OCBC Investment Research Analyst Ada Lim has maintained her “buy” call but lifts her fair value estimate on Parkway Life REIT (PLife REIT) from $4.29 to $4.48 after the REIT acquired a newly-built nursing property in Osaka on Aug 7.
PLife REIT completed the acquisition of Hibisu Higashi Sumiyoshi, a newly-built nursing home property in Osaka. In the acquisition announcement released on July 30, PLife REIT noted that the 138-bed property has a remaining lease term of approximately 30 years with an annual gross rental of JPY127.2 million ($1.1 million).
PLife REIT further noted that this would increase their average lease expiry from 16.05 years to 16.17 years as at June 30, and would also increase income diversification amongst properties and lessees from its Japan portfolio.
Lim notes that K.K BISCUSS is an existing lessee that contributes to less than 2% of PLife’s monthly rental in Japan.
According to PLife REIT, the purchase consideration of JPY2.4 billion is 9.1% below the property’s independent valuation of JPY2.7 billion as of June 30. The acquisition will be fully funded by JPY debt, and this is estimated to increase PLife REIT’s leverage ratio from 35.3% to 35.9% as of June 30, on a pro forma basis, Lim notes.
Lim states that PLife REIT’s management expects the acquisition to be distribution per unit (DPU) accretive, although it is not expected to have a material impact on FY2024 DPU or net tangible assets.
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Lim has adjusted the fair value estimate in view of the acquisition and a potentially more hawkish Bank of Japan (BOJ), with officials indicating that interest rates are likely to increase further as inflation is expected to continue firming.
As such, Lim has increased her FY2024 DPU forecasts by 0.1% and decreased her FY2025 DPU forecasts by 0.1%. Lim has also decreased the terminal growth rate by 25 basis points (bps) to 2%, in line with the target rate of inflation. Lim is of the opinion that higher interests costs in Japan could stifle acquisition opportunities, notwithstanding PLife REIT’s healthy debt headroom.
“Finally, we lower our risk-free rate assumption by 50 bps to 2.5%, which more than offsets a slight increase in our beta input from 0.56 to 0.58 as we refresh our data on a rolling basis,” Lim adds.
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Lim notes that the valuations look “less compelling” as PLife’s share price has rallied 14.2% since the last update on July 29.
As such, “it is now trading at a forward 12-month price-to-book (P/B) ratio of 1.7 times, and forward 12-month dividend yield of 3.6%, both of which are at their five-year historical average,” Lim notes.
Despite this being a less compelling entry point, Lim maintains her “buy” call given that healthcare is an especially defensive subsector. Lim favours “PLife’s long-term lease structures as they provide a steady stream of rental income and thus downside protection during market downturns.”
Furthermore, Lim recognises the further growth potential through rental escalations and upside sharing with tenants. Lim also expects significant DPU growth once renewal capital expenditure (capex) works at Mount Elizabeth Hospital are completed in 2026.
As at 3.13pm, units in PLife REIT is trading 3 cents less or 0.72% down at $4.14.
