• New master lease agreements and renewal capex agreement provide strategic benefits.
• Parkway Life REIT (SGX:C2PU)'s WALE expands to 16.6 years, lifting proforma DPU/NAV by 32.4%/27%.
• Reiterate ADD rating on Parkway Life REIT, with a higher DDM-based target price of S$5.05.

Parkway Life REIT Extends Strategic Collaboration for Singapore Hospitals

• Parkway Life REIT announced it has entered into new master lease agreements (MLAs) and a Renewal Capex Agreement with IHH Healthcare (SGX:Q0F), the master lessee for its three Singapore hospitals. In addition, IHH Healthcare has also granted it the right of first refusal (ROFR) over the Mount Elizabeth Novena Hospital property for a period of 10 years.
• The new MLA will be for a term of 20.4 years from 23 Aug 2022 to 31 Dec 2042, with an option to renew for a further 10 years to 31 Dec 2052. The initial rent under the new MLA is S$97.2m (39.6% higher than the estimated rent for the last year of the expiring term) while the rental formula, which is similar to the current formula, shall be applicable from Year 4 (i.e. FY26).
• We estimate the new MLAs will lengthen Parkway Life REIT’s portfolio weighted average lease expiry (WALE) to 16.6 years, providing it with a long-term income certainty and an inbuilt growth structure.
• Parkway Life REIT will seek unitholders approval for these transactions at an EGM.

Win-win Move to Enhance Singapore Hospitals’ Competitiveness

• Parkway Life REIT will also inject a one-time Mark Certification and technological advances. This will likely improve the operational performance and asset values of the properties and enable IHH Healthcare to ride the growth potential of the Singapore healthcare industry, in our view.

Transactions Are DPU and NAV Accretive

• We view these developments as positive for Parkway Life REIT. We would likely deepen Parkway Life REIT’s debt headroom, providing it even more room to tap inorganic growth opportunities.

Reiterate ADD

• We tweak up our FY21-22F DPU estimates for Parkway Life REIT by 0.08-1.8% to factor in the like Parkway Life REIT for its stable yield, backed by a strong and defensive income structure.
• Potential re-rating catalysts: accretive new acquisitions.
• Downside risk: a spike in Singapore government bond yields resulting in compressed yield spreads.

Source: CGS-CIMB Research - 15 Jul 2021