Parkway Life REIT
Limited near-term upside
CGS-CIMB analyst Lock Mun Yee has downgraded Parkway Life REIT (PREIT) from “add” to “hold” with an unchanged target price of $5.05, given how its recent price gains probably have limited further upside.
“While we like PREIT for its stability, backed by its defensive income structure with in-built escalation features, its share price has outperformed in recent months and near-term upside appears limited,” Lock writes in her April 25 note.
Nevertheless, she continues to be somewhat positive on PREIT, which on April 22 reported a set of earnings “in line” with her projections.
In 1QFY2022 ended March, the REIT’s net
property income was up 1.9% y-o-y to $28.6 million. Revenue in the same period was up 2.3% y-o-y to $30.7 million.
Its Singapore portfolio of the three 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 its new master lease agreement 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, thereby giving it strong income visibility.
In addition, the annual rent review formula will kick in from FY2026 to FY2042, providing PREIT with inbuilt organic growth.
Furthermore, with its triple-net lease structures, PREIT is shielded from higher inflation-related expenses.
The REIT’s portfolio of nursing homes in Japan, meanwhile, 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 end-1QYF022, the REIT’s gearing stood at 34.5%, with an interest cover of 20.2x. —