DBS Group Research analysts Rachel Tan and Derek Tan have maintained their “buy” call on Parkway Life REIT (PLife REIT) C2PU , favouring the trust for its strong earnings visibility amid the current backdrop of a volatile and uncertain market outlook.
“PLife REIT is one of Asia’s largest listed healthcare REITs by asset size and a rare jewel amongst Singapore REITs (S-REITs) that offers highly visible, stable and sustainable earnings by virtue of its resilient industry and long leases with downside risk protection.
“In addition, PLife REIT owns three private hospitals in Singapore, which have captured the majority of the market share,” they note in their Feb 20 report.
These Singapore hospitals provide a high degree of income visibility to PLife REIT, contributing about 60% of its top line. Its rental reversions are pegged to a consumer price index-linked formula, which underpins its steady growth profile, the analysts add.
They highlight that the renewal of the Singapore master lease in 2021 comes with about 40% rent increment, 27% rise in net asset value (NAV) as well as a 20-year extension of the lease tenure. While the 40% rent increment kicks in from 2026, the lease guarantees a 3% growth in rentals from FY2023 to FY2025 during the period of asset rejuvenation.
The annual rent review formula shall be applicable from FY2026 with an estimated 25% step up in rents, the analysts point out.
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Concurrently with the renewal of the master lease, the REIT’s sponsor IHH Healthcare has granted a 10-year right of first refusal (ROFR) on Mount Elizabeth Novena Hospital. Given the successful collaboration between PLife REIT and its sponsor, the analysts believe the potential injection of Mount Elizabeth Novena Hospital could be realised.
Meanwhile, major refurbishment and upgrading works at Mount Elizabeth Hospital dubbed “Project Renaissance” have commenced, with an estimated capex of $350 million. The analysts note that the extensive refurbishment work would enable the transformation of the medical institution into a modern and integrated multiservice hub.
PLife REIT’s asset recycling activities in Japan nursing homes are still ongoing — the REIT had acquired five nursing homes for a total of $55.5 million in Sept 2022 at a net property yield of 5.2% to 6.5%. In FY2021, the REIT acquired three nursing homes for a total of $87.3 million, at a net property yield of 5.7% to 5.9%.
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In Jan 2021, the REIT sold its non-core asset P-Life Matsudo — the only pharmaceutical product distributing and manufacturing facility within its Japan portfolio — for $37.2 million at a divestment yield of 4.3% versus 5.3% acquisition yield, 12% above the original purchase price.
With the recent acquisitions, the analysts believe PLife REIT’s asset recycling exercise will continue to drive growth ahead given its successful track record.
The analysts highlight that the REIT’s management is looking into building a third pillar for its next growth phase, exploring opportunities in developed countries with a mature healthcare market such as Australia and Europe. It however remains cautious about new ventures, which leads to uncertain potential entry timeline.
DBS lowers their target price to $4.80 from $5.50 by raising its risk-free rate to 2.4% and factoring a higher cost of debt. Factoring in recent acquisitions, the analysts increase their FY2023-FY2024 DPU estimates by about 2%.
As at 9.46am, units in PLife REIT are trading 2 cents higher or 0.5% up at $4.02.
