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Brokers' Digest: Parkway Life REIT, Cromwell European REIT, United Hampshire US REIT, Raffles Medical, Yoma Strategic

The Edge Singapore
The Edge Singapore • 11 min read
Brokers' Digest: Parkway Life REIT, Cromwell European REIT, United Hampshire US REIT, Raffles Medical, Yoma Strategic
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Parkway Life REIT
Price target:
OCBC Investment Research ‘buy’ $4.27

Stable portfolio with growth potential

OCBC Investment Research is initiating coverage on Parkway Life REIT (PLife REIT) with a “buy” call and a fair value estimate of $4.27.

The way analyst Ada Lim sees it, the counter is defensive, has a stable portfolio and well-structured master leases translate to steady income streams with built-in rental escalations for growth potential.

PLife REIT is one of Asia’s listed healthcare REITs with a portfolio of 61 high-quality and yield-accretive healthcare assets — including private hospitals and medical centres in Singapore and Malaysia, and nursing homes in Japan — managed by 33 lessees, with a total valuation of $2.2 billion as at Sept 30, 2023.

“While S-REITs are generally considered a defensive sector, healthcare is an especially defensive sub-sector. We like PLife REIT’s long-term lease structures as they provide a steady stream of rental income and thus downside protection during market downturns,” says Lim.

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At the same time, there is also growth potential through rental escalations and upside sharing with tenants. A combination of organic rental growth, accretive acquisitions and prudent capital management has allowed PLife REIT to grow its distributions consistently since 2007 and the analyst looks favourably upon the REIT’s potential to continue along this trajectory, supported by secular megatrends such as a rise in foreign medical tourism in Singapore and an ageing population in Japan.

Lim notes that 2023 was a tough year for S-REITs and despite the challenging macroeconomic environment, PLife REIT was able to post a 2.8% y-o-y increase in DPU to 10.99 cents in 9MFY2023 ended September 2023.

Gross revenue and net property income (NPI) increased by 24.6% and 26.2% to $110.9 million and $104.5 million respectively in 9MFY2023, thanks to full nine months contribution from five nursing homes acquired in Japan, as well as higher rent from the Singapore portfolio following master lease renewals.

See also: RHB maintains ‘neutral’ on Japan Foods Holdings at lowered target price of 26 cents

“The combination of organic and inorganic rental growth more than offset higher finance costs and the depreciation of JPY, allowing PLife REIT to continue its track record of uninterrupted DPU growth,” says Lim.

Overall, Lim is positive on the counter. While a yield of about 4% might seem less attractive vis-à-vis other selected S-REITs, the analyst believes that the premium is justified given the defensiveness of the healthcare sub-sector, as well as PLife REIT’s track record of steady DPU growth and risk profile. — Samantha Chiew

Cromwell European REIT
Price target:
CGS-CIMB Research ‘add’ EUR2.15

Unlocking value

CGS-CIMB Research analysts have initiated coverage on Cromwell European REIT (CEREIT) with an “add” call and target price of EUR2.15 ($3.13), citing the successful execution of its redevelopment and reconstitution strategy as key factors.

Despite trading at a 37% discount to net asset value (NAV), analysts Natalie Ong and Lock Mun Yee note that the REIT’s recent divestments averaged 13.7%/21.4% above the latest valuations/purchase price, realising EUR40.3 million in capital gains and reaffirming its portfolio quality.

The analysts say that CEREIT has clear divestment and redevelopment strategies in place to unlock deep value — it consists of a EUR250 million mid-term redevelopment plan, of which about 80% has been announced, comprising five redevelopments.

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“We estimate that these could deliver about EUR60 million–EUR70 million upside to NAV, translating into 11–12 EUR cents, or a 4.7%–5.5% uplift in NAV/share (NAVPS). Within its long-term redevelopment pipeline, the redevelopment of Parc des Docks could lift NAV by up to EUR200 million, or 36 EUR cents per share, translating into about 16% NAVPS upside,” they say.

Ong and Lock believe that the mid- and long-term redevelopments could lift NAVPS by 21%, which the market has overlooked.

In addition, the analysts say that CEREIT’s portfolio will shift towards a more defensible composition of 60%/40% industrial/Grade A office assets, away from 46%/25%/19% industrial/Grade A offices/Grade B and C offices currently.

“CEREIT’s light industrial/logistics assets are benefitting from secular trends, such as higher near-shoring and growth of e-commerce penetration in Europe, which EuroCommerce expects to increase from 10% - 25% of total retail sales to about 30% by 2030 as the market matures,” they add.

