Analysts from DBS Group Research and CGS-CIMB Research are upbeat on Parkway Life REIT (PREIT) following the renewal of its master lease agreement (MLA) with IHH Healthcare for its three Singapore hospitals.
To that end, DBS has upped its target price from $4.50 to $5.75, while CGS-CIMB has raised its target price from $4.80 to $5.05. The brokerages have “buy” and “add” calls on PREIT respectively.
The new MLA will be for a term of 20.4 years from Aug 23, 2022 to Dec, 31, 2042, with an option to renew for a further 10 years to Dec 31, 2052.
The REIT also entered a renewal capex agreement with IHH, with PREIT committing to $150 million in asset enhancement works to be carried out over FY2023-2025. IHH also renewed PREIT’s right of first refusal (ROFR) over the Mount Elizabeth Novena Hospital property for a period of 10 years.
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The new MLA incorporates a 40% increment in rent commencing in FY2026 following the completionof the asset enhancement works. PREIT’s portfolio weighted average lease expiry (WALE) is expected to increase to 16.6 years, up from 5.7 years currently.
The renewal of the lease will be presented for unitholders’ approval at an EGM expected to be called by 3Q2021.
DBS analysts Rachel Tan and Derek Tan call the new lease “the deal of the decade,” noting that it secures PREIT’s income visibility from its Singapore hospitals for the next two decades, which currently contributes some 60% of its net property income (NPI).
“With the strategic collaboration and support from its sponsor, IHH Healthcare, to ensure business continuity and sustained growth for both sponsor and PREIT, the new master lease agreements have exceeded expectations on all fronts,” Rachel and Derek say in a July 15 research note.
They also believe the deal places PREIT in a better position for a “new chapter of inorganic growth”. “PREIT is now in a better position of focusing on inorganic growth via i) asset-recycling strategies, ii) venturing into a new market (third pillar), and iii) exercising ROFR from its sponsor,” the analysts say.
Factoring in the new MLA, their target price for PREIT has been raised to $5.75. “We have factored in upward rental revision and extension of lease tenure with the renewal of the master lease and assumed new acquisitions worth $25 million,” they explain.
CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei also point out that the new MLA’s and capex agreement will boost PREIT’s proforma distribution per unit by 32.4% by FY2026, while proforma book net asset value could rise by 27% over the same period.
To that end, they anticipate PREIT’sgearing to dip slightly to 37.3% post-completion of the asset enhancement works. Combined with PREIT’s expanded asset under management base, this would give it more debt headroom, allowing it to tap inorganic growth opportunities.
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Lock and Eing’s new target price of $5.05 is underpinned by adjusted DPU estimates for the new MLA, as well as to factor in PREIT’s acquisition of two Japan properties recently. “We continue to like PREIT for its stable yield, backed by a strong and defensive income structure,” they say.
Units in PREIT closed up 10 cents or 2.1% higher at $4.87 on July 15.
Photo: PREIT
