Parkway Life REIT - DBS Research 2021-07-15: A New Lease Of Life Secured For The Next Two Decades


Parkway Life REIT - A New Lease Of Life Secured For The Next Two Decades

  • Parkway Life REIT (SGX:C2PU) finally revealed the much-anticipated renewal of the master lease for its three Singapore hospitals with the deal of the decade. This secures Parkway Life REIT’s income visibility from its Singapore hospitals for the next two decades, which currently contributes the bulk of its income (~60% of its NPI). The renewal of the master lease will extend Parkway Life REIT’s WALE from 5.7 years to 16.6 years.
  • The renewal of the lease will be presented for unitholders’ approval in an EGM expected to be called by 3Q21, after which completion is expected by the end of 3Q21.

New lease exceeds expectations.

  • With the strategic collaboration and support from its sponsor, IHH Healthcare (SGX:Q0F), to ensure business continuity and sustained growth for both sponsor and Parkway Life REIT, the new master lease agreements have exceeded expectations on all fronts.
    • Extension of lease tenure by another five years, securing the master lease for 20 years (to expire on 31 Dec 2042) instead of 15 years as previously expected (the initial master lease was for 15+15 years), providing a longer term of income certainty and stability. The new master lease includes an option to renew for a further term of 10 years from 1 Jan 2043 to 31 Dec 2052.
    • Higher-than-expected S$150m of asset enhancement works driving ~40% rental upliftment in FY26. There will be a rental increase of ~40%, an estimated total rental of S$99m in Year 4 (FY26), post the completion of S$150m asset enhancement works to which Parkway Life REIT has committed. The asset enhancement works will be targeted to improve efficiency, utilisation and productivity that will drive the income generation capabilities of the underlying hospital operations.
    • The rental upliftment was ~11% above our forecasts on a higher committed amount of capex works of S$150m vs our assumption of S$100m (please refer to our previous report Parkway Life REIT - DBS Research 2021-04-19: Capitalise On This Once In 15 Years Opportunity).
    • Guaranteed rental step-up of 2-3% during downtime from AEI. Although the rental boost will not be seen immediately upon the renewal, Parkway Life REIT has again delivered “no downside risks” even during the downtime from AEI. Instead, it provides guaranteed rental step-up of 2-3% during the 3-year AEI period, in line with the historical average of rental growth per annum from its annual rent review mechanism calculated from CPI+1% formula.
    • Immediate NAV upside of ~20% upon renewal and a total of ~40% increment in asset value post AEI. Based on pro forma figures, the value of the assets is expected to increase by ~40% post AEI. Assuming that capex will be fully funded by borrowings, Parkway Life REIT’s NAV is expected to increase by ~20% upon renewal of the master lease following the renewal and rental uplift. NAV is expected to rise by a total of ~27% upon completion of the AEI in Year 4, FY26.
    • As such, gearing is expected to reduce to 34.5% from 38.5% as at Dec 2020, providing sufficient debt headroom to fund the capex works and/or potential future acquisition. Based on pro forma figures and assuming the S$150m is fully debt-funded, Parkway Life REIT’s gearing will increase to 37.3% upon completion of the AEI.
    • Maintain its CPI-linked lease structure favoured by investors while keeping the option to ride on potential upside from the asset. The lease structure’s annual rent review is still calculated based on the higher of
      1. CPI+1% formula, which is highly favoured by investors, or
      2. base + variable rent formula, which allows investors to participate in potential upside from the hospital operations.

ROFR on Mount Elizabeth Novena Hospital “renewed” for 10 years, reinforces Parkway Life REIT’s intention to stay Singapore-centric.

  • The rights of first refusal (ROFR) on Mount Elizabeth Novena Hospital was granted by the sponsor during the IPO had expired in 2012. As such, the sponsor continues to show its strong support and intention by granting a “new” ROFR on the hospital to Parkway Life REIT for a period of 10 years. This further solidifies the continued collaboration of Parkway Life REIT and its sponsor for the long term and reinforces Parkway Life REIT’s intention to stay Singapore-centric and its interest to acquire (though timing remains uncertain) Mount Elizabeth Novena Hospital when the opportunity arises.

AEI to upgrade assets for higher asset utilisation and towards “green” and sustainability features.

  • The asset enhancement plans will largely be on Mount Elizabeth Hospital, the largest of the three hospitals in Parkway Life REIT’s Singapore portfolio. It will focus on upgrading the quality of the assets, and drive asset efficiency and utilisation to derive future growth. The capex works will largely focus on:
    1. future proofing through improvement works on safety features and utility infrastructure,
    2. enhancing building performance with eco-friendly and sustainability features through Green Mark certification and technological advances such as building management system, and
    3. refreshing the aesthetics and the ambience of the property, as well as addressing patient demand and evolving healthcare trends through the upgrade and reconfiguration of the hospital space and functions.
  • Capex works are expected to start by 1 Jan 2023 and expected to take three years (completion by FY26). All renewal capex works is expected to be completed no later than 31 Mar 2028.

Staying on course with potential acquisitions and opportunity to recapitalise capital structure.

  • Parkway Life REIT stays on course in growing its assets via potential accretive acquisitions either in Japan or a new third market for the next phase of growth. While the timing of potential acquisitions remains uncertain, a sizeable acquisition would not only offer inorganic growth but an opportunity to recapitalise its capital structure.

Maintain BUY; raise target price for ParkwayLife REIT to S$5.75.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-07-15
SGX Stock Analyst Report BUY MAINTAIN BUY 5.75 UP 4.500