DBS Group Research has kept its "buy" call and raised its target price for Parkway Life REIT to $4.80 from $4.50, calling the owner of hospitals and nursing homes "a rare jewel" among S-REITs offering "highly visible, stable and sustainable offerings."
In their Nov 25 note, analysts Tabitha Foo and Derek Tan laud the REIT's position in a resilient industry along with long leases with downside risk protection.
They believe that the REIT's recent unit price correction is an attractive re-entry point. At current levels, the unit price implies an attractive forward FY2026 yield of 5.0%.
"A cross-check across four major valuation metrics: yield, yield spread, P/B, and implied asset return - points to an over-correction, positioning the stock for a rebound," the analysts say.
In a bid to grow its portfolio, Parkway Life REIT recently announced the acquisition of a chain of 11 nursing homes in France for $159.9 million, thereby building a key third market on top of Singapore and Japan.
The French nursing homes are acquired at an initial net property income yield of 6.5%, a premium above 4.75% fetched on average by other nursing home deals in France, the analysts say, citing data from Cushman & Wakefield.
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Foo and Tan believe that Parkway Life REIT's ability to extract a 1.5% spread vs. market competition could be deal-specific or a result of timing, where the sharp rise in interest rates could have provided a liquidity window for investors to enter the market.
"Looking ahead, with interest rates expected to decline in 2025-2026, we believe there is certainly potential to compress yields with NAV upside," they add.
Another positive aspect is the 2021 renewal of master leases for the three Singapore hospitals that form the core of the REIT's portfolio.
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Under terms of the renewal, the REIT is benefitting from a 40% rent increment, 27% rise in NAV, and 20-year extension of the lease tenure with effect from FY2026.
"Further, the upgrading works in Mount Elizabeth Orchard could boost underlying hospital income, driving potentially higher growth for the REIT in the medium term," state Foo and Tan, referring to one of the three hospitals here.
"Meanwhile, distributions are projected to increase at around 2% p.a. in FY2024 to FY2025, with minimal downside," they add.
The analysts acknowledge that DPU growth for FY2024 to FY2025 is muted due to the renovation of Mount Elizabeth Orchard and the provision of rent rebates.
However, they project DPU to jump 20% in FY2026 to a yield of 5%, a level which is close to 1 standard deviation above the REIT's historical mean.
"In addition, the stronger cash flows could also potentially drive a re-rating of its NAV towards the $3.00 level," add Foo and Tan, alluding to how Parkway Life REIT is a rarity among S-REITs in trading at a premium over its NAV.
"In the medium term, we expect Parkway Life REIT to maintain its premium valuations for the foreseeable future and remain excited about its ability to continue to acquire and grow inorganically," they add.
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Organic growth aside, the REIT's sponsor, IHH Healthcare Q0F , has another hospital Mount Elizabeth Novena that can potentially be acquired by the REIT under its rights of first refusal arrangement.
The hospital is valued at around $2 billion and if and when is acquired by the REIT, will be a new growth catalyst, the DBS analysts say.
They note that the REIT's medium-term fair value ranges from $4.54 to $5.13, supported by historical multiples.
"We advocate investors to look to the long term and continue to add to this name," the analysts say.
Parkway Life REIT closed at $3.70 on Nov 25, up 1.09% for the day.
