Analysts from CGS-CIMB Research and Citi Research have maintained their “hold” and “neutral” calls on Parkway Life REIT after the REIT announced its acquisition of two nursing homes in the Greater Tokyo region on Sept 20.
The nursing homes were acquired from Daiwa House Industry for JPY2.88 billion ($29.4 million), or 11.1% below its independent valuation.
See also: Parkway Life REIT acquires two new nursing homes in Tokyo region for $29.4 mil
CGS-CIMB analyst Lock Mun Yee has kept her target price on Parkway Life REIT at $5.06, while Citi’s Brandon Lee has maintained his target price at $5.02.
In his report, Lee says that the acquisitions underline the REIT’s established presence and strong network in Japan's nursing homes sector since venturing there in 2008.
However, it sees a tighter 5.2% net property income (NPI) yield, compared to the yield of 5.7% and 5.9% in its two preceding acquisitions in Tokyo and Chiba in June and December 2021 respectively, and there will be continued cap rate compression in this resilient asset class, he says.
See also: Test debug host entity
Lee notes that Parkway Life REIT expects the acquisition to be accretive to the REIT’s distribution per unit (DPU), but did not share specific numbers, but he estimates an FY2021 pro-forma DPU accretion of about 1%.
His estimates are predicated on a 5.2% NPI yield, 1% debt cost, 100% debt-funding structure using JPY loans and 20% of fees paid in units.
Following this acquisition and its three earlier acquisitions in Japan, he estimates Parkway Life REIT’s gearing would expand 1.7% percentage points (ppt) to 34.2%, implying a debt headroom of $225 million to $450 million before hitting the 40-45% gearing level.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
Assets under management contribution from Japan would rise by about 2 ppt to 37%, while NPI will rise by 1 ppt to 41%.
On a broader view, Lee says that Japan's accommodative monetary policy has also helped PREIT to deliver an estimated 1% DPU accretion in a challenging acquisition landscape for most S-REITs. This is despite Parkway Life REIT underperforming the broader S-REIT sector, dropping by 10% ytd compared to 7% across the sector.
Lee also sees that this acquisition has established two new collaborations with Daiwa House Industry and Zen Wellness, which could enlarge future acquisition opportunities and diversify its operator base, respectively.
Separately, CGS-CIMB’s Lock also agrees with Lee’s point on the acquisitions, saying that this will likely extend its portfolio’s weighted average lease expiry (WALE) from 17.05 years to 17.21 years, thus improving its income resiliency.
Speaking on the DPU, Lock estimates a DPU boost of 0.02% to 0.25% with the acquisitions and notes that Parkway Life REIT expects to fund the acquisition with yen-denominated debt, to provide a natural hedge for foreign exchange risks arising from yen-denominated assets.
Furthermore, she says that at the distribution income level, Parkway Life REIT’s income remains “well hedged”, with its yen net income hedged till 1QFY2027 ending March 2027 (as at end-2QFY2022), providing income stability to unitholders.
As at 11.19am, shares of Parkway Life REIT were trading at $4.54, with a FY2022 P/NAV ratio of 1.9 and dividend yield of 3.07%, according to CGS-CIMB.
