Parkway Life REIT (PLife REIT) is thriving and winning through collaborations with its sponsor, says UOB Kay Hian Research analyst Jonathan Koh.
“We expect the extension of master leases for three hospitals in Singapore to come with an increase in rents of 12% for the first year of the new 15-year master leases,” notes Koh in a Feb 9 note.
Koh is maintaining his “buy” call on PLife REIT with a raised target price of $4.38 from $3.80.
PLife REIT is one of Asia’s largest listed healthcare REITs. It invests primarily in income-producing real estate and real estate-related assets used primarily for healthcare and healthcare-related purposes.
The initial lease term of 15 years for PLife REIT’s Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital in Singapore ends on Aug 22, 2022. Negotiations between PLife REIT and master leasee Parkway Hospital Singapore (a subsidiary of Parkway Pantai owned by IHH Healthcare) are underway on exercising the option to extend the leases for another 15 years, notes Koh.
The extension of leases is expected to be finalised by 2H2021. Management targets to call for an EGM to seek approval from unitholders for the extension, which is a related-party transaction, by end-2021.
This comes on the back of improved profitability for the three private hospitals, which provides an opportunity for PLife REIT to negotiate for higher rent, says Koh. “
Koh expects the comprehensive package to encompass rents for the first year of the 15-year extension to increase by 12% and the lease structure with downside protection provided by annual rent revision formula of CPI + 1% to be maintained.
In addition, Koh expects the addition of another option to extend the master leases for another 15 years to 2052. Finally, he sees obligations to rejuvenate the three hospitals to enhance operational efficiency.
Win-win outcome
Successful completion of the extension would pave the way for future collaborations between PLife REIT and its sponsor Parkway Holdings, notes Koh.
They could involve PLife REIT acquiring Mount Elizabeth Novena Hospital; and partnership in overseas expansion whereby IHH Healthcare acquires the healthcare operators, while PLife REIT acquires the healthcare assets.
Asset recycling
Koh also highlights the acquisition of a nursing home in Greater Tokyo, Japan for a total consideration of 1.65 billion yen ($21.2 million) in December 2020. The property is located in Kamagaya City in the Chiba Prefecture, and is a 40-minute train ride from Tokyo Station.
The acquisition was made at 4.6% below valuation and provides net property income (NPI) yield of 6.4%. It provides for a fresh 20- year master lease, which lengthens the weighted average lease to expiry of PLife REIT’s Japan portfolio by 2.2% to 11.4 years.
PLife REIT has divested of P-Life Matsudo, a pharmaceutical product manufacturing and distribution facility, for a total consideration of 2.9 billion yen representing an attractive exit yield of 4.3% in January 2021.
See: Parkway Life REIT divests non-core property in Japan for $37.1 mil
The sale price is 19.8% above net book value and PLife REIT will be recognising an estimated gain on disposal of investment property of $5.1 million.
PLife REIT has also been included in the FTSE EPRA NAREIT Global Developed Index since Sept 19, 2020. The index was developed by FTSE Russell in collaboration with the European Public Real Estate Association (EPRA) and National Association of Real Estate Investment Trusts (NAREIT) in the US. It tracks the performance of listed real estate companies and REITs worldwide.
Stock impact
PLife REIT reported distribution per unit (DPU) of 3.57 cents (+6.7% y-o-y) for 4QFY2020, bringing 2020 DPU to 13.79 cents (+4.5% y-o-y). The results included the release of $905,000 for Covid-19 related relief measures.
“We forecast DPU of 13.7 cents for 2021, 15.1 cents for 2022 and 16.0 cents for 2023. The extended master leases will start contributing from Aug 23, 2022,” says Koh.
Gross revenue and NPI increased 9% and 4.2% y-o-y respectively due to contribution from three nursing homes acquired in December 2019, one nursing home acquired in December 2020, higher rent from Singapore properties (minimum guaranteed rent increased 1.17%) and appreciation of the Japanese yen. “Excluding a one-off reclassification of insurance reimbursement received in 4QFY2019, we estimate growth in gross revenue at 4.5% y-o-y in 4QFY2020,” says Koh.
Meanwhile, interest expenses declined by 21.1% y-o-y. PLife REIT’s all-in cost of borrowings declined by 0.27ppt y-o-y to 0.53% due to lower interest costs for the Singapore dollar debt and extension of interest rate hedges for Japanese yen debt at lower interest rates.
PLife REIT’s gearing remained healthy at 38.5%. It has debt headroom of $244 million and $475 million respectively before reaching the regulatory limit on aggregate leverage of 45% and 50%. Its interest coverage ratio stood at 18.1x.
As at 2.10pm, units in PLife REIT are trading flat at $4.18
