Parkway Life REIT - UOB Kay Hian 2022-10-21: Hospital Operations Normalising With Return Of Foreign Patients


Parkway Life REIT - Hospital Operations Normalising With Return Of Foreign Patients

  • Parkway Life REIT’s Singapore hospitals have been benefitting from the return of foreign patients, which accounted for 25% of revenue during pre-pandemic days, since since Singapore’s borders were reopened in Apr 22. It continues to expand in Japan and completed the acquisition of five nursing homes in Hokkaido and Greater Tokyo in Sep 22.
  • Parkway Life REIT's Share Price trades at a premium due to its resiliency and the scarcity of its healthcare properties. Maintain HOLD as Parkway Life REIT's 2023 DPU yield is fair at 3.7%. Target price: S$4.13.

Singapore hospitals.

  • Benefitting from resumption of medical tourism. More local and foreign patients returned for treatments and operations at Parkway Life REIT (SGX:C2PU)’s Singapore hospitals in 1H22. Revenue intensity increased 23% in 1H22 as case-mix skewed towards acute patients. Foreign patients have returned in significant numbers after Singapore reopened its international borders in Apr 22. This was offset by a significant tapering of COVID-19 related services. In particular, sponsor IHH Healthcare (SGX:Q0F) has ceased its arrangement with the Ministry of Health to set aside beds for COVID-19 patients.
  • On track to commence upgrading of Singapore hospitals. Renewal term for Parkway Life REIT’s Singapore hospitals has commenced with rental step-up of 2.0% for the interim period (23 Aug 22 to 31 Dec 22) and 3.0% annual step-up thereafter for the next three years (2023, 2024 and 2025). Parkway Life REIT will invest S$150m in renewal capex to upgrade its three Singapore hospitals to improve utilisation of space and resources and enhance operating performance, including rejigging of hospital layout and right-sizing of operating theatres and wards. The asset enhancement initiative is expected to start in Jan 23 and will take about three years.

Further expansion in Japan.

  • Parkway Life REIT completed the acquisition of three nursing homes within the residential areas of Ebetsu and Asahikawa Cities in Hokkaido Prefecture for JPY2,558m (S$26.1m) (12.2% below valuation) on 21 Sep 22. The three properties provide NPI yield of 6.5% and have long balance lease term of 19 years. Parkway Life REIT also completed the acquisition of two nursing homes in the Greater Tokyo region for JPY2,880m (S$29.4m) (11.1% below valuation) on 28 Sep 22. The two properties provide NPI yield of 5.2% and have long balance lease term of 29 years.
  • The number of Parkway Life REIT’s nursing homes in Japan reaches 57. The acquisitions have extended Parkway Life REIT’s weighted average lease expiry (WALE) by gross revenue from 17.01 years to 17.21 years. The acquisitions are fully funded by Japanese yen-denominated debts. Aggregate leverage is expected to increase by 1.7ppt to 35.2%.

Prudent capital management.

  • Parkway Life REIT had healthy aggregate leverage of 32.5% as of Jun 22. About 90% of Parkway Life REIT’s borrowings are denominated in Japanese yen. Natural hedge for its Japan portfolio is high at 92%. Thus, the negative impact of the yen’s depreciation on its NAV per share is expected to be manageable.
  • Parkway Life REIT has conservatively extended its yen net income hedges till 1Q27 to ensure stable revenue stream from its Japan portfolio.

Stable interest rates for the yen.

  • Parkway Life REIT’s all-in cost of debt was low at 0.61% as of Jun 22. About 82% of interest rate exposure hedged to fixed rates. UOB Global Economics & Markets Research expects Bank of Japan to maintain JPY Policy Rate at -0.10% for the foreseeable future. There are no debt refinancing needs till Jun 23.

Pure play on healthcare and ageing population.

  • Singapore is witnessing an unprecedented shift with the number of residents aged 65 years or older multiply threefold from 300,000 in 2005 to 900,000 in 2030. By 2030, one out of every five residents will be a senior. The demographic shift and ageing of Singapore’s population will drive growth in demand for the healthcare industry.
  • Comprehensive package that fosters future collaborations. Parkway Life REIT has extended its strategic collaboration with sponsor IHH Healthcare:
    1. Extension for 20 years with sizeable step-up in rents. Parkway Life REIT 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. 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. There is also an option to renew for a further 10 years (2043 to 2052).
    2. Renewal that enhances capital values. Parkway Life REIT will invest S$150m (cap) in one-time renewal capex to renovate and upgrade its three Singapore hospitals to enhance operational efficiency. Leasee Parkway Singapore Hospitals Pte Ltd would be able to increase utilisation of available space and increase its number of hospital beds, operating theatres, medical clinics and laboratory facilities. The renewal capex will be financed by external borrowings. Parkway Life REIT will grant a total rental rebate of S$60.9m during 2023 to 2025.
    3. Potential injection of Mount Elizabeth Novena Hospital. Parkway Life REIT is granted the right of first refusal (ROFR) to acquire the hospital block of Mount Elizabeth Novena Hospital for a period of 10 years.

Parkway Life REIT – Earnings forecast revision and recommendation

Impeccable track record.

  • Parkway Life REIT is the ultimate defensive S-REIT listed on the SGX. It has demonstrated resiliency with 15 consecutive years of uninterrupted growth in DPU driven by organic growth and new acquisitions. Parkway Life REIT had long WALE of 17.1 years as of Jun 22 (Singapore: 20.4 years and Japan: 11.5 years).

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-10-21
SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.13 DOWN 4.34