Income investors are constantly seeking good investments that can grow their passive income in the future. One of the vehicles that meet such investment needs in Singapore is the real estate investment trust (REIT).
Among all the REITs in Singapore, Parkway Life REIT (SGX: C2PU) stands out due to its consistent performance over a long period of time, boasting a solid track record of consistent growth in distribution per unit (DPU) and portfolio value.
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For those who are new to this REIT, Parkway Life REIT is one of the largest listed healthcare REITs in Asia by asset size. It has ownership over three private hospital properties locally and holds stakes in 46 healthcare-related assets in Japan. It also has strata-titled units/lots in Gleneagles Intan Medical Centre in Malaysia.
Despite its solid track record, I’m not buying the REIT, at least not for now. There are two reasons for this. The first reason is simple – I’m looking for undervalued as well as high growth companies. So in some ways, this is not my type of investment. But the second reason is what we want to focus on here, since it impacts all investors. And that is due to its high valuation.
As investors, we always try to buy something at less than its value. This philosophy applies not only to value stocks, but also income stocks like Parkway Life. In simple terms, that means paying less than S$1 for each dollar of assets.
One way to gauge Parkway Life’s valuation (overvalued, fair, and undervalued) is to compare its current valuation with the market’s valuation, focusing on two simple metrics: price-to-book (PB) ratio and distribution yield. I will be using the average PB ratio and distribution yield for the 39 REITs that are listed in Singapore’s stock market. With that, let’s look at some numbers:
From the above, we can see that Parkway Life’s distribution yield is lower than that of the market average, indicating that it’s trading at a higher valuation. Similarly, its PB ratio is significantly higher than that of the market average.
In addition, its current distribution yield of 4.1% is among the lowest of all Singapore REITs, indicating that Parkway Life is trading at a rather expensive valuation for now.
In sum, despite all the positive attributes of Parkway Life as an income stock, I’m not buying it due to 1) my personal preference and 2) its high valuation.
For income investors, they should pay attention to the second point that I have raised about Parkway Life’s valuation. To buy the REIT at its current valuation means that investors should be reasonably confident that the REIT can continue to deliver stable growth in the foreseeable 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. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore has recommended shares of Parkway Life REIT.