Broker’s Call: Parkway Life REIT Acquires 2 Japanese Nursing Homes for S$30 million

Parkway Life REIT dividend

Mun Yee Lock

September 23, 2022

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CGS-CIMB Analyst take

Investors find themselves in an environment of rising interest rates and multi-decade-high inflation. But can real estate investment trusts (REITs) in Singapore provide protection to portfolios?

Some investors think that more defensive REITs can, such as those related to healthcare. One such healthcare REIT listed in Singapore is Parkway Life REIT (SGX: C2PU).

Earlier this week, the REIT – which owns nursing homes and hospitals across Singapore, Malaysia and Japan – announced that it was acquiring two nursing homes in the Greater Tokyo region of Japan for a combined ¥2.88 billion (S$29.4 million).

The research team at CGS-CIMB Securities maintains our “HOLD” call and target price for Parkway Life REIT at S$5.06 (offering just over 12% upside from its current price of S$4.50).

So, for REIT investors interested in the healthcare sector, here’s all you should know about Parkway Life REIT’s latest portfolio additions.

Establishing new relationships

Parkway Life REIT agreed to acquire two nursing homes from Daiwa House Industry for a total consideration of ¥2.88 billion. That price came in 11.1% below an independent valuation.

The two properties are very new, having only been completed in 2021, and are well-located in residential areas of Edogawa Ward and Chiba City – with close connectivity to Tokyo.

This is the REIT’s first acquisition from Daiwa House and it kicks off a new collaboration with the company to hopefully provide a future pipeline of assets. The deal is expected to close by the end of this quarter.

As for the properties themselves, Parkway Life REIT will take over the existing lease agreements – with Zen Wellness Co – that have a balance term of 29 years.

We estimate that will likely extend the REIT’s weighted average lease expiry (WALE) from its current 17.05 years to 17.21 years. That should further improve its income resiliency.

The current tenant (Zen) is a well-established nursing home operator which operates 11 nursing homes in the Kanto/Greater Tokyo region.

DPU boost for unitholders

As for the all-important distribution per unit (DPU), or dividend, we expect this to be an accretive deal. We estimate that the additional contributions should lift Parkway Life REIT’s FY2022-2024 DPU by 0.02-0.25%.

Management said it expects the acquisition to be funded by Japanese yen-denominated debt, which should provide a natural hedge for foreign exchange risks arising from the yen-denominated assets.

Moving on to its gearing ratio, the deal (according to management) will see its gearing ratio rise from 32.5% (as of the end of June 2022) to 34.3% post the acquisition.

On the distribution level, Parkway Life REIT remains extremely well hedged with its yen-denominated net income hedged until Q1 2027. That provides rock-solid support and income visibility for unitholders.

Reiterate our Hold rating

Finally, we raise our FY2022-2024 forecast for Parkway Life REIT’s DPU by 0.02-0.25% to take into account the new income streams.

Meanwhile, our target price of S$5.06 for Parkway Life REIT shares remains unchanged. With a robust balance sheet, the REIT is well-placed to tap into more inorganic growth opportunities.

However, we think it has limited near-term upside so that’s why we retain our “Hold” rating.

This could change if the following potential re-rating catalyst of accretive acquisitions comes into play.

On the flip side, downside risks include deflationary periods whereby Singapore rent revisions would revert to a miniscule 1%, when its annual rent formula kicks in again.

Disclaimer: CGS-CIMB Securities REITs Analyst Mun Yee Lock doesn’t own shares of any companies mentioned.

About the Author: Mun Yee Lock