Parkway Life REIT (SGX: C2PU), or PLR for short, is one of the largest listed healthcare real estate investment trusts (REITs) in Asia. Its portfolio consists of three private hospitals in Singapore (Mount Elizabeth, Gleneagles and Parkway East) and 45 healthcare-related assets in Japan. It also has strata-titled units in Gleneagles Intan Medical Centre in Malaysia.
The REIT has had a stellar record of increasing shareholder value through growing distributions and net asset value per unit, and through prudent management of capital and asset enhancement initiatives. However, the past is not always representative of what is to come in the future.
To assess if the REIT can continue to possess the financial muscle to undertake yield accretive acquisitions to boost shareholder value in the future, I have decided to do a little research on their debt profile.
As of 31 December 2017, PLR had a total debt of S$642.28 million and total assets of S$1.77 million. This puts its gearing ratio at 36.4%, a safe distance from the regulatory ceiling of 45%.
The REIT can increase its debt load by a total of S$278.5 million before it hits the 45% gearing limit. More conservatively, the REIT has a debt headroom of $107.7 million before it reaches a gearing ratio of 40%.
Interest coverage ratio and cost of debt
PLR is fortunate to be able to borrow in Japan where the cost of debt is meagre compared to other countries. As a result, the all-in cost of debt is at just 1%. Furthermore, most of its interest rate exposure is hedged, reducing the effect of any interest rate changes.
In the last two years, PLR has also managed to issue Japanese Yen denominated fixed-rate bonds at 0.57% per annum, which helped to reduce its cost of debt from 1.1% to its current level of 1%.
With the low-interest expense, PLR’s interest coverage ratio sits at a very comfortable level of 11.3 times.
Debt maturity profile
Finally, the debt maturity profile shows us when the REIT needs to repay its borrowings. After the refinancing exercise mentioned earlier, PLR had a weighted average term to maturity of 3.1 years. Furthermore, only 3% of its loans are due this year and a further 20% in 2019. The rest is due in 2020 and beyond.
The Foolish bottom line
Based on what we have seen, PLR has managed its debt very prudently. This gives it the springboard to make accretive acquisitions in the future if they see fit.
However, here’s a word of caution. PLR managed to grow its distributions per unit by 91.8% from its initial public offering in 2007 to 2016. However, in 2007, PLR had a gearing ratio of just 3.8%, allowing it plenty of headroom to grow through debt-funded acquisitions. Even though PLR’s current leverage allows it to borrow more in the future, it is by no means in the same financial position as it used to be.
Nevertheless, the REIT still has room for growth, but investors should know that the REIT is unlikely to achieve the same fast pace of DPU growth as it had in the past 10 years.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of Parkway Life REIT. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.