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Broker’s Call: Parkway Life REIT Q1 2023 was Business as Usual – Upgrade to Add
April 28, 2023
We all know that healthcare is a solid defensive sector in the stock market for investors. That’s also true of the healthcare sector in Singapore’s REIT market.
Fortunately, investors can access healthcare REITs in Singapore but they’re not that common. In fact there are only two.
The biggest – Parkway Life REIT (SGX: C2PU) – reported its Q1 2023 numbers earlier this week. With its shares up just over 3% so far in 2023, did investors get another solid quarter from Parkway Life REIT?
Revenue and NPI up double digits; DPU rises 2.5%
The healthcare REIT – which owns 57 nursing homes and four hospitals/medical centres across Singapore, Japan, and Malaysia – saw its gross revenue and net property income (NPI) rise by 21.7% and 23.5% respectively.
This was mainly due to the contribution from five nursing homes acquired in September 2022, as well as higher rents from its Singapore properties.
Distributable income in Q1 2023 rose 2.5% year-on-year to S$22.1 million. Meanwhile, the all-important DPU for Q1 2023 – which will be paid out as a H1 2023 distribution given it pays its dividend on a semi-annual basis – rose in line with distributable income, notching up a 2.5% year-on-year increase to 3.65 Singapore cents.
Higher Singapore revenue offsets weaker Japan
The higher revenue from its Singapore properties came from new master lease agreements. Singapore account for around 70% of total sales and NPI for Parkway Life REIT during the quarter.
Even with the contributions from the Japan nursing homes, the Japan operations reported a 7.5% decline in NPI to S$10.7 million in Q1 2023.
Why? This was down to the depreciation of the Japanese Yen (JPY). Having said that, though, Parkway Life REIT remains well hedged at the distribution income level.
That means unit holders can expect to have visibility on distribution payouts, despite the FX volatility. Indeed, its JPY net income is hedged until Q1 2027 – providing stability from the income perspective.
Gearing increases slightly
As of the end of Q1 2023, Parkway Life REIT had a gearing ratio of 37.5%, up from 36.4% as of the end of 2022.
Additional capital expenditure funding, as part of its Capex Renewal Agreement for its Singapore hospitals, was the culprit.
Even so, its interest coverage ratio (ICR) is robust – at 15.6 times – and remains among the highest in the S-REIT universe.
Additionally, its all-in interest cost stood at 1.19% as of 31 March 2023, with 78% of its debt hedged into fixed rates.
Upgrading Parkway Life REIT to Add
The team at CGS-CIMB Securities leaves our FY2023-2025 DPU estimates unchanged and we think Parkway Life REIT’s outlook remains stable given its long-term lease structure (with downside protection) and a very long weighted average lease expiry (WALE) of 16.8 years.
We do assume a slightly higher cost of equity, though, and that means our DDM-based target price moves down to S$4.50 (versus S$4.78 previously).
But we remain fans of Parkway Life REIT given its stability, backed by its defensive income structure. Having fallen 10% since March, we upgrade our rating on Parkway Life REIT’s shares to ADD.
Re-rating catalysts include accretive acquisitions, while downside risks include deflationary periods.
Disclaimer: CGS-CIMB Securities REITs Analyst Mun Yee Lock doesn’t own shares of any companies mentioned.