CGS-CIMB Group Research analyst Lock Mun Yee has downgraded Parkway Life REIT (PREIT) from “add” to “hold” with an unchanged target price of $5.05, due to its higher share price in recent months with limited upside.
“While we like PREIT for its stability, backed by its defensive income structure with inbuilt escalation features, its share price has outperformed in recent months and near-term upside appears limited,” says Lock.
However, Lock continues to be somewhat positive on PREIT, as it reported a 1QFY2022 ended March revenue of $30.7 million, up 2.3% y-o-y mostly due to contributions from three Japan properties acquired in 2021 and higher rent from Singapore properties, partly offset by divestment of PLife Matsudo and depreciation of the Yen.
Net property income (NPI) also grew 1.9% y-o-y to $28.6 million, translating into a slightly lower NPI margin of 93.1% as compared to 93.4% in 1QFY2021. “1QFY2022 performance was in line with our projections, at 24% and 24.3% of our FY2022 revenue and NPI forecasts respectively,” says Lock.
See: Parkway Life REIT posts 1Q21 DPU of 3.57 cents, up 7.4% y-o-y
PREIT’s gearing stood at 34.5% at end-1QFY2022 with an interest cover of 20.2x.
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In addition, Singapore hospitals achieved 1.6% and 1% y-o-y increase in 1QFY2022 revenue and NPI to $17.8 million and $17 million respectively, underpinned by an in-built rental escalation structure of 1.66% for the period from Aug 23, 2021 to Aug 22.
Under the new master lease agreement (MLA) and renewal capex agreement, PREIT will benefit from guaranteed rents from Aug 23 till FY2025 with 2% and 3% y-o-y step-up in rent for the interim period and the downtime period respectively. As such, this provides PREIT with strong income visibility.
In addition, the annual rent review formula will kick in from FY2026 to FY2042, providing PREIT with inbuilt organic growth.
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Furthermore, with its triple-net lease structures, PREIT is shielded from higher inflation-related expenses.
Moreover, its Japan operations reported a 3.1% and 2.1% y-o-y rise in 1QFY2022 revenue and NPI respectively to $12.8 million and $11.5 million respectively, due to contributions from three properties acquired in 2021, partly offset by a depreciation in the JPY interest rate and income.
PREIT indicated that it has hedged 81% of its interest rate exposure through new JPY interest rate hedges put in place in March. Management has also guided that it has hedged its income from Japan operations for FY2022-FY2023, providing income stability to unitholders.
As at 10.30pm, units in PREIT are trading at 8 cents down or 1.61% lower at $4.88 at a FY2022 P/B ratio of 2.04x and dividend yield of 2.85%.
