Parkway Life REIT - UOB Kay Hian 2021-02-09: Thriving & Winning Through Collaborations With Sponsor

PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life REIT - Thriving & Winning Through Collaborations With Sponsor

We expect the extension of Parkway Life REIT's master leases for three hospitals in Singapore to come with an increase in rents of 12% for the first year of the new 15-year master leases, downside protection with annual rent revision at CPI + 1% and a new option to extend for another 15 years (23 Aug 37 to 22 Aug 52). The comprehensive package will foster future collaborations with its sponsor.
Maintain BUY. Target price: S$4.38.

Parkway Life REIT (SGX:C2PU) reported DPU of 3.57 cents (+6.7% y-o-y) for 4Q20, bringing 2020 DPU to 13.79 cents (+4.5% y-o-y). The results included release of S$905,000 for COVID-19 related relief measures (Parkway Life REIT previously retained S$1.4m in 9M20). See Parkway Life REIT's Dividend History.

Parkway Life REIT's gross revenue and NPI increased 9% and 4.2% y-o-y respectively due to contribution from three nursing homes acquired in Dec 19, one nursing home acquired in Dec 20, higher rent from Singapore properties (minimum guaranteed rent increased 1.17%) and appreciation of the Japanese yen. Excluding a one-off reclassification of insurance reimbursement received in 4Q19, we estimate growth in gross revenue at 4.5% y-o-y in 4Q20.

Interest expenses declined by 21.1% y-o-y. Parkway Life REIT’s all-in cost of borrowings declined by 0.27ppt y-o-y to 0.53% due to lower interest costs for the Singapore dollar debt and extension of interest rate hedges for Japanese yen debt at lower interest rates.

Parkway Life REIT secured loan facilities in 4Q20 and extended the maturity of an existing facility to term out debts due in 2021. Thus, it has no debt refinancing till 2022. Its weighted debt maturity has increased 0.7 years q-o-q to 3.5 years.
Parkway Life REIT’s gearing remained healthy at 38.5%. It has debt headroom of S$244m and S$475m respectively before reaching the regulatory limit on aggregate leverage of 45% and 50%. Its interest coverage ratio stood at 18.1x.

The initial lease term of 15 years for Parkway Life REIT’s Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital in Singapore ends on 22 Aug 22. Negotiations between Parkway Life REIT and master leasee Parkway Hospital Singapore (subsidiary of Parkway Pantai owned by IHH Healthcare (SGX:Q0F)) are underway on exercising the option to extend the leases for another 15 years (23 Aug 22 to 22 Aug 37). The extension of leases is expected to be finalised by 2H21.
Management targets to call for an EGM to seek approval from unit holders for the extension, which is a related-party transaction, by end-21.

Improved profitability for the three private hospitals provides an opportunity for Parkway Life REIT to negotiate for higher rents. We expect the comprehensive package to encompass:
1. Rents for the first year (23 Aug 22 to 22 Aug 23) of the 15-year extension to increase by 12%;
2. the lease structure with downside protection provided by annual rent revision formula of CPI + 1% to be maintained; and
3. the addition of another option to extend the master leases for another 15 years from 23 Aug 37 to 22 Aug 52.
4. Obligations to rejuvenate the three hospitals to enhance operational efficiency.

Successful completion of the extension would pave the way for future collaborations between Parkway Life REIT and its sponsor Parkway Holdings. They could involve:
1. Parkway Life REIT acquiring Mount Elizabeth Novena Hospital; and
2. partnership in overseas expansion whereby IHH Healthcare acquires the healthcare operators while Parkway Life REIT acquires the healthcare assets.

Parkway Life REIT has acquired a nursing home in the Greater Tokyo Region in Japan for a total consideration of ¥1.65b (S$21.2m) in Dec 20. The property is located in Kamagaya City in the Chiba Prefecture, and is a 40-minute train ride from Tokyo Station. The acquisition was made at 4.6% below valuation and provides net property income (NPI) yield of 6.4%. It provides for a fresh 20-year master lease, which lengthens the weighted average lease to expiry of Parkway Life REIT’s Japan portfolio by 2.2% to 11.4 years.

Parkway Life REIT has divested of P-Life Matsudo, a pharmaceutical product manufacturing and distribution facility, for a total consideration of ¥2.9b (S$37.1m) representing an attractive exit yield of 4.3% in Jan 21. The sale price is 19.8% above net book value and Parkway Life REIT will be recognising an estimated gain on disposal of investment property of S$5.1m.

Parkway Life REIT has been included in the FTSE EPRA NAREIT Global Developed Index since 19 Sep 20. The index was developed by FTSE Russell in collaboration with the European Public Real Estate Association (EPRA) and National Association of Real Estate Investment Trusts (NAREIT) in the US. It tracks the performance of listed real estate companies and REITs worldwide.

We forecast DPU of 13.7 cents from Parkway Life REIT for 2021, 15.1 cents for 2022 and 16.0 cents for 2023. The extended master leases will start contributing from 23 Aug 22.
Maintain BUY. Our target price of S$4.38 is based on dividend discount model (cost of equity: 5.5%, terminal growth: 2.0%).
See Parkway Life REIT Share Price; Parkway Life REIT Target Price; Parkway Life REIT Analyst Reports; Parkway Life REIT Dividend History; Parkway Life REIT Announcements; Parkway Life REIT Latest News.
Catalyst to Parkway Life REIT Share Price:
- Extension of leases for Singapore hospitals.
- Yield-accretive acquisitions.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-02-09

SGX Stock Analyst Report BUY MAINTAIN BUY 4.38 UP 3.800