Following Parkway Life REIT’s acquisition of 11 nursing homes in France for EUR111.2 million ($159.9 million), Citi Research analyst Brandon Lee has maintained his “neutral” on the REIT’s valuations with an unchanged target price of $4.
Parkway Life REIT will acquire 11 nursing homes, 100% funded by equity fund raising (EFR), marking the REIT’s maiden reentry into a third key market after Singapore and Japan. The nursing homes are located across six regions in France, and the portfolio comprises 850 beds across net lettable area of about 42,600 sq m (or 0.46m sq f) and enjoys committed occupancy of 100%.
The REIT’s has also concurrently expanded its investment mandate, whereby its new strategy with effect from Nov 21 is to invest primarily in income-producing real estate and/or real estate-related assets, instead of just within the Asia-Pacific region, used primarily for healthcare and/or healthcare-related purposes, Lee notes.
The acquisition cost of EUR111.2 million represents a 3.5% discount to independent valuation of EUR115.4 million; resulting in a “decent” about 2% distribution per unit (DPU) accretion and bringing about future growth opportunities in Europe, says Lee.
The analyst adds that post acquisition, France will contribute 6.6%/8.1% of Parkway Life REIT’s assets under management(AUM)/revenue, with Singapore still dominating at 62.5%/57.5%, followed by Japan at 30.7%/34.2%.
“We estimate gearing will fall 2.6% percentage points (pts) to 34.9%, which implies debt headroom of about $210 million before hitting 40%. Parkway Life REIT guided that there may be cost savings from entering into cross-currency swaps and lower tax rate,” he says.
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The REIT will fund its acquisition through EFR with the proposal of a private placement (PP) to raise no less than about $180 million, with the expected issue price of $3.80 - $3.88/sh.
This represents 2.8% - 4.8% discount to last closing price of $3.99; 2.7% - 4.7% discount to volume-weighted-average price (VWAP) of $3.99; 1.5% - 3.5% discount to adjusted VWAP of $3.94 and premium of 65.2% - 68.7% to 3Q2024 net asset value of $2.30.
Of the $180.0 million in PP proceeds, about 89% will be for the above-mentioned acquisition and about 11% for professional fees/expenses, including $4.2 million to be used as a buffer to mitigate forex fluctuations, Lee notes.
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The analyst says that this acquisition should bring income stability to Parkway Life REIT, in view of the portfolio’s 100% committed occupancy, long WALE of 12 years and indexed rent escalations.
He adds that a new long-term strategic partnership is now formed with the vendor – DomusVi Group, which will provide the REIT with potential future opportunities on consolidation as DomusVi wishes to go asset-light.
“From a sector standpoint, there are strong structural trends in France’s nursing home sector, in view of healthy demand, strong governmental support and high-fragmentation,” Lee notes.
However, some negatives include the small-scale of the acquisition, and softening interest rates in Europe.
Lee thinks that the acquisition could have been funded with debt as based on his estimates using 50%/50% debt/equity funding, the acquisition could have resulted in greater DPU accretion of 2.4% instead of currently-guided 1.6%, although gearing would have been higher at 38.4%.
As such, the analyst derives his target price of $4 for Parkway Life REIT using an average of his dividend discount model and restated net asset value valuations, with no potential acquisition factored into his forecast.
As at 9.23am, units in Parkway Life REIT are trading 14 cents lower or 3.509% down at $3.85.
