Can the Distribution Growth at Parkway Life REIT Continue? Part 1

Parkway Life REIT  (SGX: C2PU) has outperformed the market over the past five-plus years.

The REIT has recorded capital gains of around 33% from 1 January 2010 to yesterday’s close. By comparison, the capital gains of the SPDR STI ETF (SGX: ES3) – a proxy for the Straits Times Index (SGX: ^STI) – was 16.5% for the same duration.

Parkway Life is one of the largest listed healthcare real estate investment trusts (REIT) in Asia by asset size. At the local front, the REIT has ownership over three private hospital properties. Beyond the shores of Singapore, Parkway Life also has stakes in 37 healthcare-related assets in Japan, and strata-titled unit/lots in a Gleneagles medical centre in Malaysia.

Being a shareholder of a REIT gives you partial ownership to all the real estate that it owns. As per the Monetary Authority of Singapore (MAS), REITs are mandated to distribute at least 90% of its profits as dividends to enjoy tax transparency. I also wrote about a few pointers for picking REITs here.

Over the past five years between 2010 and 2014, Parkway Life has paid out steadily increasing distributions totaling around 51 cents per share.

Financial Year Distribution per unit (Singapore cents)
2010 8.79
2011 9.60
2012 10.31
2013 10.75
2014 11.52

Source: Parkway Life’s Earnings Presentation;

Although the returns from Parkway Life has been healthy, as Foolish investors, we should look behind the curtains to understand how sustainable the REIT’s distributions are, and how it can grow.

A closer look

To get a sense of the resilience of the REIT’s property portfolio, we can look at the gross revenue contributed by the different types of properties.

Parkway Life - 1

Source: Parkway Life’s Earnings Report

Between 2010 and 2014 (note: the financial year for Parkway Life coincides with the calendar year), gross revenue for Parkway Life had grown at a compounded annualized rate of 5.8% per year.

Hospital Properties (Singapore) was the largest revenue contributor for 2014, taking up 63% of Parkway Life’s total revenue. The segment had also been a strong contributor to the REIT’s revenue growth over the past five years.

The smaller Nursing Homes (Japan) segment had also played a big role in Parkway Life’s revenue growth between 2010 and 2014.

Beyond the growth in revenue, it is worth noting the quality of Parkway Life’s revenue as well. As of the end of 2014, the REIT has favorable lease structures where 93% of its portfolios have downside revenue protection. In addition, 69% of the total portfolio is pegged to a consumer price index (CPI) linked formula that could provide future rental growth and afford some protection from the ravages of inflation.

Foolish summary

The exercise above is to look at the REIT’s sales alone. As a next step, we should observe if the top-line growth trickles down to the bottom-line for the REIT to sustain its growth in distributions.

But, that’s for the next article.

Parkway Life last traded at S$2.40 on Wednesday. This translates to a historical price-to-book ratio of 1.43 and a distribution yield of around 4.8%.

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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 Chin Hui Leong owns shares in Parkway Life REIT.