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Distributions Up At Parkway Life REIT

Parkway Life

Healthcare-related Parkway Life Real Estate Investment Trust (SGX: C2PU) released its third quarter earnings this morning and saw its distributions grow.

The REIT owns a total of 44 properties across Singapore, Japan, and Malaysia with a total appraised value of S$1.51b. The properties include four hospital & medical centres, 39 nursing homes, and one pharmaceutical product distributing and manufacturing facility.

The bulk of its properties’ value – S$980m out of S$1.51b – is concentrated on 3 hospital & medical centres in Singapore: Mount Elizabeth Hospital, Gleneagles Hospital, and Parkway East Hospital. The REIT owns an S$8.1m medical centre in Malaysia, with the rest of the remaining 40 properties located in Japan.

Some basic numbers

For the three months ended 30 Sep 2013, Parkway Life’s gross revenue fell 2.4% year-on-year to S$23.3m leading to net property income declining by the same percentage points to S$21.9m.

On the other hand, distributable income rose 3.5% to S$16.1m, with distributions per unit (DPU) up 3.5% as well to 2.66 Singapore cents.

The REIT’s gross revenue had declined primarily due to a depreciating Japanese yen which offset rental growth from existing properties as well as new rental income coming from recently-acquired properties in July 2013.

The weak Japanese yen might have had even larger impacts on the REIT’s results, but that was managed through a hedging of net income from Japan. In fact, the hedging activities even produced a net foreign exchange gain of S$0.4m in the quarter, which partially accounted for the rise in distributable income despite the fall in gross revenue.

Operational highlights and the balance sheet

The REIT ended the quarter with a 100% committed occupancy rate for its properties with a weighted average lease expiry of 14.4 years.

Parkway Life’s balance sheet has improved somewhat compared to a year ago, with its gearing ratio falling from 36.4% to 35.2% despite a slight hike in total debt from S$536m to S$539m.

In addition, the REIT’s average cost of debt (i.e. interest rates) declined from 1.61% to 1.54%, with its interest cover ratio – the ratio of earnings before interest and taxes to interest expenses – improving from 8.6 times to 10.1 times.

The REIT does not face any near-term financing risks and has an evenly spaced-out debt-maturity profile as shown in the table below:

Loam Amount Due Date
S$182m 2015
S$80m 2016
S$92m 2017
S$119m 2018
S$63m 2019

What’s next for Parkway Life REIT

Yong Yean Cheau, chief executive of Parkway Life’s manager, commented on some future plans: “We [the manager] intend to continue exploring opportunities to further boost our portfolio and financial performance and to continue delivering stable returns to Unitholders, leveraging the growing demand for high quality healthcare services and infrastructure in the Asia Pacific region.”

While inflation can always be a threat to any business’s costs if they lack the ability to raise prices, the REIT is somewhat protected from that. 65% of Parkway Life’s portfolio is pegged to a Consumer Price Index-linked revision formula, meaning to say the majority of its rents tags along with general inflation.

Parkway Life REIT’s DPU has grown from 6.32 cents in 2007 to 10.31 cents in 2012, perhaps reflecting the secular trend of growing demand for quality healthcare services as mentioned by Yong. Along the way, its units have gained 113% in price (excluding distributions) since the start of 2008, far outpacing the Straits Times Index’s (SGX: ^STI) essentially flat returns.

Much of the REIT’s ability to beat the market going forward would hinge on the demand for quality healthcare provided by its hospitals, medical centres, and nursing homes. Hospital operator Raffles Medical Group (SGX: R01) already sees the potential for competition to heat up for its flagship Raffles Hospital in Singapore as new public and private hospitals are being developed in the Asian region.

Can Parkway Life’s hospitals keep up? That’s something investors should watch out for.

Valuation

The REIT opened at S$2.40. At that price, its units are valued at 1.5 times book value and carry a distribution yield of 4.4% based on its annualised distribution for the first nine months of the year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares in Raffles Medical Group.