PARKWAYLIFE REIT (SGX:C2PU)
Parkway Life REIT 1Q21 - Positive Outlook From Lease Extension & Overseas Expansion
- Parkway Life REIT's DPU grew 3% y-o-y in 1Q21 even though divestment of P-Life Matsudo was completed in Jan 21.
- We expect Parkway Life REIT's master leases for the three private hospitals in Singapore to be extended by 15 years with a step-up in rents of 12% in the first year. Management is also exploring expansion to developed markets in Europe.
- The resiliency and scarcity of Parkway Life REIT’s healthcare assets are highly valued due to the prolonged COVID-19 pandemic. Maintain BUY. Target price: S$4.38.
Parkway Life REIT's 1Q21 Results
- Parkway Life REIT (SGX:C2PU) reported DPU at 3.57 cents for 1Q21 (+7.4% y-o-y). There was a one-off COVID-19 relief measure of S$850,000 retained in 1Q20. Excluding the one-off retention, DPU would have grown by 3% y-o-y.
Growth temporarily moderated by divestment of P-Life Matsudo.
- Gross revenue and net property income (NPI) increased 0.4% and 1.0% y-o-y respectively in 1Q21. Parkway Life REIT acquired a nursing home in the Greater Tokyo Region in Japan for a total consideration of ¥1.65b (S$21.2m) in Dec 20, which provides NPI yield of 6.4%.
- It divested 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 three Singapore hospitals contributed higher rents (minimum guaranteed rent increased 1.17%).
Refinancing ahead of maturity.
- Parkway Life REIT has successfully issued six-year ¥3.3b (S$40.1m) 0.51% senior unsecured fixed rate notes on 29 Mar 21. The proceeds were used to repurchase existing notes issued at fixed rate 0.58% due in 1Q22 at par without penalty. Thus, 18% of the loans due in 2022 were refinanced for another six years to 2027, which extended the weighted average term to maturity from 3.2 years to 3.5 years. Parkway Life REIT has no near-term requirements to refinance till 2022.
- Parkway Life REIT's interest coverage ratio is high at 20.9x, supported by low all-in cost of debt of only 0.55%. Aggregate leverage improved 0.7ppt q-o-q to 37.8%.
STOCK IMPACT
Healthcare is an essential service.
- Parkway Life REIT’s 53 assets are fully operational with its tenants implementing strict measures to ensure safety of employees and patients. While the recovery from the COVID-19 pandemic remains uncertain, Parkway Life REIT will continue to collaborate with and support its healthcare tenants, while staying prudent on financial management. It will focus on executing its growth strategy of strengthening its portfolio.
Income visibility from healthcare assets.
- Parkway Life REIT has long weighted average lease to expiry (WALE) of 5.4 years. Its Japan assets (49 nursing homes), which accounted for 39% of AUM, have long lease structure with WALE of 11.2 years.
Extension of Singapore master leases to be concluded by end-21.
- 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.
Comprehensive package that fosters future collaborations.
- 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:
- Rents for the first year (23 Aug 22 to 22 Aug 23) of the 15-year extension to increase by 12%,
- the lease structure with downside protection provided by annual rent revision formula of CPI + 1% to be maintained, and
- the addition of another option to extend the master leases for another 15 years from 23 Aug 37 to 22 Aug 52.
- Obligations to rejuvenate the three hospitals to enhance operational efficiency.
Win-win outcome facilitates future collaborations.
- Successful completion of the extension would pave the way for future collaborations between Parkway Life REIT and its sponsor Parkway Holdings. They could involve:
- acquisition of Mount Elizabeth Novena Hospital, and
- partnership in overseas expansion where sponsor IHH Healthcare acquires the healthcare operators while Parkway Life REIT acquires the healthcare assets.
Enhancing scale and diversifying geographically through acquisitions.
- Parkway Life REIT is scouting for opportunities to acquire assets in developed and mature healthcare markets. European countries such as France, Germany and the UK have developed and mature healthcare markets. These markets benefit from an ageing population. Government policies are also supportive of growth in the healthcare market. Funding cost for the € is low as well.
EARNINGS REVISION/RISK
- We maintain our existing earnings forecast for Parkway Life REIT.
VALUATION/ RECOMMENDATION
- Maintain BUY on Parkway Life REIT. Our target price of S$4.38 is based on the dividend discount model (cost of equity: 5.5%, terminal growth: 2.0%).
- See
SHARE PRICE CATALYST
- Extension of leases for Singapore hospitals.
- Yield-accretive acquisitions.
Jonathan KOH CFA
UOB Kay Hian Research
|
https://research.uobkayhian.com/
2021-04-26
SGX Stock
Analyst Report
4.380
SAME
4.380
