Parkway Life REIT - UOB Kay Hian 2021-07-15: Comprehensive Strategic Collaboration That Surpasses Our Expectations

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PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life REIT - Comprehensive Strategic Collaboration That Surpasses Our Expectations

• Parkway Life REIT (SGX:C2PU)’s strategic collaboration with sponsor IHH Healthcare (SGX:Q0F) is comprehensive, encompassing the extension of master leases, renewal capex and ROFR to acquire Mount Elizabeth Novena Hospital. Cumulatively, total rental growth is 39.4% in Year 4 of the new 20-year lease term and exceeds our expectations.
• The package is accretive to Parkway Life REIT's DPU by 32% and NAV per share by 26% in 2026 (Year4).
• Parkway Life REIT's share price performance has been spectacular, gaining 23.3% year-to-date. Downgrade to HOLD.

Parkway Life REIT has extended its strategic collaboration with sponsor IHH Healthcare

Extension for 20 years with sizeable step-up in rents.

• Parkway Life REIT (SGX:C2PU) has entered into a lease framework agreement for the extension of master leases of its three Singapore hospitals, namely Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital. The initial rent for 2023 is S$97.2m, supported by rental valuations conducted by CBRE and Knight Frank.
• Cumulatively, total rental growth is 39.4% for Year 4 of the 20-year lease term. Rental escalation is set at CPI + 1% from Year 4 to Year 20.
• Parkway Life REIT's WALE has increased from 5.7 years to 16.6 years. There is also an option to renew for a further 10 years (2043 to 2052).

Renewal that enhances capital values.

• Parkway Life REIT will invest in Jan 23. Parkway Life REIT will grant a total rental rebate of S$60.9m during 2023 to 2025.

Potential injection of Mount Elizabeth Novena Hospital.

• Parkway Life REIT is granted the right EGM to be convened in due course.

STOCK IMPACT

Win-win outcome facilitates future collaborations.

• The successful completion of the extension would pave the way for future collaborations between Parkway Life REIT and its sponsor IHH Healthcare. 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.

Strong positive impact on DPU and NAV per unit.

• On a pro forma basis, management estimates positive unit is estimated to increase by 19.9% to S$2.35 in Year 1 and a further 6% to S$2.49 in Year 4.

EARNINGS REVISION

• We forecast Parkway Life REIT to provide
  • DPU of S$0.152 for 2023 (Year1),
  • DPU of S$0.154 for 2024 (Year2),
  • DPU of S$0.157 for 2025 (Year3) and
  • DPU of S$0.187 for 2026 (Year4).

VALUATION & RECOMMENDATION

• Downgrade Parkway Life REIT to HOLD.
• Parkway Life REIT’s strategic collaboration is on a year-to-date basis.
• See
  • 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.
• Our new target price is based on DDM (cost of equity: 5.5%, terminal growth: 2.0%).

SHARE PRICE CATALYST

• Extension of leases for Singapore hospitals.
• Yield-accretive acquisitions.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-07-15

SGX Stock Analyst Report BUY MAINTAIN BUY 4.72 UP 4.380