OCBC Investment Research is initiating coverage on Parkway Life REIT (PLife REIT) with a "buy" call and fair value estimate of $4.27.
The way analyst Ada Lim sees it, the counter is defensive, has a stable portfolio and well-structured master leases translate to steady income streams with built-
in rental escalations for growth potential.
At this point, PLife REIT is one of Asia's listed healthcare REITs with a portfolio of 61 high quality and yield accretive healthcare assets – including private hospitals and medical centres in Singapore and Malaysia, and nursing homes in Japan – managed by 33 lessees, with a total valuation of $2.2 billion as at Sept 30, 2023.
"While S-REITs are generally considered a defensive sector, healthcare is an especially defensive subsector. We like PLife REIT’s long-term lease structures as they provide a steady stream of rental income and thus downside protection during market downturns," says Lim.
At the same time, there is also growth potential through rental escalations and upside sharing with tenants. A combination of organic rental growth, accretive acquisitions and prudent capital management has allowed PLife REIT to grow its distributions consistently since 2007, and the analyst looks favourably upon the REIT’s potential to continue along this trajectory, supported by secular megatrends such as a rise in foreign medical tourism in Singapore and an ageing population in Japan.
Lim notes that 2023 was a tough year for S-REITs and despite the challenging macroeconomic environment, PLife REIT was was able to post a 2.8% y-o-y increase in DPU to 10.99 cents in 9MFY2023 ended Sept 2023. Gross revenue
and net property income (NPI) increased by 24.6% and 26.2% to $110.9 million and $104.5 million respectively in 9MFY2023, thanks to full nine months contribution from five nursing homes acquired in Japan, as well as higher rent from the
Singapore portfolio following master lease renewals.
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"The combination of organic and inorganic rental growth more than offset higher
finance costs and the depreciation of JPY, allowing PLife REIT to continue its track record of uninterrupted DPU growth," says Lim.
Overall, Lim is positive on the counter. While a yield of about 4% might seem less attractive vis-à-vis other selected S-REITs, the analyst believes that the premium is justified given the defensiveness of the healthcare subsector, as well as PLife REIT's track record of steady DPU growth and risk profile.
"We note that PLife REIT is also trading at a forward 12 month P/B ratio of 1.3x, which represents more than one S.D. below the five-year historical average. In our view, this could present an attractive entry point for long-term investors seeking a stable and defensive income stream," adds Lim.
As at 10.00am, units in PLife REIT are trading 0.55% higher at $3.69.
