First REIT (SGX:AW9U) and Parkway Life REIT (SGX:C2PU) are two prominent healthcare REITs in Singapore. They both own a portfolio of hospitals and nursing homes and were listed in Singapore some 10 years ago. With investors favouring REITs at the moment, I wanted to see which of these two healthcare REITs would make a better investment.
To determine the winner, I will compare fianancial aspects of the REITs, as well as, valuations to see which REIT holds more value for investors. With that, lets begin.
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Introducing the contenders
First REIT has a portfolio of 20 properties comprising 16 in Indonesia, three in Singapore and one in South Korea. The properties are collectively worth around $1.35 billion. The REIT is sponsored by Lippo Karawaci, Indonesia’s largest property group, which has a strong pipeline of around 40 healthcare properties. First REIT, consequently has the right of first refusal to Lippo Karawaci’s healthcare properties, providing it a potential platform for growth.
Parkway Life REIT has a portfolio size of 50 properties valued at approximately S$1.75 billion. Its properties include three prominent private hospitals in Singapore (Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital), a medical centre in Malaysia and 46 healthcare properties in Japan.
Historical earnings growth
The first comparison I want to make is the historical earnings growth.
Over the last five years, First REIT has grown its revenue steadily from S$83.3 million in 2013 to S$111 million in 2017. Its net property income has likewise risen from S$80.2 million to S$109.47 million during that period. That translates to a respectable 7.01% and 6.71% compounded annual growth rate (CAGR) respectively. Net property income per unit has also grown from 11.8 cents per unit to 14.2 cents per unit, a CAGR of 3.85%.
Over the same 5-year period, Parkway Life REIT has grown its revenue from S$93.7 million to S$109.9 million. Meanwhile, its net property income expanded to S$102.6 million, from S$87.6 million. This translates to a 3.24% CAGR for revenue and a 3.21% CAGR for net property income. Net property income per unit grew at 3.21% compounded from 14 cents per unit to 17 cents.
From the above comparison, we can see that both REITs have grown in profitability over the years. However, First REIT pips Parkway Life slightly as it has grown its net property income per unit at a slightly faster pace than Parkway Life REIT.
To get a better gauge of how the REIT is managing is debt, I will also take a look at the historical data of the REITs’ balance sheets. The main aspect of the balance sheet I will look at is the gearing ratio and how it has changed over time. The gearing ratio is calculated by dividing the total debt by the total assets of the REIT. The lower the ratio, the better financial position it has to expand its portfolio in the future.
As of 31 December 2017, First REIT had a gearing ratio of 33.6%. This is largely unchanged from its gearing ratio back in 2013 of 32.3%.
Parkway Life REIT has a slightly higher gearing ratio at 36.4%. Its gearing has also grown from 33% in 2013. The increased borrowings were used to fund acquisitions, which have contributed to the greater income per unit as mentioned above.
The Foolish bottom line
From the above comparisons, both REITs have delivered strong performances over the past five years. Both have grown in profitability and have very well-managed balance sheets. However, between the pair, I will have to pick First REIT as the one with the greater potential for future growth. Not only does it have a lower gearing ratio, it also has historically been able to grow revenue and net property income per unit even without increasing its debt load. The next article, I will compare valuations between the two to conclude the eventual winner.
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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 First REIT and Parkway Life REIT. Motley Fool Singapore contributor Jeremy Chia doesn’t own units in any REITs mentioned.