PLife – Phillip

•3QFY10 revenue of $21.2 million, net property income of $19.4 million, distributable income of $13.6 million.

•3QFY10 DPU of 2.25 cents

•Downgrade to Hold, target price $1.78

2 main pillars of growth drivers

Parkway Life REIT (Plife) registered 3QFY10 revenue of $21.2 million (+28.3% y-y, +13.0% q-q), net property income of $19.4 million (+26.5% y-y, +12.3% q-q) and distributable income of $13.6 million (+17.8% y-y, +7.9% q-q). DPU for the quarter was 2.25 cents (+17.8% y-y, +7.7% q-q). There are two areas of growth driving the improved earnings. Growth from acquisitions as well as the annual rental revision of the Singapore properties. The improvements came mainly from acquisitions Plife made in Japan. It made 11 purchases in Japan this year, having acquired six nursing homes in June 2010 and another 5 nursing homes in July 2010. Plife portfolio currently consists of three Singapore properties and 29 Japan properties. Net property income contribution from the Japan properties has increased now accounts for approximately 36% in 3Q10. For the Singapore hospitals, the 4th year of lease began from 23 August 2010 and the annual revision was set at 1.73%. During the quarter, Plife completed an asset enhancement initiative (AEI) on a Japan property which gives a return on investment (ROI) of 32.3% on capital expenditure of S$0.18 million.

Gearing nearing comfort level

Plife refinanced JPY13.66 billion (S$207 million) in August ahead of the loan maturity in the second half of 2011. The debt was refinanced through two equal sized term loan facilities with maturity of 4 and 5 years each. Post refinancing, the next loan maturity would be in 2013 with loan amount of S$50 million. Current gearing is 35%. At the time of listing in 2007, Plife was listed at an enviable gearing of just 4%, thus enabling it to acquire properties using just debt alone. To-date, Plife has made total acquisitions worth $360.4 million. We figure the comfort level of gearing is at 40% and that leaves Plife with another $84 million of debt headroom.

Valuation looks stretch, downgrade to Hold

Plife has been active on the acquisition trail, capitalizing on its ability to take on debt and embarking on expansion growth in a low interest rate environment. At 35% gearing, we believe future acquisitions would be funded with a mix of equity and debt. We are not factoring in any acquisitions in our forecasts. We are rolling over our valuation to FY11E, based on our DDM model, we arrived at a target price of $1.78. Plife has an amazing run-up in price recently. At our FY10E and FY11E DPU, it is currently trading at a dividend yield of 5.1% and 5.6% respectively, putting it at the low-end of the yield curve among the S-REIT. Although we like the fundamentals of Plife, we think price action will be taking a breather as well. Thus we are downgrading our call to Hold with a target price of $1.78.