• Parkway Life REIT surprised the market with inclusion in the FTSE EPRA Nareit Global Developed Index.
• Bodes well for its visibility to institutional investors and index funds.
• We expect the long-term master lease with its sponsor to be renewed.
• To deliver steady and sustained growth through its three-pronged strategy.

Added to the FTSE EPRA Nareit Global Developed Index, Surprising the Market

• In the September 2020 review released yesterday, Parkway Life REIT (SGX:C2PU) was included in the FTSE EPRA Nareit Global Developed Index, sending Parkway Life REIT's share price above its pre-COVID-19 high of S$3.74.
• While we had previously highlighted Parkway Life REIT as a potential candidate for inclusion, it was probably not within market expectations. The index review is subject to revision until 4 September and the inclusion will be effective after 18 September.

Increases Visibility to Institutional Investors and Index Funds

• Despite Parkway Life REIT commanding a premium and maintaining its share price during the COVID-19 pandemic with its resilient earnings visibility, we believe that its indexation will increase its visibility to many institutional investors and index funds.
• Consequently, this will further validate its premium.

Long-term Master Lease With Sponsor Expected to be Renewed

• The first 15 years of the 15+15 years master lease for its three Singapore hospitals with its sponsor via Parkway Hospitals Singapore will be expiring on 22 August 2022. We understand that discussions are currently underway.
• Our base case expectation is that the master lease will be renewed for the next 15 years, with the lease structure to be maintained.

Recycling of Japanese Assets Continues to Deliver Growth; Asset Enhancement Initiative (AEI) to Improve Rental Income

• While asset-recycling activities for Parkway Life REIT's Japan assets have been sporadic, we believe that this will continue to drive growth given its successful track record. However, timing of this exercise remains uncertain.

Building a Third Pillar for the Next Phase of Growth

• As its Japan assets have grown to a decent size, contributing 40% of the group’s gross revenue, Parkway Life REIT’s management believes that it is timely to look into building a third pillar for the company’s for its next growth phase, in addition to asset recycling and acquisition pipeline from its sponsor.
• Parkway Life REIT continues to explore opportunities in developed countries with mature healthcare markets and believes that there could be potential options in Australia, Europe and the United Kingdom (UK). Although timely, the timing of any potential entry into a new market remains uncertain.

Maintain BUY on Parkway Life REIT; Target Price of S$4.00

• We continue to like Parkway Life REIT for its strong earnings visibility, which is a positive attribute especially in the current volatile and uncertain market outlook. We believe that Parkway Life REIT will continue to deliver steady DPU growth through its three-pronged growth plans:
  1. asset-recycling strategies,
  2. venturing into a new market (third pillar) and,
  3. acquisition pipeline from its sponsor while maintaining its defensive stance in expansion.

Source: DBS Research - 4 Sep 2020