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CGS-CIMB upgrades Parkway Life REIT to 'add' on share price decline and potential total return

Felicia Tan
·2-min read

“We like Parkway Life REIT for its stability, backed by its defensive income structure with in-built rent escalation features."

CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong have upgraded Parkway Life REIT C2PU to “add” with a lower target price of $4.50 from $4.78 previously.

The upgrade comes as the REIT’s unit price declined around 10% since March, with a potential total return of 17%. That said, the lower target price comes as they assume a lower cost of equity (COE) of 6.26% from 6.06% previously as they assume a higher Japanese 10-year bond yield of 0.5% from 0.3% previously.

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“We like Parkway Life REIT for its stability, backed by its defensive income structure with in-built rent escalation features,” write Lock and Ong in their report dated April 25.

On April 25, Parkway Life REIT reported a distribution per unit (DPU) of 3.65 cents for the 1QFY2023 ended March, 2.5% higher y-o-y. The quarter’s DPU came in line with the analysts’ expectations at 24.8% of their forecast for the FY2023.

In the REIT’s results, it announced that the higher revenue from its Singapore portfolio was offset by the weaker Japanese revenue due to the depreciation of the Japanese yen (JPY). That said, the analysts note that the REIT remains “well hedged” at the distribution income level with its JPY net income hedged till 1QFY2027, which provides income stability to its unitholders, in their view.

Following the REIT’s business update, Lock and Ong have kept their DPU estimates for the FY2023 to FY2025 unchanged. To them, the REIT’s outlook remains stable with its long-term lease structure with downside protection and weighted average lease to expiry (WALE) of 16.8 years.

The way they see it, conducting accretive acquisitions is an accretive catalyst while deflationary periods, where the REIT’s Singapore rent revisions will revert to 1% when its annual rent formula kicks in is a downside risk. Potential cost overruns from its asset enhancement initiatives (AEI) under its capex renewal exercise is another downside risk.

As at 12.14pm, units in Parkway Life REIT are trading 5 cents higher or 1.29% up at $3.92.

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