2H23: Steady Growth With Impending Yield Uplift In 2026 

PREIT delivered steady growth with DPU rising 2.1% yoy to 7.48 S cents in 2H23. The uplift in rents from Project Renaissance will kick in starting 2026, lifting distribution yield higher by 0.8ppt to 4.9%. PREIT appeals to risk-averse investors who value PREIT’s defensive strength due to its healthcare orientation, long WALE of 16.3 years and healthy aggregate leverage of 35.6%. Maintain BUY. Target price: S$5.07.

RESULTS 

• Parkway Life REIT (PREIT) reported DPU of 7.48 S cents for 2H23 (+2.1% yoy), which is in line with our expectations.

• Sustainable growth from healthcare and renewed master leases. Gross revenue and NPI grew 4.7% and 4.8% yoy respectively in 2H23 due to: a) contribution from nursing homes acquired in 2022 and 2023, and b) higher rents from Singapore hospitals under the new master lease agreements, which were partially offset by depreciation of the JPY.

• Coping with higher cost of debt. Finance costs have increased 62.8% yoy due to funding of capex for Project Renaissance and new acquisitions in 2022 and 2023 as well as higher interest costs from SGD-denominated debts. Interest cost on loans drawn down to fund Project Renaissance have no distribution impact as they are capitalised.

• Enhancing scale of Japan portfolio. PREIT acquired two new nursing homes in the Osaka Prefecture, namely HIBISU Shirokita Koendori and HIBISU Suita, for total consideration of ¥1,766.4m (S$16.4m) on 27 Oct 23. The two freehold properties are well-located in residential areas in close proximity to central Osaka City. They have long average lease term of 29 years. The yield-accretive acquisitions have initiated a new strategic partnership with KK FDS, an established real estate developer in Japan. PREIT’s portfolio of nursing homes in Japan has expanded to 59 properties.

• Growth in capital values. PREIT recognised portfolio valuation gain of S$15.8m. NAV per unit increased 0.4% yoy to S$2.34.

• Resilient balance sheet. Aggregate leverage was stable at 35.6% as of Dec 23. PREIT has secured six new committed and long-term facilities, comprising SGD- and JPYdenominated loans. The new facilities will be utilised to finance the renewal capex for Mount Elizabeth Hospital (MEH) and pre-emptively refinance the loans maturing in 2024 and 2025. PREIT has no long-term debt refinancing needs till Mar 25.

• Conservative risk management. 90% of PREIT’s interest rate exposure is hedged till end-1Q24. PREIT has extended its JPY net income hedges for another two years till 1Q29 to shield against volatility in the Japanese yen.

STOCK IMPACT 

• Upgrading MEH for higher productivity. PREIT launched the upgrading of MEH on 3 Jan 23. The S$350m Project Renaissance, jointly funded by sponsor IHH Healthcare and PREIT (PREIT’s share in renewal capex is S$150m), will transform MEH into a modern and integrated multi-service hub over three years. Public-facing areas, including the dropoff point and lobby, will be refreshed with a new look. A new VIP lounge will be added at Level 1. Infrastructure will be improved by upgrading technology and equipment. The mechanical, electrical and fire protection systems will be upgraded to comply with the latest building codes and fire safety regulations.

• Creating an enlarged healthcare campus. Project Renaissance will develop the enlarged MEH campus with various healthcare services repositioned across adjacent buildings within the vicinity. The fertility centre and haematology & stem cell transplant centre will be relocated to The Heeren, creating space at MEH for the expansion of inpatient hospital-based clinical services. The radiology, executive health screening and outpatient rehabilitation centres will stay put at Paragon.

• Capacity expansion for inpatient treatment. Clinical assets and back rooms will be redesigned for better connectivity and privacy. The emergency department and inpatient and outpatient treatment centres will be expanded for better operational flow. Major operating and day surgery theatres will be consolidated. Its wards will be reconfigured with 56 single-bed wards added to its existing 112 single-bed wards to cater to growing demand for admissions from local and foreign patients.

• Reaping the fruit of renewal capex. The lease structure for Singapore hospitals provides guaranteed 3.0% annual rental step-up for three years (2023, 2024 and 2025) and annual (CPI+1%) rent review formula in-place for the subsequent 17 years. There is also an option to renew for a further 10 years (2043 to 2052). Singapore hospitals will benefit from rent step-up of 25.3% in 2026 after the completion of Project Renaissance (rent rebate not applicable after AEI is completed). PREIT’s share of the renewal capex of S$150m will be fully financed by external borrowings.

EARNINGS REVISION/RISK

• We maintain our DPU forecasts for 2024, 2025 and 2026.

VALUATION/RECOMMENDATION 

• Maintain BUY. PREIT appeals to risk-averse investors who value PREIT’s defensive strength due to its healthcare orientation and long WALE of 16.3 years.

• We roll forward our valuations, and our new target price of S$5.07 is based on DDM (cost of equity: 6.25%, terminal growth: 3.0%).

SHARE PRICE CATALYST 

• Higher contributions from the extended leases for Singapore hospitals.

• Yield-accretive acquisitions in Singapore.

BUY by UOB Kay Hian Research. Share price closed at S$3.63