Parkway Life REIT is set to continue driving growth in asset recycling, as it looks to build a potential third pillar in matured markets, say DBS Group Research. As one of Asia's largest listed healthcare REITs, Parkway Life surprised the market when it was included in the FTSE EPRA Nareit Global Developed Index last week, sending its share price above its pre-Covid-19 high of $3.74. 

Parkway Life REIT invests in income-producing real estate and real estate-related assets used primarily for healthcare and healthcare-related purposes. 

DBS Group Research analysts Rachel Tan and Derek Tan are maintaining “buy” on the REIT, with a 12-month target price of $4.00.

Parkway Life REIT’s inclusion in the FTSE EPRA Nareit Global Developed Index will be effective after September 18. “Despite PREIT commanding a premium and maintaining its share price during the Covid-19 pandemic with its resilient earnings visibility, we believe that its indexation will increase its visibility to many institutional investors and index funds. Consequently, this will further validate its premium,” the analysts write in a September 4 note.

The first 15 years of the 15+15 years master lease for its three Singapore hospitals with its sponsor via Parkway Hospitals Singapore will be expiring on Aug 22, 2022, note the analysts. “We understand that discussions are currently underway. Our base case expectation is that the master lease will be renewed for the next 15 years, with the lease structure to be maintained.”

Parkway Life REIT will deliver steady distribution per unit (DPU) growth through its three-pronged growth plans, note analysts, namely asset-recycling strategies, venturing into a new market (third pillar) and acquisition pipeline from its sponsor.

While asset-recycling activities for its Japan assets have been sporadic, the analysts believe that this will continue to drive growth given its successful track record. However, the timing of this exercise remains uncertain. 

As its Japan assets have grown to a decent size, contributing about 40% of the group’s gross revenue, the management believes that it is timely to look into building a third pillar for the company’s for its next growth phase, in addition to asset recycling and acquisition pipeline from its sponsor, say analysts. 

In July, the manager of Parkway Life REIT reported a DPU of 3.36 cents for 2Q20 ended June, 2.5% higher than the 3.27 cents in 2Q19.

Gross revenue for 2Q20 grew 4.9% y-o-y to $30.3 million mainly due to revenue contribution from three Japan nursing rehabilitation facilities acquired in 4Q19, higher rent from Singapore properties as well as the appreciation of the Japanese Yen.

See: Parkway Life REIT reports 2.5% higher 2Q20 DPU of 3.36 cents

“We continue to like Parkway Life REIT for its strong earnings visibility, which is a positive attribute especially in the current volatile and uncertain market outlook,” say the analysts. 

“We believe that Parkway Life REIT will continue to deliver steady DPU growth through its three-pronged growth plans: asset-recycling strategies,  venturing into a new market (third pillar), and acquisition pipeline from its sponsor while maintaining its defensive stance in expansion”, they add.

As at 12.17pm, units in Parkway Life REIT are trading at 25 cents higher, or 6.49% up, at $4.10.