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


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.

3Q19 results highlights

  • 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 uplift from new minimum guaranteed rent revision

  • 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.

New acquisition contributions, partly offset by lower NPI margin

  • 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.

Lower funding cost

  • 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.

Maintain HOLD

  • 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