 2.55