Maybank Securities analyst Krishna Guha has initiated a “buy” call on Parkway Life REIT, Asia’s largest healthcare REIT, as he sees several factors going in its favour.
In his report dated Jan 8, Guha notes the REIT’s strong track record and earnings visibility, strategic growth plan and favourable cost of capital.
Since its initial public offering (IPO) in 2007, Parkway Life REIT’s distribution per unit (DPU) has grown by 134%. Its net asset value (NAV) has also grown steadily, Guha points out.
In addition, the REIT has a visible revenue and distribution growth for the analyst’s forecast years from FY2024 to FY2026 with a renewed master lease for its Singapore hospitals in place. The REIT will also enjoy stable revenue at least thanks to adjustments to inflation.
The REIT also has a fairly diverse portfolio of properties in three markets, Singapore, Japan and France. The REIT announced its intention to enter the French market by acquiring 11 nursing homes in the country from DomusVi Group. the third largest aged care operator in Europe. The acquisition was completed on Dec 20, 2024.
“Parkway Life REIT is in the right sector with a strong and supportive sponsor. Demographics, income and supportive policies are fuelling the growth of healthcare sector. [Its] sponsor, [IHH Healthcare], is a leading hospital operator and has granted right of first refusal (ROFR) for the Mount Elizabeth Novena hospital,” says Guha.
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He adds that the REIT has historically grown while capping its gearing and currently has leverage of 37.5%. “With a favourable cost of capital (4% yield and cost of debt of 1.4%), it is well positioned to capture further growth opportunities.”
With this, Guha has initiated a target price of $4.10, which represents an upside of 12% to the REIT’s $3.79 unit price as at his report. The target price is based on 7% cost of equity (COE) and a medium-term growth rate of 2%.
Based on his estimates, the REIT is trading at 1.55 times its P/B at historical mean and a tight yield spread at 130 basis points compared to its historical spread of 260 basis points.
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Despite the tight yield spread, the analyst sees that the REIT’s “attractive attributes and favourable sector” justifies its premium valuation.
Guha has also forecasted a DPU compound annual growth rate (CAGR) of 7.2% from FY2024 to FY2026 driven by in-built rent escalations in Singapore and the REIT’s acquisition in France.
Units in Parkway Life REIT closed 3 cents higher or 0.8% up at $3.79 on Jan 9.
