UOB Kay Hian analyst Jonathan Koh has upped his target price on Parkway Life REIT (PLife REIT) to $4.82 from $4.72 previously after he sees a “potential catalyst in the making”.
Koh has, however, kept his “hold” recommendation for the time being.
In March, PLife REIT’s sponsor IHH Healthcare had submitted a bid to acquire Ramsay Sime Darby for RM5.67 billion ($1.83 billion) on a cash-free debt-free basis. Should the acquisition proceed, IHH will need funding, which could be fulfilled if it divests the hospital block of Mount Elizabeth Novena Hospital to PLife REIT, Koh writes.
On July 14, 2021, PLife REIT’s sponsor, IHH Healthcare, granted the REIT the first right of refusal (ROFT) to acquire the hospital block of Mount Elizabeth Novena Hospital for a period of 10 years.
Should PLife REIT choose to acquire the hospital from IHH Healthcare for $1.286 billion, the move could increase its distribution per unit (DPU) for the FY2023 by 17% to 17.6 cents, assuming that the acquisition would be completed by end-2022.
The potential acquisition would then raise Koh’s target price on PLife REIT to $5.42.
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“PLife REIT trades at distribution yield of 3.2% for FY2025 and 3.9% for FY2026 due to investors’ preference for sustainable growth in the healthcare industry and its long weighted average lease expiry (WALE) of 17.3 years. Its premium valuation supports accretive acquisitions,” Koh writes.
He adds that the potential acquisition of the hospital is a “sizeable” one and would increase the REIT’s assets under management (AUM) by 57%. “Management might consider pursuing the acquisition over two phases to make the sizeable deal more digestible,” the analyst suggests.
Mount Elizabeth Novena Hospital opened its doors in 2012. It has 13 operating theatres, 38 medical suites and 333 single-bed-only wards.
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The property is currently valued at RM3.961 billion ($1.278 billion) on IHH’s balance sheet, says Koh.
Within the same report, Koh is also positive on the ongoing asset enhancement initiatives (AEIs) for the REIT’s three hospitals in Singapore, Mount Elizabeth Hospital at Orchard Road, Gleneagles and Parkway East Hospital.
To him, the REIT will benefit from the enhancement to revenue generation as rental escalation is pegged to the consumer price index (CPI) of + 1% or 3.8% of adjusted hospital revenue, whichever is higher.
The upgrading to the hospitals will focus on improving productivity and efficiency, including rejigging of hospital layout and right-sizing of operating theatres and wards, the analyst notes.
The three hospitals have a fixed rental escalation at 3% per year for 2022, 2023 and 2024, in which the escalation will be pegged to CPI + 1% formula or 3.8% of adjusted hospital revenue, whichever is higher, thereafter.
As such, growth in rental for the three hospitals in Singapore is always positive and at least 1% per year, says Koh.
Finally, PLife REIT’s conservative capital management is a plus for Koh.
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As at December 2021, PLife REIT has maintained a healthy aggregate leverage at 35.4%.
“It has term out with a five-year committed loan facility of up to 7.7 billion yen ($83.75 million) secured in December 2021. There is no debt refinancing till June 2023. Its weighted average debt maturity has improved to 3.9 years. Cost of debt remains low at 0.52%, while interest coverage ratio is an impressive 21.5x,” he writes.
With this, he has estimated a DPU of 15.1 cents for the FY2023, 15.3 cents for the FY2024, 15.6 cents for the FY2025 and 18.6 cents for the FY2026. The estimates are based on extension of the lease for the three Singapore hospitals, he says.
Catalysts to the REIT’s unit price include a step-up in rents for its Singapore hospitals in 2026 once their AEIs are completed. Yield-accretive acquisitions, including the acquisition of Mount Elizabeth Novena Hospital, are also factors that may drive up its unit price.
As at 4.01pm, units in PLife REIT are trading 2 cents higher or 0.42% up at $4.83.
