Parkway Life REIT - Defensive yields (CIMB)

OUTPERFORM Maintained

S$1.90 Target: S$2.11

Mkt.Cap: S$1,149m/US$954m

REIT

• In line; maintain Outperform. 2Q11 DPU of 2.37cts meets Street expectation and our expectation (23% of FY11 estimates). 2Q11 DPU was up 13.3% yoy on revenue contributions from Japanese properties acquired in 2010-11 and higher rentals for Singapore assets. Management announced a minimum guaranteed rent increase of 5.3% (1.73% in previous year) from Aug 11, and a lower all-in cost of debt of 1.65% (from 1.96%). We retain our assumption of S$200m acquisitions, but defer the bulk to FY12. Factoring in higher rental growth and lower interest costs, we adjust our FY11-13 DPU estimates by -2/+5%. Accordingly, our DDM target price rises to S$2.11 (discount rate: 7.2%) from S$1.98. We continue to like PLife for its defensive qualities and good inflation hedge. We anticipate stock catalysts from asset enhancement and earlier-than-expected acquisitions.

• Increase in minimum guaranteed rent. Under its CPI + 1% rental revision formula for Singapore assets, their minimum guaranteed rent has been increased by 5.3% for the year commencing 23 Aug 11. This is higher than the prior year’s increase of 1.73%, on the back of rising inflation in the preceding 12 months.

• Lower all-in cost of debt. Management has extended interest-rate swap hedges for an average of 3.5 years on 45% of its loan portfolio to lock in low interest rates. Annual interest savings are estimated at S$1.5m (S$0.6m for FY11), or 2% of distributable profit. This lowers the REIT’s all-in cost of debt to 1.65%, the lowest among SREITs.

• Still awaiting acquisition catalysts. Management has identified Malaysia as a place for acquisitions, but remains cautious because of global uncertainties. We expect more headway in its negotiations with sponsor Khazanah on the potential acquisition of Pantai’s healthcare assets towards late 2011. We understand that management is still looking out for assets from the sponsor and third parties and thus defer part of our assumed acquisitions to 2012. Low asset leverage of 34% still offers debt headroom of S$261m to management’s mid-term gearing target of 45%.