Parkway Life Real Estate Investment Trust - DBS Research 2017-01-26: Divestment ‘lai see’ in FY17

Parkway Life Real Estate Investment Trust - DBS Vickers 2017-01-26: Divestment ‘lai see’ in FY17 PARKWAYLIFE REIT C2PU.SI

Parkway Life Real Estate Investment Trust - Divestment ‘lai see’ in FY17

  • 4Q16 DPU (excl one-off gains) up 2.3% y-o-y - in line.
  • 4Q16 net property income was 4% higher y-o-y.
  • Divestment gains of S$5.3m will be distributed quarterly in FY17 (c. 0.2 Scts per quarter).
  • Extended debt maturity profile to 3.6 years.

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 nine years.
  • The bulk of revenue (c.60%) is from Singapore, 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.

4Q16 DPU (excluding one-off gains) grew 2.3% y-o-y, in line.

  • 4Q16 DPU, excluding a one off distribution in FY15, grew 2.3% yo-y to 3.06 Scts, in line with consensus’ estimates. Net property income (NPI) recorded strong growth of 4% y-o-y, supported by Singapore hospitals (+1.3%) following a marginal increase in revenue from Parkway East Hospital as it outperformed its minimum rent, and Japanese assets (+9%). 
  • Plife REIT has divested four nursing homes in Japan and is expected to distribute S$5.3m gains quarterly during FY17 (c. 0.2 Scts per quarter). It has no refinancing needs until FY19, average debt to maturity is 3.6 years, and cost of debt is expected to remain stable 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.36%, 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. 

  • We roll forward our estimates and adjust our FY17F-FY18F DPU estimates by -1.4% to +4% taking into account divestment of assets and distribution of divestment gains. 
  • Our target price implies a potential total return of 20%. 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 | 2017-01-26
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.750 Same 2.750