As the flight to quality and corporate commitments to net zero emissions has resulted in Grade A/A green offices accounting for about 60%–80% of office take-up, the analysts believe that earnings will be supported by CEREIT’s portfolio recalibration, which will result in a future-ready portfolio with lower vacancy and devaluation risks.

Finally, Ong and Lock note that the EU market is at an inflection point, and are therefore keen on buying into Europe’s nascent recovery near the bottom of the cycle.

Citing headline inflation in the EU hitting a two-year low of 2.4% in October 2023 as a key indicator that the macroeconomic outlook is improving, Ong and Lock say that this could mitigate interest rate and valuation risks for CEREIT. — Nicole Lim

United Hampshire US REIT
Price target:
UOB Kay Hian 'buy' 64 US cents

Irresistible yield

US strip centre owner United Hampshire US REIT ODBU -

(UHREIT) offers an “attractive and irresistible” 2024 distribution yield of 9.2%, 5.3% above the 10-year US government bond yield of 3.9%, says Jonathan Koh of UOB Kay Hian.

In a Jan 8 note, Koh says UHREIT’s portfolio, focusing on grocery-anchored and necessity-based retail, is benefitting from continued growth of domestic consumption, population migration to suburban locations, overcoming of e-commerce disruption through adoption of omnichannel strategies and limited new supply and record-low vacancy of 6.6%.

“There is renewed interest from institutional investors, who are rediscovering the merits of retail assets and strip centres. UHREIT trades at P/NAV of 0.68x,” adds Koh, who has kept his “buy” call on UHREIT with a target price of 64 US cents (85.07 cents).

The industry outlook has turned positive, says Koh. “Personal consumption continues to power growth in the US economy and expanded by 2.4% in 3Q2023, supported by a low unemployment rate of 3.7% and growth in average hourly earnings of 4.0% y-o-y.”

According to Coresight Research, retailers plan to open 4,500 new locations compared with 3,500 closures, resulting in net new stores of 1,000. Retailers can more accurately pinpoint sites for successful stores utilising data analytics, add Koh.

Strip centres are also recovering after years of minimal construction, says Koh. “Supply of new retail space has been limited over the past decade since the Global Financial Crisis and continues to be crimped by high construction costs.”

According to Green Street, strip centres have the least new supply coming onstream over the next five years due to elevated construction costs and supply barriers, especially in dense affluent residential suburbs.

According to CBRE, availability for neighbourhood and community strip centres saw the largest drop of 0.5 percentage points (ppts) y-o-y to a record low of 6.6% in 3Q2023.

UHREIT’s industry peers are starting to outperform, says Koh. Share prices for industry peers listed in the US have rallied. Brixmor Property, Kimco Realty, Regency Centers and RPT Realty gained 12.0%, 21.7%, 12.7% and 22.0% respectively in 4Q2023.

The industry is consolidating, Koh adds. Regency Centers completed the acquisition of Urstadt Biddle Properties in August 2023 to expand in premier suburban areas. Kimco Realty will acquire RPT Realty to expand its presence in coastal and Sun Belt markets.

As at September 2023, 63.6% of UHREIT’s base rental income was derived from tenants providing essential services.

Its triple net leases require tenants to reimburse the landlord for property taxes, insurance and maintenance for common areas, which shelter UHREIT from the negative impact of inflation, says Koh.

Leases for anchor tenants typically have a built-in rental escalation of 5%–10% for every five to 10 years. Tenants typically do not have early termination rights, he adds.

UHREIT has invested US$12 million to develop a new 63,000 sq ft store on excess land within its St Lucie West property in Florida. Academy Sports + Outdoors, a Fortune 500 sporting goods retailer, has leased the new store for 15 years.

Construction was completed ahead of schedule and Academy Sports has commenced interior build-out. The new store opened in November 2023, ahead of the festive season, and provides “high-single-digit ROI”, says Koh.

UHREIT has completed refinancing for 2024. Aggregate leverage improved 0.3ppt q-o-q to 41.7% as of September 2023 due to the divestment of Big Pine Center.

UHREIT’s key bankers are Canadian Imperial Bank of Commerce and M&T Bank. It has completed the refinancing of its term loans due in 2024.

It only has a “small” mortgage loan of US$21.1 million maturing in March, says Koh, and there is no significant refinancing requirement until November 2026. The weighted average debt maturity is 3.2 years. — Jovi Ho

Raffles Medical Group
Price target:
CGS-CIMB Research ‘add’ $1.20

Holiday season, higher patient load

CGS-CIMB Research analyst Tay Wee Kuang is keeping his “add” call on Raffles Medical Group BSL -

(RMG) with an unchanged target price of $1.20 as December 2023 saw communicable disease infections peak for 2023.

