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1 REIT That Lagged the Market This Year

Credit: Kenny Loule

Year-to-date, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has generated a decent return of some 6.3% to 3,367 points even without accounting for dividends.

For real estate investment trusts as a group, it has been an even better year as the FTSE ST Real Estate Investment Trusts Index (SGX: FSTAS8670), a collection of 33 REITs that are listed in Singapore, has gained some 9% since the start of the year.

But for Parkway Life REIT (SGX: C2PU), 2014 hasn’t been memorable so far as it has been essentially flat for the year, lagging its peers and the market. The healthcare REIT closed at S$2.36 at the end of 2013 and is currently going for S$2.37 per unit. Even after factoring in gains from reinvested dividends, the REIT’s only up less than 6% year to date.

Parkway Life REIT invests in real estate used mainly for healthcare and healthcare-related purposes. It owns healthcare properties in Singapore, Japan, and Malaysia. In our city-state, it has Mount Elizabeth Hospital, Gleneagles Hospital, and Parkway East Hospital as part of its portfolio.

One of the reasons for the REIT’s relatively lackluster performance in 2014 may be that the trust was trading at lofty valuations to begin with. At the start of 2014, the REIT was trading at 1.5 times its net asset value (NAV) of S$1.57. Now, at its current price of S$2.37, it too is valued at 1.5 times its NAV of S$1.63 as of 30 September 2014. The REIT has been trading at that valuation range for some time now. Its current dividend yield of 4.5% is also one of the lowest among REITs in Singapore.

For the third quarter ended 30 September 2014, Parkway Life REIT posted a gross revenue of S$25.3 million, an 8.5% year-on-year rise. Distribution per unit (DPU) also rose around the same percentage to 2.90 Singapore cents per unit. The good showing was due to “rental income contributions from the Japanese properties that it acquired between the second half of 2013 and first quarter of 2014” and “higher rentals from existing properties”.

Talking about Japanese properties, the healthcare REIT announced last Friday that it is divesting seven nursing homes in Japan for a total price of around S$88.3 million. The properties were originally purchased for approximately S$68.9 million, so the sale would translate to a gain of around 28%. The selling price is also 8.3% above the properties’ latest valuation and 16.1% above their net book value.

Mr Yong Yean Chau, Chief Executive Officer of the manager of the REIT, commented on the sale: 

“The proposed divestment which sees us divesting those assets of less strategic value resonates well with our recycling strategy to rebalance and strengthen the overall quality and growth potential of PLife REIT’s Japan Portfolio.”

“As a first mover in the market, PLife REIT is well-positioned to take advantage of the growing elderly care healthcare market in Japan which has of late spurred increased competition from private sector investors resulting in a more robust and exuberant investment market.

This maiden divestment capitalises on an unique opportunity for PLife REIT to realise the seven properties at a good price as we strengthen our Japan portfolio mix. As we remain competitive in making our acquisitions, the divestment proceeds will enable us to acquire other attractive assets which would serve to enhance the overall value and growth potential of PLife REIT”.

If Parkway Life can indeed recycle the proceeds to “acquire other attractive assets”, boosting its DPU and NAV in the process, then the sale would be a great move for existing unit-holders of the REIT.

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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 Sudhan P doesn’t own shares in any companies mentioned.