DBS Group Research analysts Rachel Tan and Derek Tan believe that the potential upcoming renewal of Parkway Life REIT’s (PLife REIT) Singapore hospitals master lease gives investors a rare opportunity to ride further upside on the counter.
In an April 19 research note, the analysts maintained their ‘buy’ rating for the REIT with a higher target price of $4.50 from $4.00 previously.
The 15-year master lease for PLife REIT’s Singapore hospitals ends on Aug 22, 2022. Rachel and Derek believe that IHH Healthcare, the REIT’s sponsor and master leasee, will renew the lease.
This provides a key opportunity to revise rentals upwards, as well as carry out potential upgrades for the hospitals, the analysts say.
To that end, they estimate the renewal could drive the REIT’s distribution per unit (DPU) up between 7% - 23%, which could translate to a share price upside of 4% to 25%.
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They recommend investors to buy the counter ahead of the master lease renewal to ride the upside from the rental revision, despite PLife REIT currently trading at a premium of 2.1 times P/NAV.
Derek and Rachel believe the renewal, along with robust income visibility, supports PLife REIT’s position as a “success story” and a favourite among investors.
They note that the REIT’s share price has more than tripled since listing in 2007, translating to a compound annual growth rate (CAGR) of 9%. “On a total return basis, investors have enjoyed a return of more than 4 times since its IPO or 11% CAGR,” they add.
In terms of other catalysts, the analysts note that in addition to asset recycling and acquisitions from its sponsor, PLife REIT’s management is currently exploring opportunities to pin down a third pillar to drive its next phase of growth.
They believe this could come from investments in mature healthcare markets like Australia, Europe, or the UK. The acquisition of Mount Elizabeth Novena is also a possibility.
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“We believe the hospital would soon reach a stabilised state and potentially be injected into PLife REIT when the yield of the asset is accretive,” they say.
Their target price for PLife REIT is raised to $4.50, factoring in an upward revision to rentals with the renewal of the master lease and assumed new acquisitions worth $25 million.
As at 1.22pm, units in PLife REIT are up 1 cent or 0.24% higher at $4.15.
