First REIT (SGX:AW9U) and Parkway Life REIT (SGX:C2PU) are two prominent healthcare REITs in Singapore. They both had their initial public offerings at around the same time, and both have a portfolio of properties that focuses on healthcare, such as hospitals and nursing homes.
Despite its uncanny similarities, I wanted to find out which REIT would make the better investment. As such, I decided to pit them head-to-head by comparing individual aspects of their financials and valuations. This is the second part of the series, in which I will compare the valuations between the pair. In the first part, I took a look at the historical earnings growth and compared the balance sheets between the two REITs.
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The first valuation metric that I want to compare between the pair is the price-to-book (PB) ratio. The PB ratio is a comparison between the unit price of the REIT against its book value per unit.
At the time of writing, First REIT had a PB ratio of 1.25, while Parkway Life REIT had a PB ratio of 1.59. In this respect, First REIT is considered cheaper than Parkway Life REIT.
Another consideration when assessing the valuation of a REIT is the price-to-funds-from-operation (PFFO). This gives investors an idea on how cheap or expensive a REIT cost in relation to its operational earnings capacity.
The fund from operation (FFO) statistic is a better gauge than earnings because it removes any non-cash asset revaluation gains or one-off divestment gains out of the equation.
Parkway Life REIT achieved a total FFO of S$82 million for 2017 and at the time of writing, has a market cap of S$1.69 billion. This puts its PFFO ratio at 20.7 times.
Meanwhile, First REIT earned a total FFO of S$80.7 million and has a market cap of S$1.07 billion. The PFFO ratio, therefore, equates to 13.3.
As with the PB metric, First REIT is trading at a discount to Parkway Life REIT’s valuation.
Finally, and perhaps of importance to most income investors is the distribution yield.
First REIT has distributed a total of 8.57 cents per unit and last changed hands at S$1.37. Based on that price, the REIT has a distribution yield of 6.2%.
Parkway Life REIT has a distribution of 12.46 cents (after excluding a one-off divestment gain). The REIT currently trades at a price of S$2.80, putting its distribution yield at just 4.45%.
Once again, First REIT provides a much higher yield to unitholders than Parkway Life REIT.
The Foolish bottom line
Based on the valuation analysis above, First REIT is trading at a steep discount to Parkway Life REIT. Furthermore, from the first article, I found out that First REIT had managed to grow its net property income per unit at a slightly faster tick than Parkway Life REIT. It also has a lower gearing ratio. Putting all of this together, I will have to declare that at current prices, First REIT should provide better value to unitholders than Parkway Life 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. 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 companies mentioned.