UOB Kay Hian analyst Jonathan Koh has kept his “hold” rating on Parkway Life REIT (PLife REIT) even as he sees several positives for the REIT.
In his report dated Oct 21, Koh notes that the REIT’s hospitals in Singapore have been benefitting from the return of foreign patients, which accounted for 25% of the REIT’s pre-pandemic revenue.
The REIT also saw the return of more local and foreign patients for treatments and operations in the 1HFY2022 ended June. In the same period, revenue intensity increased 23% as case-mix skewed towards acute patients, Koh points out. The positives were, however, offset by a significant tapering of Covid-19-related services.
PLife REIT is also on track to commence upgrading of its Singapore hotels.
“Renewal term for PLife REIT’s Singapore hospitals has commenced with rental step-up of 2.0% for the interim period (Aug 23 to Dec 31) and 3.0% annual step-up thereafter for the next three years (2023, 2024 and 2025),” Koh writes.
The REIT previously announced that it will invest $150 million in renewal capex to upgrade its three Singapore hospitals in a bid to improve utilisation of space and resources and enhance operating performance. This includes the rejigging of hospital layout and right-sizing of operating theatres and wards.
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The asset enhancement initiative (AEI) is expected to start in January 2023 and will take about three years, says Koh.
In addition, the REIT has further expanded its presence in Japan with the acquisition of a total of five nursing homes in 2022. The acquisition brings the number of Japan nursing homes under the REIT to 57.
Further to his report, Koh also notes the REIT’s prudent capital management with its healthy aggregate leverage of 32.5% as at June 30. About 90% of the REIT’s borrowings are denominated in Japanese yen (JPY).
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“Natural hedge for its Japan portfolio is high at 92%. Thus, the negative impact of the yen’s depreciation on its net asset value (NAV) per share is expected to be manageable,” Koh writes.
“PLife REIT’s all-in cost of debt was low at 0.61% as of June. About 82% of interest rate exposure hedged to fixed rates. UOB Global Economics & Markets Research expects Bank of Japan to maintain JPY Policy Rate at -0.10% for the foreseeable future. There are no debt refinancing needs till June 2023,” he adds.
Pure play on healthcare and the ageing population with impeccable track record
To the analyst, the REIT is a pure play on healthcare and the ageing population, especially with Singapore witnessing an unprecedented shift with the number of residents aged 65 years or older multiply threefold in 2030 from 2005.
“By 2030, one out of every five residents will be a senior. The demographic shift and ageing of Singapore’s population will drive growth in demand for the healthcare industry,” he points out.
The REIT is also the “ultimate defensive” Singapore REIT (S-REIT) listed on the Singapore Exchange (SGX), says Koh. It has so far demonstrated an impeccable track record with 15 consecutive years of uninterrupted growth in its distribution per unit (DPU) driven by organic growth and new acquisitions. It had a long weighted average lease expiry (WALE) of 17.1 years as of June 2022, he adds.
Furthermore, its strategic collaboration with sponsor IHH Healthcare is comprehensive and fosters for future partnerships.
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Trimmed FY2023 DPU forecast
That said, Koh has trimmed PLife REIT’s DPU forecast for the FY2023 by 3%. This is after factoring in higher interest rate for floating rate loan of $86.7 million due 2024, he says.
Koh has also lowered his target price estimate to $4.13 from $4.34 previously. His new target price is based on a cost of equity (COE) of 7.0% and terminal growth of 3.0%. “We have raised the risk-free rate for [the] dividend discount model (DDM) from 3.00% to 3.25%,” he writes.
To the analyst, he is keeping his “hold” call as the REIT’s premium valuation already reflects the positive impact of leased extension for Singapore hospitals.
“Valuation is now more palatable after the recent retracement. Nevertheless, 2023 DPU yield is fair at 3.7%,” he says.
Units in PLife REIT closed 13 cents higher or 3.45% up at $3.90 on Oct 26.
