• Parkway Life REIT's 3Q/9M20 DPU in line at 26.3%/76% of our FY20F forecast.
• Performance boosted by higher Singapore and Japan contributions.
• Reiterate HOLD rating with a higher DDM-based Target Price of S$4.03.

Parkway Life REIT's 3Q20 Results Highlights

• Parkway Life REIT (SGX:C2PU) posted a 0.8% y-o-y increase in 3Q20 gross revenue to S$30.2m, thanks to additional contributions from three assets in Japan bought in Dec 2019, appreciation of the ¥, and higher Singapore hospital income, partly offset by one-off receipt of insurance proceeds for the reimbursement of property repair expenses incurred by certain Japanese assets in 2019.
• Parkway Life REIT's net property income (NPI) grew a higher 2% y-o-y to S$28.1m in 3Q21 on lower property expenses. As a result, NPI margin ticked up to 93.1% (vs. 92.1% previously).
• Distributable income to unitholders grew a larger 7.4%% y-o-y to S$21.4m as Parkway Life REIT benefited from lower interest cost due largely to a low interest rate environment.
• Parkway Life REIT's 3Q/9M20 DPU of 3.54/10.22 cents were in line with our expectations, at 26.3%/76% of our FY20F forecast.

Singapore and Japan Hospital Contributions Continued to Grow

• Singapore hospitals achieved a 1%/1.2% y-o-y increase in 3Q20 revenue/NPI to S$17.4m/S$16.6m on upward minimum guarantee rent revision of 1.17%. This adjustment commenced on 23 Aug 2020 and will last until 22 Aug 2021. This provides the trust with strong income visibility. Its Japan operations saw a 3.6% y-o-y expansion in 3Q NPI to S$11.5m, due to additional rental contributions from three properties acquired in Dec 2019 and a slight improvement in NPI margin to 90.4% (vs. 87.8% in 3Q19).

Robust Balance Sheet Metrics

• Meanwhile, Parkway Life REIT has continued to strengthen its balance sheet with no long-term debt refinancing needs until Jun 2021. As at end-3Q20, its gearing stood at 38.6%, and interest cover at 17x. Effective all-in funding cost declined q-o-q to 0.54% at end-3Q20, and 88% of its interest rates were hedged.
• According to management, the trust targets to put in place loan facilities by 4Q20 to term out all maturing debts due in 2021. It has debt headroom of S$236.5m, assuming a gearing limit of 45%, to tap potential inorganic growth opportunities.

Reiterate HOLD Rating

• We leave our Parkway Life REIT's FY20-22F DPU unchanged but raise our DDM-based Target Price to S$4.03 as we adopt a lower cost of capital of 5.78% (vs. 6.46% previously).
• While we like Parkway Life REIT for its stable yield backed by its defensive income structure, our recommendation remains a HOLD given the 1.6% total returns based on the 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 - 4 Nov 2020