Analysts from CGS International (CGSI) and Citi Research have maintained their “add” and “neutral” calls on Parkway Life REIT after the REIT reported gross revenue of $108.5 million in its 3QFY2024 ended Sept 30 business update. The REIT also reported a distribution per unit (DPU) of 11.3 cents in 9MFY2024.
CGSI’s Lock Mun Yee and Natalie Ong have kept their target price at $4.91 while Citi’s Brandon Lee has maintained his target price at $3.61. The REIT’s 9MFY2024 DPU stood relatively in line with the analysts’ estimates at 75.5% of CGSI’s FY2024 forecasts and 77% of Citi’s full-year estimates.
On Oct 21, Citi upgraded its target price to $4 after Parkway Life REIT's recent acquisition of a nursing home in Osaka and a lower cost of debt reflected a higher growth rate and slightly lower portfolio cap rate. Lee keeps his "neutral rating" given an about 4% total return.
Parkway Life REIT’s lower gross revenue was due to the depreciation of the yen against the Singapore dollar, but this was partially offset by contributions from three nursing homes acquired in October 2023 and August this year, note the CGSI analysts. Meanwhile, its 9MFY2024 income available for distribution of $68.3 million was 2.8% higher y-o-y, due to foreign exchange gain from the REIT’s yen forward exchange contracts. The REIT’s realised foreign exchange gain of $7.8 million also mitigated the impact of the weaker yen.
At the same time, the analysts also note that the REIT’s Singapore operations provided a stable income with flat revenue and net property income (NPI) on a y-o-y basis due to the straight-lining of rental income under the new master lease agreements that commenced in August 2023.
“Parkway Life REIT remains well hedged at the distribution income level, in our view, with yen net income hedges put in place until 1QFY2029. In addition, the REIT announced it purchased a 138-bed nursing home in Osaka for $20.7 million in August,” the analysts write. “According to management, this acquisition should bolster Parkway Life REIT’s Japan portfolio to $676.8 million and add about $1.1 million in annual gross rental income to the REIT’s revenue.”
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Lock and Ong note that the REIT has no debt refinancing needs until September 2026, with its gearing ratio at 37.5% as at end September 2024. Its interest coverage ratio (ICR) of 10.2 times as at end-9MFY2024 remained the highest among Singapore REITs (S-REITs), while all-in interest cost ticked up marginally q-o-q to 1.36% at end-9MFY2024.
The REIT has 87% of its interest rate exposure hedged into fixed rates. They also add that in 3QFY2024, Parkway Life REIT put in place two seven-year yen loans to refinance its loans maturing in FY2025, thus extending its debt expiry to 3.8 years, as well as lengthening its interest rate swaps for another four to seven years.
Lock and Ong like Parkway Life REIT for its stability, backed by its defensive income structure with inbuilt rent escalation features. Its re-rating catalysts include accretive acquisitions, while downside risks include deflationary periods whereby Singapore’s rent reversions would revert to 1% or when potential cost overruns from its asset enhancement initiatives (AEI) under its capex renewal exercise.
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In addition to their unchanged target price, Lock and Ong have also kept their FY2024-FY2026 DPU estimates unchanged
Likewise, Lee from Citi says that the REIT’s business update illustrated the growth effect of its master leases in Singapore, with three decent acquisitions in Japan and prudent yen hedges.
He adds that the REIT’s balance sheet remained “solid” with high ICR, low debt costs of 1.36% and manageable 37.5% gearing.
“Parkway Life REIT has outperformed S-REITs ytd, but we maintain our “neutral” rating on valuation and see DPU-accretive acquisitions and, or major AEIs as key share price catalysts from these levels,” he says.
Lee’s target price is derived from the average of the dividend discount model (DDM) and revalued net asset value valuations.
As at 11.59am, units in Parkway Life REIT are trading 1 cent higher or 0.251% up at $4.
