It has been a strong quarter for Parkway Life REIT (PREIT), which recorded a 4.9% and 5.3% y-o-y increase in 2Q20 gross revenue and net property income (NPI) respectively. Yet despite this bullish performance as well as distributions per unit (DPU) performing to expectations, CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei have maintained their “hold call” on the stock due to its relatively low return potential. 

“While we like PREIT for its stable yield backed by its defensive income structure, our recommendation remains a ‘hold’ given the 5.5% total return potential based on its current share price,” remark the analysts. Nevertheless, they adjusted FY20-22 distribution per unit (DPU) upwards by 0.8% due to lower average debt cost and raised its target price from $3.38 to $3.43. 

PREIT’s 2Q20 gross revenue and net property income (NPI) came in at $30.3 million and $28.2 million respectively. Much of this growth stems from the additional contributions of three new assets in Japan acquired in December in 2019, an appreciation in the Japanese Yen (JPY) and stronger hospital income in Singapore. Hospitals in Singapore saw 2Q20 revenues and net property income rise 1.7% and 1.9& respectively to $17.3million and $16.5million respectively. 

“During the quarter, PREIT provided Covid-19 related support and targeted assistance of $0.3m to its tenants. PREIT announced its new minimum guaranteed rent agreement for 23 Aug 2020 to 22 Aug 2021,” observed the analysts. Under the latest terms, they continue, PREIT will likely enjoy further rental increases of at least 1.17% during this period, providing it with strong income visibility going forward. 

PREIT’s Japanese property arm has also performed strongly, reporting a 11.4% y-o-y expansion in NPI for 2Q2020 on the back of additional income from its three new Japanese properties. Besides JPY appreciation, the NPI margin of PREIT’s Japanese business has grown from 89.1% in 2Q2019 to 90.6% in 2Q2020. 

Another plus for the counter is its balance sheet strength, with PREIT requiring no long-term debt refinancing until Jun 2021. Its gearing ratio stands at 38.3% as of end 2Q2020 -- well below MAS’s gearing limit of 50% -- while interest cover stands at 15.8x, providing it with a generous debt headroom of $250 million assuming a gearing limit of 45% to tap into potential inorganic growth opportunities. 

“Effective all-in funding cost declined to 0.6% at end-2Q20, and 88% of its interest rates are hedged. According to management, the trust has also extended its ¥ net income hedge till 2Q2025,” say Lock and Eing. PREIT’s DPU of 3.36 cents in 2Q2020 and 6.68 cents in 1H2020 more or less conformed to expectations at 25.2% and 50.1% of FY2020 forecasts respectively. 

The analysts have identified accretive acquisitions as the main upside risk for PREIT. Meanwhile, deflationary periods are seen to be the main downside risk for the counter, whereby Singapore rent revisions would revert to 1%.

As at 2.55pm, PREIT is trading 0.08 points higher at $3.52 with a price-to-earnings (P/E) ratio of 17.22. Dividend yield is currently 3.09%.