Is Parkway Life REIT a Good Investment?
Parkway Life REIT (“PLife REIT”) (SGX: C2PU) is one of Asia’s largest listed healthcare REITs. Listed in Singapore, It invests in income-producing real estate and real estate-related assets used primarily for healthcare and healthcare-related purposes. As at 30 June 2017, PLife REIT’s total portfolio size stands at 49 properties, totalling approximately S$1.7 billion. Over the past 5 years, the company has returned about 70% in total return to its unitholders. What is the secret behind this great return? Here are 7 things you need to know about Plife REIT.
Stock Information
TICKER SYMBOL: SGX: C2PU
MARKET CAP: S$1.7 billion
INDUSTRY: REIT
The Business
PLife REIT is a healthcare REIT which owns 49 properties across 3 countries, Singapore, Japan and Malaysia.
Below is a snapshot of the REIT’s portfolio.
Source: Parkway Life REIT presentation slides
The majority of the properties in the portfolio are in Japan. In fact, a total of 45 properties is located in Japan. Singapore has 3 properties and Malaysia has 1. It has 100% occupancy for its portfolio, as the majority of its properties are master leased. The Singapore hospitals are leased by Parkway Hospitals Singapore Pte Ltd, which is related to its sponsor. The Japan properties are mostly nursing homes which are leased out to well-known nursing home operators, there is also one property which is a pharmaceutical distributing and manufacturing facility. Finally, the Malaysian property is leased to Parkway Hospital Group as well.
Source: Parkway Life REIT presentation slides
PLife REIT’s leases structures have inbuilt rental escalation clauses that allow it to grow year over year for its Singapore properties. While in Japan, the lease structures are more diverse, the diagram above shows the details.
Source: Parkway Life REIT presentation slides
Moving on to PLife REIT’s track record, it can be seen that over the last 10 years the REIT has seen growing distribution per unit. This is good evidence of the strong growth that the REIT has enjoyed over the long term. In the current year, the REIT is also seeing strong growth. Despite the strong growth, the REIT is not sitting on its laurels.
Source: Parkway Life REIT presentation slides
As seen from the diagram above, PLife REIT has planned its next moves for the near future. Of importance, in my opinion, is the fact that the manager puts great emphasis on asset improvements and enhancement this helps extract further value from the properties. Also, the manager has been consolidating assets in Japan and improving synergies to drive higher cost savings. Lastly, the manage is also seeking out new opportunities in its existing and new markets to diversify its risks further.
Let’s move on to look at the REIT’s key opportunities and risks.
Key Opportunities
Diverse earnings base
PLife REIT has a total of 49 properties across 3 countries. Singapore and Japan are major contributors while Malaysia contribution is less than 1% of total revenue. Although 2 countries make up most of its earnings, the account for 48 of the 49 properties. This allows the REIT to have a resilient earning base as no one property is responsible a big chunk of revenue or earnings.
Source: Parkway Life REIT presentation slides
The diagram below, shows the current asset mix and allocation. As seen below, hospitals and medical centres make up 60.4% of the portfolio, 38.1% are nursing homes while the pharmaceutical facility makes up 1.5%. In the long run, the manage hopes to optimise its target mix to make it slightly more balanced. This should help to further diversify risk.
Source: Parkway Life REIT presentation slides
Hospitality is more resilient
The next key opportunity for PLife REIT is the fact that hospitals & medical centers, as well as nursing homes, are not economy dependent. In fact, with the ageing population in Japan and increasing in other parts of the world, both facilities will become even more essential in the future. This means that the REIT is large recession proof due to the nature of business its properties are used for.
This is unlike, retail spaces that have been facing pressure from growth in e commerce. And this has led to a dampening effect on demand for such spaces.
Key Risks
Competition in a growing sector
The increase in demand for medical services and nursing homes has brought about many new entrants into the market. This means that for PLife REIT it needs to ensure that its properties are well positioned so that demand remains high. This could be due to many factors such as location, maintenance, operators of the nursing home to name a few.
Of course, with new entrants for a REIT owner, they need to be wary of default risk. To reduce default risk PLife REIT needs to ensure that the well-known nursing homes lease their properties. While the business risk is not totally PLife REITs risk its risk comes in the form of over capacity of these spaces. On this front PLife REIT hopes to optimise its asset mix.
Slowdown in healthcare business
Hospitals located in Singapore generate most of PLife REIT’s revenue and profits. In Singapore, the hospitals haven’t been performing as well as in the past. This is mostly due to drop in medical tourism. This could be due to many factors such as poor economic growth or services being too costly here in Singapore. Whichever the reason, PLife REIT needs to keep an eye on the situation to ensure that the hospital operators don’t find themselves in a tight position due to decreasing revenue & profits and increasing rents.
Valuation
PLife REIT currently trades at a Price to book (P/B) ratio of 1.6 and spots a 3.5% distribution yield for its investors. Both metrics are higher compared to its five-year average of 1.4 P/B ratio and 4.5% distribution yield. Its closest peer in the Singapore market would have to be First REIT, read more about it here.
Investor Relations
Investor Relation Material:
Parkway Trust Management Limited (Manager of Parkway Life REIT)
80 Robinson Road
#02-00 Singapore 068898
Top Shareholders (31st December 2016)
- Parkway Investments Pte Ltd 35.25%
- Citibank Nominees Singapore Pte Ltd 17.72%
- Dbs Nominees (Private) Limited 15.96%
Financials
What Do You Think Of Parkway Life REIT As An Investment? Will You Invest In it? Share Your Views Below
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ketz’s personal capacity. It does not in any way represent those of his employer and other related entities. Ketz does not own any companies mentioned.
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