Brokers’ take: CGS-CIMB upgrades Parkway Life Reit to ‘buy’ with lower target price

CGS-CIMB upgraded its call on Parkway Life Real Estate Investment Trust : C2PU 0% (Reit) to “buy” from “hold”, after the Reit announced higher topline figures for the first quarter of 2023.

The healthcare Reit’s distribution per unit (DPU) of S$0.0365 for Q1 was within expectations at 24.8 per cent of CGS-CIMB’s forecast for FY2023.

The brokerage’s upgrade was based on Parkway Life Reit’s recent unit price decline of almost 10 per cent since March 2023.

This implied a potential total return of 17 per cent, said its analysts on Tuesday (Apr 25).

While CGS-CIMB maintained its estimates for the Reit’s DPU for FY2023 to FY2025, its target price on the Reit was lowered to S$4.50 from S$4.78 previously. This was to factor in a higher cost of equity as well as a higher Japanese 10-year bond yield.

Its analysts said they like the Reit for its stability, highlighting its defensive income structure with in-built rent escalation features – particularly its long-term lease structure with downside protection and weighted average lease expiry of 16.8 years.

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Parkway Life Reit saw a dip in Japan revenue in Q1 2023 following the depreciation of the yen. Despite that, CGS-CIMB analysts said that the Reit’s net income from its Japan portfolio remains hedged until Q1 2027, providing income stability to unitholders.

While they acknowledged that the Reit’s gearing has risen in the latest quarter, they also highlighted that its interest coverage ratio as at the end of Q1 FY2023 remained the highest among Singapore Reits.

Units of the Reit traded 0.5 per cent or S$0.02 lower at S$3.93 before the midday break.