Despite ‘neutral’ call, analysts are upbeat on Parkway Life REIT amid expanding Japan footprint

CGS-CIMB has lifted its TP to $5.06 with higher DPU estimates for the FY2022 to FY2024

Analysts are upbeat on Parkway Life REIT (PLife REIT) following its latest acquisition announced on Sept 13.

PLife REIT announced the acquisition of three nursing homes – Blue Terrace Kagura, Blue Rise Nopporo and Blue Terrace Taisetsu – in the Hokkaido region in Japan for a total purchase price of 2.56 billion yen ($26.1 million), or 12.2% below independent valuation.

See: PLife REIT further expands footprints in Japan with acquisitions

With that, CGS-CIMB Research analyst Lock Mun Yee has kept a “hold” rating on PLife REIT with an increased target price of $5.06 from $5.05.

Lock observes that the properties are well-located with transport connectivity within the residential areas of Ebetsu and Asahikawa Cities in Hokkaido Prefecture. It expects the transaction to be completed by 3Q2022.

“The purchase is in line with the REIT’s strategy to acquire healthcare-related income producing assets and could boost its asset under management (AUM) by 1.2% to $2.2 billion,” explains Lock.

Post purchase, the REIT’s Japan portfolio will expand to $725.3 million, making up around 32% of its total AUM. Under the terms of the agreement, the REIT will take over the properties’ existing lease agreements which have a balance lease term of 19 years. This will likely extend its portfolio weighted average lease expiry (WALE) from 17.01 years to 17.05 years, thus improving its income resiliency, says the analyst.

The REIT expects to fund the acquisition with yen debt, to provide a natural hedge for foreign exchange risks arising from yen denominated assets. “That said, at distribution income level, PREIT income remains well hedged, with its yen net income hedged till 1QFY2027 (as at end 2QFY2022), providing income stability to unitholders,” says Lock.

According to management, the purchase will likely raise PLife REIT’s pro forma leverage ratio from 32.5% (as at end-June) to 33.4%.

“We expect the deal to be distribution per unit (DPU) accretive,” the analyst writes. “Based on the stated net income yield of 6.5%, we estimate the additional contributions could raise our FY2022-FY2024 DPU estimates by 0.27%-0.48%.”

However, Lock estimated a total return of less than 10% in the near term for the REIT as well.

Nevertheless, with its robust balance sheet, the analyst finds the REIT is well placed to continue tapping more inorganic growth opportunities. “We like PLife REIT for its stability, backed by its defensive income structure with in-built escalation features,” says Lock.

Meanwhile, Citibank Research analyst Brandon Lee has kept a “neutral” rating on the REIT with an unchanged target price of $5.02.

“We estimate a FY2021 pro-forma DPU accretion of 1.3%-1.4%, predicated on the 6.5% NPI yield, 0.9%-1% debt cost, 100% debt-funding structure using yen loans (in-line with the REIT’s guidance) and 20% of fees paid in units,” says Lee.

Following the acquisition, the REIT’s gearing would expand 0.9 percentage points (ppt) to 33.4%, implying debt headroom of $0.3 billion-$0.5 billion before hitting 40%-45%, writes Lee.

The analyst is forecasting AUM contribution from Japan to increase by about 1% to 36%, while net property income (NPI) is expected to rise by 1ppt to 41%, with Singapore still dominating with an AUM of 64% and an NPI of 59%.

Some downside risks the analyst foresees include the loss of master lessee as the properties are specialised medical facilities and have limited uses; the growth of lower-cost medical expertise and facilities in the region might draw medical tourists away from Singapore; competition from more medical centres and new entrants in Singapore; and changes in government healthcare regulations.

As at 11.16am, PLife REIT is trading at 3 cents down or 0.63% lower at $4.72 at a FY2022 P/B ratio of 1.95x and dividend yield of 2.99% according CGS-CIMB’s estimates.

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