Broker Name: OCBC Investment Research
Date: 21 October 2024
Investment Rating
- Rating: BUY (as of 21 October 2024)
- Last Close: SGD 3.99
- Fair Value Estimate: SGD 4.48
- Parkway Life REIT (PLIFE) maintains a stable outlook amidst challenging market conditions. The REIT’s strong fundamentals and strategic capital management make it a favorable option for long-term investors.
Recent Financial Performance
- 9M24 Distribution per Unit (DPU): Grew by 2.8% year-on-year (YoY) to 11.3 Singapore cents. Despite the depreciation of the Japanese yen (JPY), distributable income was safeguarded through JPY net income hedges.
- Gearing: Increased to 37.5% as of 30 September 2024, following the acquisition of a nursing home in Osaka, Japan. However, the all-in cost of debt remains low at 1.36%.
- Gross Revenue and Net Property Income (NPI): For 9M24, gross revenue and NPI declined by 2.2% and 2.1% YoY, respectively. The JPY depreciation was partially offset by new contributions from acquired nursing homes in Japan and rental step-ups.
- Distributable Income: Amounted to SGD 68.3 million for 9M24, translating to a DPU of 11.3 Singapore cents (or 3.76 Singapore cents for 3Q24). This meets 73.7% of the full-year DPU forecast.
Investment Thesis
PLIFE is one of Asia’s largest listed healthcare REITs, with a robust portfolio of 64 healthcare assets across Singapore, Malaysia, and Japan. The REIT is known for its long-term lease structures, offering stability and growth potential through rental escalations and acquisitions.
- Defensive Sector: Healthcare REITs are typically defensive, with PLIFE benefitting further from its diversified healthcare assets.
- Portfolio: Comprises private hospitals and medical centers in Singapore and Malaysia, and nursing homes in Japan, totaling a portfolio valuation of SGD 2.25 billion as of 30 September 2024.
- Growth Potential: Continued potential for growth supported by trends such as increasing foreign medical tourism in Singapore and an aging population in Japan.
Capital Management
- Gearing and Debt Management: Gearing rose slightly due to recent acquisitions but remains manageable at 37.5%. About 87% of interest rate exposure is hedged, and the all-in cost of debt is stable at 1.36%.
- Loan Refinancing: The REIT has refinanced maturing loans due in 2025, including a short-term loan linked to recent acquisitions. This extends the weighted average debt term to 3.8 years, with no significant refinancing needed until September 2026.
Valuation and Performance
- Current Valuation: Trading at a forward 12-month price-to-book (P/B) ratio of 1.6x and a forward dividend yield of 3.7%, which are below and above the five-year historical averages, respectively.
- Investment Outlook: Long-term investors can consider buying on price pullbacks ahead of anticipated significant DPU growth, particularly after 2026, when renovation works at Mount Elizabeth Hospital are completed.
ESG Overview
- ESG Rating: Maintained as of December 2023. Although PLIFE actively promotes energy conservation, the proportion of green-certified buildings remains limited. Corporate governance could be improved with more independent board members.
- Business Ethics: A robust framework, including whistleblower protection, positions PLIFE ahead of many global peers.
Key Risks
- Interest Rates and Funding Costs: High interest rates could affect distributable income, impacting growth prospects.
- Tenant Issues: Risks include tenant defaults or refusal to renew leases, particularly in Japan.
- Cost Overruns: Potential overruns from capital expenditure programs or asset enhancement initiatives.
Future Catalysts
- Accretive Acquisitions: Further growth through acquisitions that enhance the DPU.
- Japanese Yen (JPY) Dynamics: A hawkish Bank of Japan (BoJ) could strengthen the JPY, which would positively impact PLIFE’s income.
- Rental Upside: Higher-than-expected performance of Singapore assets or successful renegotiation of Japan leases could drive additional revenue.
Conclusion
Parkway Life REIT continues to exhibit robust growth and stability. With a strategic approach to acquisitions, prudent debt management, and resilience in a defensive sector, it remains a solid investment for those seeking long-term income stability.
