Parkway Life REIT
DPU growth from acquisitions
▊ Plife’s 3Q distributable income was up 1.2%/3.5% on qoq/yoy basis. While Plife’s underlying assets are stable and management has demonstrated its ability to make yield accretive acquisitions, we believe a valuation premium has already been priced in. With 3M/9M DPU at 25/70% of our FY13 forecast, we deem it as broadly in line given the backend-loaded year from acquisitions. We account for recent acquisitions and tweak our model, leading to a 2.8% lowering of FY13 DPU, 0.7-0.9% increases in FY14-15 DPUs and a 1.7% rise in our DDM-based target price to S$2.37. Maintain Neutral on valuations.
Acquisitions working well
Distributable income rose 3.5% yoy in 3Q and 4.2% yoy in 9M13, reflecting yield-accretive acquisitions in Japan and Malaysia and higher rent from existing properties. 4Q13 DPU should show greater improvement as five Japanese nursing homes were acquired in Sep 2013.
The Singapore hospital rents were revised upwards by 4.44% for the Aug 2013-Aug 2014 period. Our Singapore economist Song Seng Wun expects core and headline CPI to be in the range of 2.5-3% for 2014-15, which should translate into 3.5-4% upward rental reversions for the Singapore hospitals. Future yield accretion from the acquisition of Japanese nursing homes may be reduced, in our view, given the intensifying competition from private funds. NPI yields for recent acquisition have already compressed from the 8.3% high to c.7%, near pre-crisis levels. Assuming 20% withholding tax and 1.6% funding cost, that has cut the yield spread from 500bp to 400bp.
We view Plife’s stability, clear strategy and yield accretive acquisitions positively, but we believe a valuation premium has been priced in. Plife is trading at 1.55x book value, a premium over its S-REIT universe peers of 1.05x. Its FY15F dividend yield of 5% provides a 270bp spread to 10-year Singapore bond yield, also lower than the S-REIT universe of 404bp.
Publish date: 08/11/13