Parkway Life REIT - Stable DPU Growth Expected

REIT’s 4Q13 DPU was within expectation. NPI growth was flat at +3.4% y-o-y, as the depreciating JPY offset the higher rental income from its Singapore properties and acquisitions during 2013. PREIT’s ongoing asset enhancement initiatives (AEI) will support rental growth as it faces competition in making acquisitions. We introduce our FY15 estimates and arrive at a DDM-based TP of SGD2.39.

Yen depreciation a drag on net property income (NPI) growth. PREIT’s 4Q13 NPI rose 3.4% y-o-y to SGD23.2m despite higher rental income from its Singapore properties and contribution from its acquisitions during 2H13. NPI from its Singapore properties was 4.9% higher y-o-y during the quarter, while that from its Japanese properties inched up 1.2% y-o-y even though it has added new assets to its Japan portfolio. Management attributed this to the y-o-y depreciation in the JPY. On the whole, the company’s yield accretive acquisitions in Japan boosted its DPU growth 4.5% higher y-o-y in 4Q13.

AEIs to support growth. Asset enhancements will drive growth as
PREIT remains neutral on its acquisition prospects, especially in Japan, given that it is still facing competition from private funds. Meanwhile, the rental income from its Singapore properties will continue to go up, supported by its unique lease structure. Together with full year contribution from an acquisition it made in FY13, we expect a moderate DPU growth of 3.4% y-o-y in FY14.

Maintain NEUTRAL. PREIT’s balance sheet remains robust, with a loan-to-value (LTV) ratio of 33.8% as at end-4Q13. This gives it ample headroom to take on debt amounting to SGD179.3m before hitting 40% gearing. As we roll forward our earnings, we arrive at a TP of SGD2.39, based on DDM. PREIT currently offers a 4.9% yield. While we like the REIT’s stable DPU growth, we hold the view that its prospects are likely to have been priced in.