One real estate investment trust (REIT) that I’ve been eyeing for some time but couldn’t get myself to buy is Parkway Life REIT (SGX: C2PU). The healthcare REIT has a portfolio of 50 properties in Singapore, Japan and Malaysia worth S$1.86 billion. In our country, Parkway Life REIT owns three hospitals, namely, Gleneagles Hospital, Mount Elizabeth Hospital, and Parkway East Hospital.
At its current unit price of S$2.85, it is selling at a price-to-book ratio of 1.5, which is a 50% premium to its net assets. Its trailing distribution yield of 4.6% also seems low for the risks taken. Even though the REIT looks overvalued, I like the healthcare REIT due to many aspects, three of which I’ll outline here.
Attractive lease terms
As of 31 March 2019, Singapore contributed 60.2% of Parkway’s gross revenue, with Japan taking up 39.6% and Malaysia the remaining 0.2%. The properties in Singapore are master leased to Parkway Hospitals Singapore Pte Ltd, a wholly owned subsidiary of Parkway Pantai Limited, the largest private healthcare operator in Singapore. Parkway, in turn, is a subsidiary of IHH Healthcare Bhd (SGX: Q0F), one of the world’s largest healthcare groups.
The Singapore properties have long-term master leases of 15 years that started on 23 August 2007. There is an option to extend the lease for another 15 years after 2022. The lease arrangement is a triple-net one, meaning the REIT does not have to bear any property tax, property insurance (exception is the property damage insurance for Parkway East Hospital), and property operating expenses.
The leasing structure is also attractive for the REIT. The rentals to be paid by Parkway Hospitals includes a built-in rental escalation, based on the consumer price index (CPI) – a measure of inflation. This feature guarantees a 1% growth in minimum rental yearly.
As for the Japan properties (a total of 46), they are all freehold in nature. The weighted average lease term to expiry (WALE) by gross revenue was 12.14 years, as of 31 March 2019. Most of the properties have an “up only” rental structure, meaning that the rentals can only go up. In all, the portfolio’s WALE by gross revenue was 6.85 years at end-March 2019, and 94.8% of the assets are downside protected.
Strong distribution per unit growth
Due to the favourable leasing structures and its growing portfolio size over the years (from three properties in 2007 to 50 now), Parkway Life REIT has rewarded unitholders well in the form of growing distribution per unit (DPU). Since its initial public offering (IPO) in 2007, its DPU has climbed a total of 103.6% till 2018. On an annualised basis, DPU has grown 6.7%. In 2015 and 2017, Parkway Life REIT paid out one-off divestment gains to unitholders after divesting some assets in Japan.
The chart below shows the DPU growth from 2007 till now:
Source: Parkway Life REIT 1Q2019 results presentation
Parkway Life REIT is a very well-financed REIT. As of 31 March 2019, it had a gearing ratio of 36.4%, well below the regulatory limit of 45%. The REIT has debt headroom of around S$113 million and $295 million before reaching 40% and 45% gearing respectively. This headroom allows the REIT to lever up to buy yield-accretive assets, helping to fuel DPU growth.
Furthermore, the REIT’s effective all-in cost of debt stood at just 0.91%, with an interest coverage ratio of 13.2 times, as of 31 March 2019. Those metrics look very attractive.
The Foolish takeaway
Parkway Life REIT is a well-run REIT given its:
1) Strong long-term lease structure with downside protection;
2) Stable income stream supported by regular rental reversion; and
3) Portfolio that taps into the fast-growing healthcare sector in the Asia-Pacific region.
However, I feel the REIT is overvalued at its current unit price. I would be more comfortable in having a stake in the REIT at more palatable valuations, if the opportunity presents itself in future.
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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 Sudhan P doesn’t own shares in any companies mentioned.