• Parkway Life REIT's 2Q/1H20 DPU of 3.36/6.68 Scts were in line with expectations at 25.2%/ 50.1% of our FY20 forecasts.
• Performance boosted by higher Singapore and Japan contributions.
• Reiterate HOLD, with a higher DDM-based Target Price of S$3.43.

Parkway Life REIT's 2Q20 Results Highlights

• Parkway Life REIT (SGX:C2PU) posted 4.9% and 5.3% y-o-y increase in 2Q20 gross revenue and net property income (NPI) to S$30.3m and S$28.2m respectively. The improvement was achieved largely through additional contributions from three assets in Japan bought in Dec 2019, appreciation of the ¥, and higher Singapore hospital income. However, distributable income to unitholders grew a smaller 2.5% y-o-y to S$20.3m as Parkway Life REIT retained an additional S$0.85m for Covid-19 related relief measures.
• Parkway Life REIT's 2Q/1H20 DPU of 3.36/6.68 Scts were in line with our expectations at 25.2%/50.1% of our FY20 forecasts.

Continued Growth for Singapore Hospitals

• Singapore hospitals achieved a 1.7%/1.9% y-o-y increase in 2Q20 revenue/NPI to S$17.3m/S$16.5m. During the quarter, Parkway Life REIT provided Covid-19 related support and targeted assistance of S$0.3m to its tenants.
• Parkway Life REIT announced its new minimum guaranteed rent agreement for 23 Aug 2020 to 22 Aug 2021. Under the latest terms, it is set to enjoy further rental increases with a minimum rent increase of 1.17% during this period. This provides the trust with strong income visibility.

Acquisitions Boosted Japan Contributions

• Parkway Life REIT's Japan property arm reported a 11.4% y-o-y expansion in 2Q NPI to S$11.7m, thanks to additional rental contributions from three properties acquired in Dec 2019 and appreciation of the ¥ as well as a slight improvement in NPI margin to 90.6% (vs. 89.1% in 2Q19).

Robust Capital Management

• Meanwhile, Parkway Life REIT continues to strengthen its balance sheet with no long-term debt refinancing needs till Jun 2021F. As at end-2Q20, its gearing stood at 38.3%, and interest cover at 15.8x. Effective all-in funding cost declined to 0.6% at end-2Q20, and 88% of its interest rates are hedged. It has debt headroom of S$250m, assuming a gearing limit of 45%, to tap potential inorganic growth opportunities.
• According to management, the trust has also extended its ¥ net income hedge till 2Q25F.

Reiterate HOLD Rating

• We tweak our Parkway Life REIT's FY20-22F DPUs up by 0.8% to factor in lower average debt cost. Accordingly, our DDM-based Target Price rises to S$3.43.
• While we like Parkway Life REIT for its stable yield backed by its defensive income structure, our recommendation remains a HOLD given the 5.5% total return potential based on 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%.

Source: CGS-CIMB Research - 28 Jul 2020