Parkway Life REIT - DBS Research 2016-07-27: Healthy as a horse

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PARKWAYLIFE REIT C2PU.SI 

Parkway Life REIT - Healthy as a horse

• 2Q16 DPU (ex one-off gains) up 1% y-o-y to 3.01Scts.
• 2Q16 NPI recorded strong growth of 6% y-o-y.
• Cost of debt reduced to 1.4% (Dec15: 1.6%).
• Maintain BUY; TP raised to S$2.75.

Holding steady amid uncertainty. 

• Parkway Life REIT (Plife REIT) offers one of the strongest earnings visibility profile among S- REITs, with a weighted average lease expiry of close to 9 years. 
• The bulk of revenue is from Singapore (c.59% of revenues), and is forecast to grow at CPI + 1% at a minimum of 1%. The remaining 41% 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.

2Q16 DPU (ex one-off gains) grew 1% y-o-y, in line. 

• 2Q16 DPU fell 10% y-o-y to 3.01 Scts due to a one-off distribution of divestment gains in 2Q15. Excluding the one-off gains, DPU grew 1% y-o-y. 
• Net property income (NPI) in 2Q16 recorded strong growth of 6% y-o-y, supported by Singapore hospitals (+1.3%) and Japanese assets (+15%). 
• Plife REIT has successfully termed out all remaining FY17 refinancing requirements, extending average debt to maturity to 3.7 years (3.5 years in Mar16) and lowered its cost of debt to 1.4% (1.6% in Dec15).

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. We rolled forward our estimates and raised our TP to S$2.75 from $2.65. Our target price implies a potential total return of 12%. 
• 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.41% 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/ 2016-07-27

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.75 Up 2.65