CGS-CIMB stay positive on Parkway Life REIT, keep 'add' call and TP of $4.50

Analysts like PLife REIT for its stability, backed by its defensive income structure with inbuilt rent escalation features.

Following another set of “good results” for Parkway Life REIT’s (PLife REIT) C2PU 1HFY2023 ended June 30, analysts from CGS-CIMB have maintained their “add” call on the REIT with an unchanged target price of $4.50.

The REIT announced a distribution per unit (DPU) of 7.29 cents for the six-month period in line with 49.9% of analysts Lock Mun Yee and Natalie Ong’s full-year FY2023 forecast.

For its 1HFY2023, PLife REIT reported a 23.6% y-o-y increase in 1HFY2023 gross revenue to $74.4 million due to contributions from five Japan nursing homes acquired in September 2022 and higher rents from Singapore hospitals from the new master lease agreement. Distribution income to unitholders was also up 3.3% y-o-y to $44.1 million on the back of higher interest expenses.

Singapore revenue and net property income (NPI) accounted for 68.2% and 70% of the REIT’s total 1HFY2023 revenue and NPI levels, respectively, as rent from Singapore hospitals during the period increased under a new 20-year lease agreement which commenced in August last year. Singapore revenue rose 42.8% y-o-y to $50.8 million while NPI increased 44.4% y-o-y to $49 million.

However, the analysts note that the impact on distributable income was tempered by $13.7 million of adjustments from recognising rental income on a straight-line basis over the lease term period.

They add that PLife REIT  has maintained a strong balance sheet to tap growth opportunities , with gearing standing at 35.3% at end-1HFY2023. “Its interest coverage ratio (ICR) of 13.8x as at end-1HFY2023 remained the highest amongst S-REITs. All-in interest cost stood at 1.19% at end-1HFY2023,” say Lock and Ong.

“PLife REIT’s strong balance sheet should allow it to tap inorganic growth opportunities in existing markets or to build a third key market, which we believe could enhance its long-term prospects,” they add.

The analysts have kept their FY2023 to FY2025 DPU estimates unchanged and maintained their dividend discount model (DDM) based target price at $4.50. “We like PLife REIT for its stability, backed by its defensive income structure with inbuilt rent escalation features,” Lock and Ong say.

Their re-rating catalysts include accretive acquisitions, while downside risks include deflationary periods, during which the REIT’s Singapore rent revisions could revert to 1% as its annual rent formula kicks in again, or potential cost overruns from its asset enhancement initiatives under its capex renewal exercise.

As at 1.07pm, units in PLife REIT were trading 7 cents or 1.80% down at $3.81.

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