UOB Kay Hian analyst Jonathan Koh has upgraded Parkway Life REIT C2PU (PLife REIT) to “buy” with a higher target price of $4.49 from $4.43 previously.
Koh says PLife REIT appeals to risk-averse investors who value its defensive strength due to its healthcare orientation and long weighted average lease expiry of 17 years. He notes that the unit price has corrected up to 22% since UOBKH’s last downgrade to “hold” on July 15, 2021.
PLife REIT’s 2HFY2022 DPU of 7.32 cents is marginally above UOBKH’s expectations. Its gross revenue and NPI grew 14.2% and 18% y-o-y respectively during the period.
This is attributable to higher rents from properties acquired in 2021 and 2022, higher adjusted hospital revenue from Parkway East Hospital and higher rent from its Singapore hospitals under its new master lease agreement.
The renewed lease term of 20.4 years for PLife REIT’s Singapore hospitals commenced Aug 23, 2022. The lease structure provides a guaranteed 2% rental step-up for the interim period followed by 3% annual rent step-up for the next three years up to 2025, as well as an annual rent review formula in place for the subsequent 17 years.
The REIT has recently launched the upgrading of Mount Elizabeth Hospital (MEH) on Jan 3. The $350 million “Project Renaissance” will transform the hospital into a modern and integrated multi-service hub over the next three years.
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Project Renaissance will develop the enlarged MEH Campus with various healthcare services repositioned across adjacent buildings within the vicinity, Koh highlights. The fertility centre as well as the haematology and stem cell transplant centre will be relocated to The Heeren, creating space at MEH for the expansion of inpatient hospital-based clinical services, he adds.
Its wards will also be reconfigured with an additional 56 single bed wards to its existing 112 single bed wards to cater to growing demand for admissions from local and foreign patients.
Meanwhile, PLife REIT had also completed two separate acquisitions of nursing homes across Japan, including three in Hokkaido and two in Greater Tokyo. Besides being yield-accretive, the acquisitions also kicked off collaboration with reputable Japanese developer Daiwa House, Koh highlights.
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Currently, PLife REIT has a portfolio of 57 nursing homes in Japan which accounted for 34.4% of its portfolio valuation.
Koh adds that the REIT has issued a six year 5 billion yen ($49.6 million) note and a maiden seven year 6 billion yen note in December 2022, at attractive fixed rates of 0.85% and 0.97% respectively. “The two new notes preemptively refinance existing fixed rate notes due in 2023 and short-term Japanese yen loans for the five properties acquired in 2022,” he adds.
PLife REIT has extended its weighted term to maturity from 2.9 years to 3.4 years. It has no debt refinancing needs until February 2024.
The REIT’s aggregate leverage is low at 36.4%, says Koh. It has increased the proportion of borrowings on fixed rate from 73% to 80%, adopting a natural hedge strategy for its investments in nursing homes in Japan.
“PLife REIT has Japanese yen net income hedges in place till 1QFY2027 to shield against the volatility of the exchange rate for Japanese yen.”
Expecting cost of debt to hit 1.2% in 2HFY2023, UOBKH trims its 2023 DPU forecast for PLife REIT by 2%.
As at 12.25pm, units in PLife REIT are trading 2 cents higher or 0.5% up at $4.02.
