Parkway Life REIT - CGS-CIMB Research 2021-05-10: Coming Into Its Own; Master Lease Likely To Be Renewed Upwards

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PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life REIT - Coming Into Its Own; Master Lease Likely To Be Renewed Upwards

• The potential renewal of Singapore hospitals’ master lease agreement (MLA) is a catalyst for Parkway Life REIT's share price outperformance.
• We anticipate DPU CAGR of 4.8% over FY20-23F for Parkway Life REIT post MLA renewal, not including any potential future inorganic growth exercises.
• Upgrade Parkway Life REIT to ADD with a higher DDM-based target price of S$4.80.

Upgrade Parkway Life REIT to ADD

• We revisit our DPU projections for Parkway Life REIT (SGX:C2PU) in view of the upcoming review of its Singapore hospitals’ master lease agreement (MLA). We expect the MLA to be renewed upwards given the strong operating performance of the Singapore hospitals during the current lease tenure.
• Based on our assumptions, we project Parkway Life REIT to deliver a DPU CAGR of ~4.8% over FY20-23F when its new MLA becomes effective. We upgrade our rating for Parkway Life REIT to ADD with a higher DDM-based target price of S$4.80.
• We believe Parkway Life REIT's share price can re-rate further when Parkway Life REIT’s portfolio weighted average lease to expiry (WALE) lengthens to ~13.5 years post renewal (from 5.37 years as at 1Q21) while a high 95% of its revenue remains backed by downside protection. This provides investors with strong income visibility and growth, in our view.
• Furthermore, any possible asset valuation uplift, underpinned by a higher income base, could result in lower gearing and increased debt headroom, allowing Parkway Life REIT to deliver even greater inorganic earnings growth in the medium term.

Singapore Hospital Master Lease Agreement likely to be renewed upwards

• We believe the estimates, we project 12-16% uplift in the Singapore hospital rentals post renewal. This is likely to drive Parkway Life REIT's DPU higher, resulting in potential 9.4% DPU growth in FY23F, when the impact of the new MLA is fully felt.

Strong inorganic growth potential

• Parkway Life REIT has diversified and grown its portfolio; Japan assets stood at ~40% of total AUM at end-1Q21.
• Looking ahead, we believe Parkway Life REIT will continue to remains uncertain at this point, we believe the improving operating performance of the latter and IHH Healthcare (SGX:Q0F)’s stated target to double its ROE in 5 years could mean that this property is an ROFR asset for Parkway Life REIT given it is the asset recycling vehicle for the group, in the medium term.

Projected FY20-23F DPU CAGR of 4.8% for Parkway Life REIT.

• In terms of valuations, Parkway Life REIT is trading at FY21F DPU yield of 3.3%, with the potential to rise to 3.7% when the new MLA kicks in. Our current assumptions have not included any pre-emptive acquisitions.
• While we think current visibility and capacity to realise more inorganic growth prospects in the medium term. See the 15-page report attached below for complete analysis on Parkway Life REIT.
• See also
  • Parkway Life REIT's Share Price,
  • Parkway Life REIT's Target Price,
  • Parkway Life REIT's Analyst Reports,
  • Parkway Life REIT's Dividend History,
  • Parkway Life REIT's Announcements,
  • Parkway Life REIT's Latest News.
• Upside risks: higher-than-projected rents post MLA review and accretive new acquisitions.
• Downside risk: a spike in Singapore government bond yield resulting in compressed yield spreads.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-05-10

SGX Stock Analyst Report ADD UPGRADE HOLD 4.80 UP 4.110