Singapore’s Ministry of Health (MOH) estimates average daily Covid-19 infections reached a 2023 peak of 8,300 cases per day, with polyclinic attendances for acute respiratory infections (ARIs) also reaching a 2023 peak of 3,600 cases daily in December 2023.

CNA reported on Dec 27, 2023, that the current wave of Covid-19 infections has seen patient loads at RMG increase 30%–50% during the December period across its hospital and clinic network in Singapore, with other private clinic operators such as Healthway Medical and Fullerton Healthcare also experiencing higher patient loads.

With the rise in Covid-19 cases, hospitalisation from Covid-19 infections also rose. To preserve the capacity of public hospitals, MOH, on Dec 16, 2023, converted the Transitional Care Facility (TCF) at Changi Expo Hall 10 into a Covid-19 treatment facility (CTF) with 40 beds for Covid-19 patients.

According to the government tender site GeBIZ, RMG will manage Halls 9 and 10 of Changi Expo until February 2025 and can be called upon by MOH to run the halls as a TCF or CTF. “Operating a CTF should be more profitable for RMG considering the drastic 67.4% y-o-y decline in its 3QFY2023 ended September profit after tax when the facility was operating as a TCF instead of a CTF,” says Tay.

Tay thinks the higher patient load and outpatient attendance in 4QFY2023 supports his forecast of 9.1% net profit growth q-o-q to $13.5 million for 4QFY2023 with potential surprise on the upside due to the conversion of the Hall 10 TCF into CTF.

“However, we keep our estimates unchanged due to the lack of visibility on the facility’s operations,” says Tay, who has estimated that RMG’s overall profitability should also remain below FY2021–FY2023 levels in FY2024 given the high-base effect due to melt-off in contribution from Covid-19-related services since 2HFY2023. — Samantha Chiew

Yoma Strategic Holdings
Price target:
PhillipCapital ‘unrated’

Responding to challenging macro environment

Yoma Strategic Holdings is adapting well to the challenging operating environment of its home market Myanmar, says PhillipCapital analyst Paul Chew in an unrated report.

Myanmar’s GDP, in US dollar nominal terms, contracted 17.5% y-o-y in 2021 and 8.9% in 2022. Inflation is running at 20% per annum and the kyat is down 60% since 2021.

In response to these challenges, Yoma has been de-gearing its balance sheet, disposing of its non-core assets, localising costs as well as “rebalancing” its headcount, Chew points out.

“Following the pandemic and coup in 2021, Yoma has undergone a major de-leveraging and rightsizing exercise. Net debt has shrunk from US$326 million ($433.6 million) in September 2021 to US$134 million in September 2023. The company disposed of investment properties, restructured Yoma Central debt, resized food and beverage (F&B) operations, lowered manpower costs and generated operating cash flow,” says Chew.

Real estate development has been the key performer for Yoma. The division’s revenue has more than tripled in 1HFY2024 ended September 2023 to US$48 million.

As at September 2023, there is US$65.2 million of unrecognised revenue from the property division. Not included in this number are 515 of the 527 units at the Estella project, which have been sold and booked since the launch in October 2023.

Future launches include Phase 4 of Estella (163 units) and City Loft West third tower (247 units). There is another 6.2 million sq ft landbank which Yoma can develop on its own or with partners, says Chew.

Property earnings contributed to two-thirds of Yoma’s almost fourfold spike in ebitda to US$18.8 million in 1HFY2024. The next three major contributors were Wave Money, leasing and F&B.

Myanmar’s digital payment sector is dominated by Wave Money and KBZPay, operated by the country’s largest bank, KBZ Bank. Wave Money became a subsidiary of Yoma in December 2022 after the acquisition of an additional stake from Telenor.

In future, more money transfers will likely move into the digital wallet rather than via agents. Although KBZ Bank has the advantage of securing commercial customer deposits that can be used for digital money transfers, banks suffer from a small footprint of branches compared to the huge network of Wave Money agents, Chew points out.

In its leasing business, demand for Yoma’s fleet is expected to be positive with the resumption of business activities. Additionally, the expansion of Yoma Plus to offer financing plans is an opportunity in the current credit-constrained environment.

Lastly, Yoma’s F&B business has been managing a high-cost environment amid high import costs and additional fuel costs to cope with power cuts. The benefits of the difficult past two to three years are starting to bring results, as revenue achieves record levels of US$16.7 million in 1HFY2024.

“There are fewer competitors in casual dining and fewer options for consumers to spend their disposable income and leisure time,” says Chew. — Khairani Afifi Noordin

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