Inflation-linked rental growth
- FY21 DPU +2.1% y-o-y, in line
- Borrowing costs at its lowest of 0.52%, with no refinancing until 1 Jun 23
- 2% to 3% rental growth guaranteed from Singapore hospitals; potential catalysts include acquisition of pipeline Singapore hospital and venturing into new market)
- Maintain BUY; TP of S$5.75
Investment Thesis
A new lease of life secured for the next two decades. Parkway Life Real Estate Investment Trust (PREIT) has surpassed expectations with the renewal of the Singapore hospitals’ master lease that comes with a c.40% rent increment, 27% rise in NAV, and 20-year extension of the lease tenure. While trading at a premium of 2.4x P/NAV, we believe PREIT’s growth story remains intact with catalysts in the pipeline. BUY!
Staying Singapore-centric, with “renewed” ROFR on Mount Elizabeth Novena Hospital. The ROFR on Mount Elizabeth Novena Hospital has been “renewed” for 10 years, implying PREIT’s intention to remain Singapore-centric and the committed support that its sponsor lends.
Third pillar of growth. PREIT’s management believes that it is timely to look at building a third pillar for the company’s next growth phase, which, we think, would be in matured markets.
Valuation:
Maintain BUY, raised TP to S$5.75. Our DCF-derived target price (TP) of S$5.75 is based on a weighted average cost of capital (WACC) of 4.7% and terminal growth of 2.9%. We have factored in the renewal of the master lease and assumed new acquisitions worth S$25m.
Where we differ:
A new chapter of growth. We believe the rental upliftment from the renewal of the master lease marks the start of a new chapter of growth. PREIT is now in a better position of focusing on inorganic growth via i) asset recycling strategies, ii) venturing into a new market (third pillar), and iii) exercising ROFR from its sponsor.
Key Risks to Our View:
Currency risks. PREIT derives c.40% of its earnings from healthcare assets in Japan and is exposed to foreign exchange (forex) volatility.