Parkway Life REIT - CGS-CIMB Research 2020-11-04: Solid Performance

PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life REIT - Solid Performance

Parkway Life REIT (SGX:C2PU) posted a 0.8% y-o-y increase in 3Q20 gross revenue to S$30.2m, thanks to additional contributions from three assets in Japan bought in Dec 2019, appreciation of the ¥, and higher Singapore hospital income, partly offset by one-off receipt of insurance proceeds for the reimbursement of property repair expenses incurred by certain Japanese assets in 2019. See Parkway Life REIT Announcements.
Parkway Life REIT's net property income (NPI) grew a higher 2% y-o-y to S$28.1m in 3Q21 on lower property expenses. As a result, NPI margin ticked up to 93.1% (vs. 92.1% previously).
Distributable income to unitholders grew a larger 7.4%% y-o-y to S$21.4m as Parkway Life REIT benefited from lower interest cost due largely to a low interest rate environment.
Parkway Life REIT's 3Q/9M20 DPU of 3.54/10.22 cents were in line with our expectations, at 26.3%/76% of our FY20F forecast. See Parkway Life REIT Dividend History.

Singapore hospitals achieved a 1%/1.2% y-o-y increase in 3Q20 revenue/NPI to S$17.4m/S$16.6m on upward minimum guarantee rent revision of 1.17%. This adjustment commenced on 23 Aug 2020 and will last until 22 Aug 2021. This provides the trust with strong income visibility. Its Japan operations saw a 3.6% y-o-y expansion in 3Q NPI to S$11.5m, due to additional rental contributions from three properties acquired in Dec 2019 and a slight improvement in NPI margin to 90.4% (vs. 87.8% in 3Q19).

Meanwhile, Parkway Life REIT has continued to strengthen its balance sheet with no long-term debt refinancing needs until Jun 2021. As at end-3Q20, its gearing stood at 38.6%, and interest cover at 17x. Effective all-in funding cost declined q-o-q to 0.54% at end-3Q20, and 88% of its interest rates were hedged.
According to management, the trust targets to put in place loan facilities by 4Q20 to term out all maturing debts due in 2021. It has debt headroom of S$236.5m, assuming a gearing limit of 45%, to tap potential inorganic growth opportunities.

We leave our Parkway Life REIT's FY20-22F DPU unchanged but raise our DDM-based Target Price to S$4.03 as we adopt a lower cost of capital of 5.78% (vs. 6.46% previously).
See Parkway Life REIT Share Price; Parkway Life REIT Target Price; Parkway Life REIT Analyst Reports; Parkway Life REIT Dividend History; Parkway Life REIT Announcements; Parkway Life REIT Latest News.
While we like Parkway Life REIT for its stable yield backed by its defensive income structure, our recommendation remains a HOLD given the 1.6% total returns based on the current Parkway Life REIT share price.
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 2020-11-04

SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.03 UP 3.430