Parkway Life REIT - DBS Research 2021-04-19: Capitalise On This Once In 15 Years Opportunity


Parkway Life REIT - Capitalise On This Once In 15 Years Opportunity

  • Upcoming renewal of Singapore hospitals master lease to deliver possible DPU upside of 7-23% to Parkway Life REIT.
  • Robust income visibility is likely to keep Parkway Life REIT as among the top picks of investors.
  • Possible introduction of a 3rd pillar to accelerate growth further.

Parkway Life REIT – a success story in the past 14 years and many more to come; delivered 4-fold total return since IPO.

  • In a blink of an eye, it has been almost 14 years since Parkway Life REIT (SGX:C2PU)'s IPO. Parkway Life REIT's share price has risen by more than 3 times from its IPO price, which works out a CAGR of 9%. On a total return basis, investors have enjoyed a return of more than 4 times since its IPO or 11% CAGR.
  • Given its strong track record of delivering positive returns and its stable earnings visibility, Parkway Life REIT has remained one of the favourite stocks among investors and has been trading at a high premium to NAV.

Sponsor IHH Healthcare supportive to grow the REIT.

  • While Parkway Life REIT has successfully delivered consistent growth in DPU throughout the years (kudos to Parkway Life REIT’s management team for their timely and conservative asset acquisitions), the end of the first 15 years of its master lease for its Singapore hospitals is fast approaching. The master lease will be expiring on 22 Aug 2022.
  • Given that the Singapore hospitals contribute up to ~65% of revenues and involves negotiations with Sponsor IHH Healthcare (SGX:Q0F) and an EGM is likely to be called for minorities to vote on the terms of the new master lease, we believe it is time for investors to focus on this.

Renewal of master lease a key catalyst to watch.

  • While there were initially some concerns on the renewal of the lease for the next 15 years, we believe its sponsor, IHH Healthcare, who is also the master lessee, will remain Singapore hospitals is a key anchor for Parkway Life REIT. As such, we believe the lease structure will remain intact and support Parkway Life REIT’s earnings in its next 15 years.

Rare opportunity in 15 years to raise rental income that could translate to DPU upside of 7-23% on our estimates.

  • Singapore hospitals are due for an upgrade, in our constant usage, and long overdue in our view.
  • Achieving higher rentals could be possible and is justifiable from Parkway Life REIT’s perspective as the property owner, given that the operations of its 3 Singapore hospitals (Mount Elizabeth Hospital, Gleneagles Hospital & Parkway East Hospital) have been growing successfully and much faster than rentals according to our estimates. As such, the occupancy cost (rental / estimated EBITDA of the 3 Singapore hospitals) has fallen from ~30% down to upside of 4% to 25% to Parkway Life REIT's share price. See details of our scenario analysis in report attached below. Our key assumptions are:
    1. ROI of 10% from additional capex for refurbishment / upgrading works.
    2. Estimated yield of 4%.
    3. New revised rental effective from Aug 2022.
  • As such, we believe this is a rare opportunity for Parkway Life REIT to see a significant uplift to rental income of the Singapore hospital assets which contribute ~60% of gross revenue. We believe that investors should position themselves ahead of that.

Maintain BUY on Parkway Life REIT; target price raised to S$4.50.

Potential further catalysts to drive next phase of growth - entry into a new market & potential acquisition

  • Apart from the master lease renewal, we believe that the future catalysts to drive Parkway Life REIT into its next phase of growth would be its entry into a new market and the long-awaited potential acquisition of Mount Elizabeth Novena.
  • While the timing of these two potential catalysts is uncertain depending on market conditions and opportunities, we believe Parkway Life REIT may stand a better chance to acquire Mount Elizabeth Novena if it beefs up its size with a third country of healthcare assets. However, as the asset value of Mount Elizabeth Novena could be bigger than the 3 Singapore hospitals combined, it may be too large for Parkway Life REIT to acquire at this stage.

Building a third pillar for the next phase of growth.

  • As previously mentioned, Parkway Life REIT’s management believes countries with mature healthcare markets, potentially Australia, Europe and the UK. While it is timely to build a third pillar, the timing of potential entry into a new market remains uncertain.

Potential acquisition of Mount Elizabeth Novena.

  • The potential acquisition of Mount Elizabeth Novena, the final of the state and potentially be injected into Parkway Life REIT when the yield of the asset is accretive.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-04-19
SGX Stock Analyst Report BUY MAINTAIN BUY 4.50 UP 4.000