Parkway Life REIT - UOB Kay Hian 2022-04-13: Potential Catalyst In The Making

PARKWAYLIFE REIT (SGX:C2PU)

Parkway Life REIT - Potential Catalyst In The Making

Sponsor IHH Healthcare has to consider recycling assets if it decides to acquire Ramsay Sime Darby for RM5.67b (S$1.83b). We estimate that the potential acquisition of Mount Elizabeth Novena Hospital from IHH Healthcare for S$1,286m could increase Parkway Life REIT’s 2023F DPU by 17% to S$0.176 and raise our target price from S$4.82 to S$5.42.
Management might consider pursuing the acquisition over two phases to make the sizeable deal more digestible. Maintain HOLD.

As part of the strategic collaboration between the two companies, sponsor IHH Healthcare (SGX:Q0F) has granted Parkway Life REIT (SGX:C2PU) the first right of refusal (ROFR) to acquire the hospital block of Mount Elizabeth Novena Hospital for a period of 10 years. Mount Elizabeth Novena Hospital commenced operations in 2012. It has 13 operating theatres, 38 medical suites (excluding 216 sold to private medical specialists for RM1,210m (S$495m) in 2012) and 333 single-bed-only wards. The property is currently valued at RM3,961m (S$1,278m) on IHH Healthcare’s balance sheet.
Sponsor IHH Healthcare on acquisition trial. Sponsor IHH Healthcare has submitted a bid to acquire Ramsay Sime Darby for RM5.67b (S$1.83b) on a cash-free debt-free basis. Ramsay Sime Darby is a 50:50 JV between Ramsay and Sime Darby and operates six hospitals in Malaysia. The acquisition is conditional upon the completion of satisfactory due diligence. IHH Healthcare would need funding should it decide to proceed to acquire Ramsay Sime Darby, which could be fulfilled by asset recycling through divestment of the hospital block of Mount Elizabeth Novena Hospital to Parkway Life REIT.

The asset enhancement initiative (AEI) for Parkway Life REIT's 3 Singapore hospitals is tracking schedule. We expect the initiative to focus on Mount Elizabeth Hospital located near Orchard Road, which is the largest and oldest of the three hospitals. The upgrading will focus on improving productivity and efficiency, including rejigging of hospital layout and right-sizing of operating theatres and wards. Parkway Life REIT will benefit from enhancement to revenue generation as rental escalation is pegged to CPI + 1% or 3.8% of adjusted hospital revenue, whichever is higher.
Benefitting from built-in rental escalation. Rental escalation for the 3 Singapore hospitals is fixed at 3% per year for 2022, 2023 and 2024. Thereafter, rental escalation is pegged to CPI + 1% formula or 3.8% of adjusted hospital revenue, whichever is higher. CPI is deemed to be 0% if it is negative. Thus, growth in rental for the three hospitals in Singapore is always positive and at least 1% per year.

Parkway Life REIT has completed the acquisition of a nursing home located in the Greater Tokyo region in Japan for ¥3,200m (S$37.9m) on 17 Dec 21. The acquisition is priced at 7% below valuation and is expected to generate NPI yield of 5.9%. This was the third acquisition in 2021 and brings S$0.15’s Japan portfolio to 52 properties valued at S$804m (35.4% of AUM). The nursing home is operated by Habitation Group, Parkway Life REIT’s largest nursing home operator in Japan.
The acquisition comes with a 20-year lease agreement, which lengthens Parkway Life REIT’s WALE by gross revenue m 17.42 to 17.47 years.

Our effort to value Mount Elizabeth Novena Hospital is hampered by the lack of 17.6 cents. Our target price would increase from S$4.82 to S$5.42 if Parkway Life REIT proceeds with the acquisition of Mount Elizabeth Novena Hospital.

Parkway Life REIT trades at distribution yield of 3.2% for 2025F and 3.9% for 2026F due to investors’ preference for sustainable growth in the healthcare industry and its long WALE of 17.3 years. Its premium valuation supports accretive acquisitions.
Step by step. The potential acquisition of Mount Elizabeth Novena Hospital is sizeable and increases AUM by 57%. Management might consider pursuing the acquisition over two phases to make the sizeable deal more digestible.
Adopting half-yearly reporting and semi-annual distribution. Parkway Life REIT will release its financial results on a half-yearly basis starting in financial year ending Dec 22. It will also be making distributions on a semi-annual basis going forward.

We forecast DPU for Parkway Life REIT is based on DDM (cost of equity: 5.5%, terminal growth: 2.0%).
See
Share price catalysts:
- Step-up in rents from Singapore hospitals in 2026 after AEI is completed.
- Yield-accretive acquisitions, including Mount Elizabeth Novena Hospital.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-04-13

SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.82 UP 4.720