Felicia Tan Fri, Jun 10, 2022
SAC Capital analyst Lam Wang Kwan has started coverage on ParkwayLife REIT (PLife REIT) with a “hold” recommendation and a target price of $4.69.
To Lam, the REIT offers several positives including its income stability and built-in rental escalation. That said, his target price and recommendation are capped by a lack of near-term catalysts.
As at his report dated June 10, PLife REIT had renewed the master leases for its three Singapore hospitals for 20.4 years till December 2042.
The master leases, which also come with a 10-year extension option, offers stable growth for unit holders, says Lam.
Existing lease terms, in which rental escalation is calculated based on the higher of 3.8% of respective adjusted hospital revenue or consumer price index (CPI) + 1%, will run until the REIT’s existing lease expiry on Aug 22, Lam notes.
During the interim period (from August to December), rent is guaranteed to increase by 2.0%. Subsequently, the REIT will invest $150 million between FY2023 to FY2025 in asset enhancement works to improve the productivity and efficiency of its Singapore hospitals portfolio, he adds.
During this period, rents are guaranteed to increase 3% annually after adjusting for rental rebate due to capex work. Thereafter, existing rental review formula will be reinstalled. This translates to a minimum 1% annual rental growth for the three hospitals in Singapore.
The REIT’s nursing home portfolio in Japan will also provide stability with its net income 100% hedged till the 3QFY2026.
Within the portfolio, 48 out of the REIT’s 52 properties are insulated from rent reduction. Of the 48 properties, 45 of them are subjected to rental review every two to five years, in which rent will be adjusted upwards if the market rate is higher than the existing rate.
In addition, the rent of the remaining four of the 52 properties will also be renegotiated every two to three years.
“The Japan portfolio will provide income stability with potential upside coming from periodic rental review,” says Lam.
As at March 31, the REIT has a gearing ratio of 34.5%. Its next refinancing need is in June 2023.
With its interest coverage ratio (ICR) of 20.2x, the REIT has a debt headroom of $715.6 million at a leverage limit of 50%, which allows it room to pursue inorganic growth.
“PLifeREIT has $796 million of debt, with [around] 80% denominated in JPY. Cost of debt is at 0.57%. 81% of the net interest exposure hedged with a combination of interest rate swaps and interest rate caps,” Lam writes.
“We estimate that for every 100 basis point (bps) increase in interest rate, effective interest rate will increase by 0.7%. We assume effective interest rate to rise to 1.2% in our forecasts,” he adds.
Furthermore, the analyst expects the REIT’s distribution per unit (DPU) to continue its growth trajectory over his three year-forecast largely based on the 3% rental escalation from the master lease renewal.
“PLife is trading at a yield of 2.9%, compared to Singapore’s 10-year bond yield of 2.8% and its cost of funds of 0.6%. The REIT is trading at FY2022 P/NAV of 2.1. [Around] 15% of the NAV denominated in JPY, the depreciating JPY (-11% year-to-date) will impact [the REIT’s] share price,” says Lam.
Units in PLife REIT closed 1 cent lower or 0.2% down at $4.92 on June 10.