Analysts are mostly positive on Parkway Life REIT (PLife REIT) after the REIT reported a higher distribution per unit (DPU) of 7.54 cents for the 1HFY2024 ended June 30, 3.5% up y-o-y.
CGS International (CGSI) analysts Lock Mun Yee and Natalie Ong noted that it was “business as usual” for the REIT as its DPU stood in line with expectations at 50% of their FY2024 forecast.
Gross revenue, however, fell by 2.7% y-o-y to $72.4 million due to the depreciation of the Japanese yen (JPY) against the Singapore dollar (SGD) but was offset by the contributions from the two new nursing homes added in October 2023.
The REIT’s distributable income rose by 3.5% y-o-y to $45.6 million as it has outstanding yen forward exchange contracts that were partly moderated by higher interest expenses from the funding of capital expenditures (capex) and new acquisitions, note Lock and Ong in their July 29 report.
At the distribution income level, the REIT remains “well hedged”, say the analysts, referring to the REIT’s realised foreign exchange (forex) gain of $4.7 million, which mitigated the impact of the weaker JPY.
“In addition to fully funding its yen acquisitions, it also extended its yen net income hedge until 1QFY2029, which provides income stability to unitholders, in our view,” they add.
As at end-June, PLife REIT’s stood at 35.3% with an interest coverage ratio (ICR) of 10.6 times, the highest among the Singapore REITs (S-REITs) as at the same period. Its all-in interest cost averaged 1.35% in the 1HFY2024.
“PLife REIT indicated that 90% of its interest rate exposure is hedged into fixed rates. PLife REIT does not have any long-term debt refinancing needs until March FY2025,” the analysts point out.
With its strong balance sheet, the REIT has the ability to tap on growth opportunities, they add.
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Lock and Ong have kept their “add” call with an unchanged target price of $4.50.
“We like PLife REIT for its stability, backed by its defensive income structure with in-built rent escalation features,” they say.
DBS Group Research analyst Derek Tan also remains positive on PLife REIT, calling it “the one and only” and a “rare jewel” among S-REITs in a defensive industry.
The REIT was one of the few to see growth in the middle of a high-interest-rate environment, he notes in his July 29 report.
The REIT also offers earnings that are “highly visible, stable and sustainable” due to its “resilient” industry and long leases with downside risk protection, Tan adds.
Furthermore, he notes that the REIT owns three private hospitals in Singapore, which have captured the majority of the market.
Other pluses: forex risk that’s hedged till 1QFY2029, offering income stability and conservative gearing that optimally positions the REIT for acquisitions.
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The REIT’s renewal of the master lease for its Singapore hospitals also gives the REIT a “new lease of life” with rental upside for the next two decades. The master lease was renewed in 2021 and came with a 20-year extension of the lease tenure, a rent increment of some 40% and an 27% increase in net asset value (NAV).
“While the 40% rent increment kicks in from 2026, the lease guarantees 3% growth in rentals from FY2023 to FY2025 during the period of asset rejuvenation,” says Tan.
To him, the REIT’s next leg of acquisition growth will be the key re-rating catalyst. “The potential acquisition would entail exercising its right of first refusal (ROFR) on Mount Elizabeth Novena Hospital or expanding into a third pillar, although the timing of either is uncertain.”
Tan has kept his “buy” call on PLife REIT with an unchanged target price of $4.50.
“The stability offered by PLife REIT is a welcome trait in the midst of macro uncertainties and high interest rates, which have impacted returns for most S-REITs,” he says. However, PLife REIT’s financials continue to shine and remain resilient on the back of conservative capital and financial management strategies.”
OCBC Investment Research analyst Ada Lim also likes PLife REIT’s prospects, calling it a “beacon in the fog” as the REIT defends its uninterrupted track record of recurring DPU growth. PLife’s DPU, which came in at 49.2% of Lim’s forecast, met her expectations.
“We like PLife REIT’s long-term lease structures as they provide a steady stream of rental income and thus downside protection during market downturns,” Lim writes in her July 29 report.
“At the same time, there is also growth potential through rental escalations and upside sharing with tenants,” she adds.
The analyst has kept her “buy” call on the REIT with an unchanged fair value estimate of $4.29.
“PLife REIT’s current forward 12-month distribution yield of 4.2% screens attractive, in our view, at slightly more than one standard deviation (s.d.) above its five-year historical average of 3.7%, and we think this presents an opportunity for income-seeking investors to gain exposure to PLife ahead of expected significant DPU growth once renewal capex works at Mount Elizabeth Hospital are completed in 2026,” she writes.
Citi Research analyst Brandon Lee also notes PLife REIT’s growth as well as stable and predictable income streams.
“PLife REIT’s 1HFY2024 results illustrated the growth effect of its master leases in Singapore, sound acquisitions in Japan, and prudent yen hedges, while the balance sheet remained healthy with a high ICR of 10.6 times, low debt cost of 1.35%, and relatively low 35.3% gearing,” he writes in his July 27 flash note.
However, Lee is the only one to have a “neutral” call on PLife REIT due to valuations. Based on Lee’s estimates, PLife REIT has a P/B of 1.52 times and a yield of 4.1%.
Lee has also kept his target price unchanged at $3.61.
“We see muted share price reaction on slight results beat,” he says.
Units in PLife REIT closed 2 cents higher or 0.55% up at $3.64 on July 30.
