Time for Parkway Life Reit to acquire Mount Elizabeth Novena Hospital: SAC Capital

THE time has come for Parkway Life Real Estate Investment Trust (Reit) : C2PU 0% to proceed with the much-touted acquisition of Mount Elizabeth Novena Hospital, said SAC Capital on Friday (Jan 12).

The hospital has established itself as a stable asset with consistent cash flow, so it has become “an ideal target for capital recycling” for its sponsor IHH Healthcare, said SAC analyst Matthias Chan.

“As IHH focuses on its growth strategy, to maximise balance sheet efficiency, the asset-light or capital-recycling model is likely to be brought to the fore,” he said. He added that the heartland hospital stands out in IHH’s portfolio for the way it synergises best with Parkway Life Reit’s assets.

In addition, Parkway Life Reit, whose major shareholder Parkway Holdings is an IHH unit, has the right of first refusal (ROFR) on the acquisition of Mount Elizabeth Novena Hospital.

As the estimated deal size of S$2.0 billion is comparable to Parkway Life Reit’s market capitalisation of S$2.2 billion, Chan expects the Reit to acquire a one-third stake of the hospital at a time over a five to six-year period, or at about S$650 million to S$700 million for each tranche.

He said the deal would still be yield-accretive if Parkway Life Reit funds the acquisition purely through new equity, and sets aside debt for other opportunities.

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He noted that the Reit will have a debt headroom of about S$370 million upon raising its gearing to 45 per cent from 36 per cent as at the end of last September.

He highlighted that the current capitalisation rate of Singapore hospitals, at around 5 per cent, compares favourably with the Reit’s annualised distribution yield of 4 per cent, based on its FY2023 H1 financials.

Given the new annual rent-review formula based on either adjusted hospital revenue or consumer price index (CPI) – to be applied from FY2026 – Chan sees favourable earnings growth from the Reit’s Singapore properties.

Parkway Life Reit stands to benefit from an annual rental upside of more than 3 per cent, based on the CPI formula and Singapore’s average 10-year CPI of 2.5 per cent. If the hospital’s revenue formula produces higher rent, the Reit’s earnings would get an even bigger boost. “In the meantime, till FY2026, rental increase has been locked in at 2 to 3 per cent per annum,” he added.