Parkway Life REIT - CGS-CIMB Research 2019-10-31: A Question Of Entry Level

PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life REIT - A Question Of Entry Level

ParkwayLife REIT’s 3Q/9M19 DPU of 3.3/9.85 Scts was in line at 25.4%/75.7% of our FY19 forecast.
The uplifting effect of higher minimum rent revision of 1.61% for Singapore hospitals from 23 Aug 2019 was partly offset by lower Japan NPI margin.
We maintain our HOLD call with a higher Target Price of S$3.26.

PARKWAYLIFE REIT (SGX:C2PU) recorded 3Q19 DPU of 3.30 Scts, +2.2% y-o-y and +0.9% q-o-q. This was achieved on a 5.4% y-o-y increase in gross revenue. See Parkway Life REIT Dividend History.
The improvement was achieved through rental growth from existing properties, finance cost savings, appreciation of the yen as well as one-off insurance proceeds from certain Japanese properties which were used to partly reimburse property repair expenses. See Parkway Life REIT Announcements.
Portfolio NPI margin slipped 1.3% pts to 92.1% due to higher property repair expenses.

Singapore hospitals achieved a 0.9%/0.6% y-o-y increase in 3Q revenue and NPI to S$17.2m/S$16.4m with the new minimum rent increase of 1.61% kicking in from 23 Aug 2019 to 22 Aug 2020. This continues to provide the trust with strong income visibility.

Japan properties reported a 12.7%/9.9% expansion in 3Q revenue and NPI thanks to rental contribution from a property acquired in 1Q18 as well as the stronger yen. However, NPI margin dipped from 90.0% in 3Q18 to 87.8% in 3Q19 due to higher property repair expenses.

Effective all-in funding cost declined to 0.81% from 0.91% in 2Q, following the extension of its interest rate hedges in early Oct 19, with about 88% of its interest rates hedged. Debt’s weighted average term to maturity was 2.8 years. ParkwayLife REIT has 12.3% of its total debt due to be refinanced in 4QFY19-20F and a further 29% due in FY21F. We anticipate its debt cost to remain low given the low interest rate environment.
Gearing stood at 37.2% at end-3Q19. It has debt headroom of S$275m, assuming a gearing limit of 45%, to tap potential inorganic growth opportunities.

We tweak our FY19F DPU up but lowered our FY20-21F DPU down marginally post results. However, our DDM-based Target Price is raised to S$3.26 as we roll our assumptions forward to FY20. See Parkway Life REIT Share Price; Parkway Life REIT Target Price.
While we like ParkwayLife REIT for its stable yield backed by its defensive income structure, valuations are somewhat rich, at 1.76x P/BV and estimated total return of 4.7%. Hence, we maintain our HOLD call.
Upside risks include accretive acquisitions while downside risks include deflationary periods whereby Singapore rent revisions would revert to 1%.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2019-10-31

SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.260 SAME 3.140