UOB Kay Hian's Jonathan Koh has kept his "buy" call on Parkway Life REIT following its FY2023 results. And with steady distribution growth ahead, he has raised his target price to $5.07 from $4.84.
For its 2HFY2023, Parkway Life REIT reported a distribution per unit of 7.48 cents, up 2.1% y-o-y, in line with expectations. The higher payout stems from stronger revenue and net property income from the REIT's acquisitions in Japan and higher rents collected from the Singapore hospitals.
However, a weaker yen offset some of the gains, as had higher financing costs related to the funding of so-called Project Renaissance, which refers to an extensive AEI to be done to the Mount Elizabeth Hospital as part of the lease renewal. Parkway Life REIT will spend $150 million and sponsor IHH Healthcare Q0F another $200 million.
As at end of FY2023, the REIT recognised a portfolio valuation gain of $15.8 million, up 0.4% y-oy, equivalent to NAV per share of $2.34.
Its aggregate leverage was stable at 35.6% as at end of last year.
Parkway Life REIT has secured six new committed and long-term facilities, comprising both Singdollar and yen-denominated loans.
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The new facilities will be utilised to finance the renewal capex for Mount Elizabeth Hospital and pre-emptively refinance the loans maturing this year and 2025.
In his Feb 7 note, Koh notes that the REIT's manager has adopted a conservative approach to risk management, with 90% of its interest rate exposure hedged till end of 1Q24. It PREIT has extended its JPY net income hedges for another two years till 1Q29 to shield against volatility in the Japanese yen.
Under Project Renaissance, the Mount Elizabeth Hospital, the single most valuable asset of the REIT with an appraised value of $897 million, will undergo an extensive renovation.
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Among other improvements, the hospital, completed in 1979, will have new mechanical, electrical and fire protection systems.
The hospital will also create new capacity for inpatient treatment; 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 the growing demand for admissions from local and foreign patients.
Under the leasing structure, the hospitals in Singapore, which constitute two-thirds of the portfolio value, has in place a 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, says Koh.
There is also an option to renew for a further 10 years (2043 to 2052). Singapore hospitals will benefit from a rent step-up of 25.3% in 2026 after the completion of Project Renaissance, he adds.
Koh is keeping his DPU projections for the current FY2024 and the coming FY2025 and FY2026.
"Parkway Life REIT appeals to risk-averse investors who value PREIT’s defensive strength due to its healthcare orientation and long WALE of 16.3 years," he says.
His new target price of $5.07 is derived using a dividend discount model, with cost of equity assumed at 6.35% and terminal growth at 3%.
