Can the Distribution Growth at Parkway Life REIT Continue? Part 2

Welcome to the second part of my study of Parkway Life REIT’s  (SGX: C2PU) ability to sustain the growth of its distributions.

In my previous article,  I covered the REIT’s sources of revenue and sales growth over the past five years between 2010 and 2014. In here, I’d look at Parkway Life’s gross profit and debt profile.

As a recap: The REIT has outperformed the market over the past five-plus years. The REIT has recorded capital gains of around 33%. 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. Over the past five years between 2010 and 2014, Parkway Life has paid out steadily increasing distributions totaling around 51 cents per share.

A closer look

Ideally, we would like to see the REIT’s revenue dollars drip down to the bottom-line. For that, we look into the Net Income Property (NPI) of the properties. The NPI is defined as the rental revenue minus all direct expenses.

Parkway Life - 2

Source: Parkway Life’s Earnings Report

Between 2010 and 2014 (note: the financial year for Parkway Life coincides with the calendar year), the REIT’s NPI grew at a compounded annualized rate of 6.2% per year. This is faster than the 5.8% rate of growth for gross revenue, so it’s a positive.

It should be no surprise that the Hospital Properties (Singapore) and the Nursing Homes (Japan) segments were the largest revenue contributors for 2014; together, the segments took up 97.4% of total revenue.

Furthermore the two segments were also the main contributors to Parkway Life’s NPI growth over the past five years.

Foolish investors should also keep an eye on a REIT’s debt profile. The debt profile may provide clues on how a REIT is funded, and its sensitivity to the interest rate environment. We can look at Parkway Life’s latest debt profile as of 31 December 2014:

Gearing ratio 35.2%
Interest Cover Ratio 10.1 times
Weighted Average Term to Maturity 3.7 years
Effective All-In Cost of Debt 1.4%
Total debt $586.7 million

Source: Parkway Life earnings presentation

Parkway Life probably has one of the best debt profiles I have seen among the REITs in Singapore. Its all-in cost of debt stands at a competitive 1.4% while the weighted average term to maturity of the loans is a healthy 3.7 years.

Furthermore, the REIT boasts an interest cover ratio of 10.1. There is no further funding required until FY2016 but the progress in refinancing of debt is where Foolish investors should still keep a watchful eye on.

Foolish summary

As lifelong students of Foolish long-term investing, it pays to look under the hood to understand whether a rise in a REIT’s share price is supported by the quality of growth that we are looking for.

Parkway Life has enjoyed steady growth along with relatively protected revenue sources. The nature of the healthcare industry is typically non-discretionary as well.

Foolish investors may want to keep their eyes on how the REIT can grow its nursing homes business in Japan. Parkway Life does have resources to pounce on growth opportunities given that it has debt headroom to expand its property portfolio.

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.