PLife – DBSV

Stable and strong earnings stream

At a Glance

• 3Q11 DPU of 2.4 Scts in line

• AEI completed; looking forward to acquisitions

• Maintain HOLD, TP lowered to S$1.96

Comment on Results

3Q results in line. Parkway Life REIT (PREIT) reported a 4.1% and 3.6% hike in gross revenues and net property income to S$22.0m and S$20.1m respectively. The improved performance was attributable to (i) acquisition of Japanese nursing properties in Jul’10 and Jan’11; and (ii) higher rental income from Singapore on the back of annual rental adjustment (5.3% increase beginning 23r Aug’11). Distributable income increased by a higher 6.8% to S$14.5m (DPU of 2.4 Scts) benefiting from interest savings from its refinancing activities (all-in cost of 1.63%). 3Q11 results formed 74% of our FY11 estimates.

Optimizing yields – creating value from asset enhancement initiatives (AEI). PREIT has completed its 2nd AEI at Sawayaka Nokatakan, which involved the conversion of an underutilised pool into an income producing Day Service facility area, that increased its maximum day service capacity from 39 to 70 people. While impact on distribution is estimated to be small, returns are decent in our view – estimated ROI of 10% on capital of S$0.15m.

Financial position remains strong. Weighted average debt maturity is 3.19 years and interest cover remains a healthy 7.7x. Gearing is a comfortable 36%, empowering the trust with additional headroom of up to S$815m (to reach 60% gearing ratio). We believe that opportunities to acquire are aplenty in our view, with healthcare assets in Malaysia, Australia and Japan that PREIT is reportedly keen on. We have assumed S$200m worth of acquisitions but now expect these to be completed in 1H12 (previously 2H11).

Recommendation

Maintain HOLD. Our DPU estimates and TP have been adjusted to reflect the delay in new acquisitions. However , we like PREIT’s defensive metrics – 87.9% of portfolio revenue with downside rental protection and 98.4% with rent review provision. We believe that the market has priced in these positives, with its premium valuation of 1.3x P/BV and forward FY11-13F yields of 5.4-6%, vs S-REIT peers (0.95x P/BV, FY11-13F yields of 6.7-7.1%). Re-rating catalysts in our view will hinge on the REIT executing on its acquisition growth strategy.