•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.

PLife Reit DPU up 17.8% in Q3

PARKWAY Life Real Estate Investment Trust (PLife Reit) has reported a 17.8 per cent year-on-year increase in distribution per unit (DPU) to 2.25 cents for the third quarter ended Sept 30, on the back of yield-accretive acquisitions in Japan and higher rent from its Singapore properties.

Gross revenue was $21.17 million, up 28.3 per cent from Q3 last year, while net property income rose 26.5 per cent to $19.43 million.

During the quarter, the group recognised revenue contributions from the six Japanese properties acquired in June this year, as well as contributions from five Japanese properties acquired in July. These amounted to $2.3 million.

Distributable income to unit-holders was $13.61 million, versus $11.55 million previously. At a DPU of 2.25 cents for the quarter, annualised distribution per unit came in at nine cents.

In September, PLife Reit completed reconstruction work at its Japanese nursing home Maison Des Centenaire Haruki.

This involved the conversion of existing clinic space into three income-producing rooms and a common area for administrative use, to yield a return on investment of 32.3 per cent and an 8.63 per cent increase in gross rent for the unexpired lease term of about 17 years.

‘PLife Reit remains cautiously optimistic about our medium to long-term prospects, supported by our favourable rental lease structures where at least 87.8 per cent of the total portfolio has downside revenue protection, good future rental growth with the CPI-linked revision formulae, long-term master leases and a 100 per cent occupancy rate across the portfolio,’ the trust said.

‘The demand for quality private healthcare will remain resilient and continue to grow, driven by growing affluence, fast-ageing populations and increasing social acceptance of the elderly living in nursing care facilities.’

The DPU for Q3 is payable on Dec 13.

Units in PLife Reit closed one cent higher at $1.70 yesterday.

Good results

• In line; maintain Outperform. 9M10 DPU of 6.41cts met consensus and our expectations (77% of our FY10 estimate). This was a 12.6% yoy improvement, led by full contributions from acquired Japanese assets. In the quarter, improvements to forward earnings were achieved through advance refinancing of debt on lower interest costs and accretive asset enhancement. While the impact of AEI is not immediately material, we view the work positively as management should be able to milk organic growth consistently (lacking in the Japanese portfolio) through such work. We factor in slightly higher Japanese contributions going forward, resulting in 1-3% upgrades in our DPU estimates for FY10-12. We also roll over our DDMbased target price to end-CY11, raising it to S$1.96 from S$1.91 (discount rate 7.2%). PLife REIT trades at 1.2x P/BV and a prospective FY11 yield of 5.9%.

• 3Q10 DPU 2.25cts grew 17.6% yoy, primarily from higher revenue from full contributions from Japanese assets acquired in June-July; and a higher CPI-pegged minimum rent for Singapore assets by 1.73%. Contributions from new Japanese assets were slightly better than expected, at 77% of our FY10 forecast.

• Debt structure improved, with the early refinancing of S$215m Japanese debt (46% of its total) which would have been due in 2H11. The debt was broken into 4- and 5-year committed term loans resulting in substantially longer weighted average debt maturity of 4.2 years (from 2.87 years) and no refinancing requirements till 2013. Weighted average cost of debt was lowered to 2.13%, (down about 30bp) with interest cost savings of about S$1m. Asset leverage was 35% as at 30 Sep 10. This gives the REIT debt headroom of S$240m, assuming 45% asset leverage. We believe potential acquisitions within S$200m are more likely to be fully debt-funded.

Growing from Strength to Strength

At a Glance

• 3Q10 DPU of 2.25 Scents (+18%) within our expectations

• Post refinancing, effective borrowing costs lowered to 2.1% while maturity lengthened to 4.37 years

• Buy, S$1.84 TP assumes S$200m acquisitions in 2011

Comment on Results

3Q10 DPU 2.25 Scts, within expectations. 3Q10 DPU of 2.25 Scts (+18% yoy; 8% qoq) was within our expectations. Gross revenue grew 28% yoy to S$21.2 m, driven largely by additional contributions from a total of 19 nursing homes acquired – Nov’09 (8 homes), Jun’10 (6 homes) and Jul’10 (5 homes). NPI margin moderated slightly to 91.5% arising from expenses related to the 19 new nursing homes. As a result, NPI grew by 26.5% to S$19.4m.

Interest savings from lower effective borrowing costs of 2.1% (vs 2.6% in 2Q10). During 3Q, management successfully refinanced its S$207m JPY facility at a lower interest cost and at the same time lengthened its debt weighted average term to maturity to 4.37 years, from 2.87 years a quarter ago. Going forward, we expect the REIT to continue adopting a proactive stance towards lengthening its debt maturity profile to match the long leases of its assets. Gearing level remains low at 35%.

Recommendation

Defensive play… We like PREIT for its stable and defensive portfolio; 88% of portfolio revenue with downside rental protection and 98.4% with rent review provision. We believe the REIT will continue to provide organic growth (through AEI and rental upside), while exploring portfolio expansion opportunities going forward. In line with the robust outlook for healthcare facilities, we believe management will probably look to structure its new leases such that it provides upside benefit to the REIT.

…with upside from acquisition pipeline; factored in S$200m worth. We have assumed S$200m worth of acquisitions in 2011, funded 70%/30% by equity/debt to maintain its existing gearing ratio of c.35% empowering PREIT to undertake opportunistic acquisitions. Maintain BUY and S$1.84 TP.