On 1 February 2024, Parkway Life REIT (“PLife”) announced their full year result for the financial year 2023. Given how they have structured their lease, it is not surprising for them to be able to continue increase DPU for FY2023. Furthermore their cost of debt remained relatively low, and as such even though we see finance costs have doubled in FY2023, the increase is not as substantial as the increase in property income.
Although in the presentation slides management have indicated their intention to build a third pillar, there are no news on this and in 2023 they have continued to acquire two nursing homes in Japan which adds on to their current portfolio of nursing homes. It is something to take note and look out for although there is no harm in waiting given their current business has been consistent.
Website: Financial Statements And Related Announcement::Full Yearly Results
Photo source: https://fifthperson.com/2021-parkway-life-reit-agm/
Background
PLife is one of Asia’s largest listed healthcare Real Estate Investment Trusts (“REIT”). It invests in income-producing real estate and real estate-related assets used primarily for healthcare and healthcare-related purposes.
It owns the largest portfolio of strategically located private hospitals in Singapore comprising Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital. In addition, it has assets located in Japan, including one pharmaceutical product distributing and manufacturing facility in Chiba Prefecture as well as high quality nursing home and care facility properties in various prefectures of Japan. It also owns strata-titled units/lots at Kuala Lumpur in Malaysia.
Key Metrics
Distribution Per Unit (“DPU”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | +2.7% | +2.8% |
For the full year FY2023, DPU have increased by 2.7% to SGD0.1477 as compared to the previous financial year of SGD0.1438. The increase in DPU is mainly attributable to significant increase in net property income with a relatively smaller increase in finance costs.
This metric is Favorable as the DPU growth is organic.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 99.7% | 99.7% |
Occupancy rate as at 31 December 2023 stands at 99.7%, unchanged from the previous quarter. Their Singapore and Japan assets remain committed at 100%, which are the major components of their assets. It is pulled down by PLife’s sole Malaysian medical center, which stood at 31%. It is above my expected healthy occupancy rate of 95% and PLife have been able to fully utilize their assets.
This metric is Favorable.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 35.6% | 36.0% |
Gearing ratio decreased to 35.6% as at 31 December 2023 from 36.0% in the previous quarter. This metric to me is Favorable as it is still a distance from the MAS limits.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 11.3x | 12.8x |
The interest coverage stands at 11.3 times, attributable by their low cost of debt of 1.27%. This is Favorable.
The Federal Reserve on 31 January 2024 have continued to hold interest rates steady at a 23-year high, after increasing the interest rates to a range between 5.25% and 5.50% on 26 July 2023. The bank was looking for “greater confidence” that the inflation would continue to fall before considering to cut interest rates.
Website: Fed holds interest rates at a 23-year high
Nonetheless, as the interest rate may potentially increase further, PLife may be subjected to significant change in their cost of debt in the near future. In their presentation they have mentioned that 74% of their interest rate have been hedged. Furthermore a portion of their debt is also on fixed rates.
I have thus performed a sensitivity analysis using the information as at 31 December 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $824,100 |
| Debt Not Hedged (%) | 26% |
| Debt at Floating Rate Exposed | $215,592 |
| Distributable Income FY2023 | $89,341 |
Interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2023 Distribution |
|---|---|---|
| + 50 bps | -$1,078 | -1.2% |
| + 100 bps | -$2,156 | -2.3% |
| + 150 bps | -$3,234 | -3.5% |
| + 200 bps | -$4,312 | -4.7% |
| + 250 bps | -$5,390 | -5.8% |
| + 300 bps | -$6,468 | -7.0% |
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, PLife may experience a fall in DPU accordingly.
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 2.8 years | 2.8 years |
Based on the announcement on 1 February 2024, gearing ratio as at 31 December 2023 was not mentioned. In the presentation slides however, management have disclosed that the weighted average debt term will extend from 2.8 years on 30 September 2023 to 3.9 years upon drawdown of the new facilities during the first quarter of 2024.
The weighted average term to maturity of their debt stands of 2.8 years as at 30 September 2023 previously was considered Favorable. This metric remains unchanged as the expected increase in debt maturity gives the REIT more time to refinance their debts as they fall due.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 1.56 | 1.53 |
The Price to Book (“P/B”) ratio currently stands at 1.56. This is computed using the closing share price of SGD3.64 on 2 February 2024 and the net asset value per share of SGD2.34 as at 31 December 2023. The P/B ratio is Unfavorable.
It was worth noting however that the share price continued to rise despite being grossly overvalued. We will cover more in the “Key Things to Note” section.
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2024 | 2.05% | SGD 0.075 |
| 2023 | 4.01% | SGD 0.146 |
| 2022 | 2.92% | SGD 0.106 |
| 2021 | 3.87% | SGD 0.141 |
| 2020 | 3.73% | SGD 0.136 |
| 2019 | 3.61% | SGD 0.131 |
PLife have announced a dividend of SGD0.0748 per share to be paid out in the first quarter of 2024. If annualised, the expected dividend for the calendar year 2024 will be estimated at SGD0.149 per share.
With the total expected dividend payout of SGD0.149 per share for the full calendar year 2024 and closing share price of SGD3.64 on 2 February 2024, this translates to a dividend yield of 4.09%. For my benchmark, a general reasonable range would be around an average of 5.25% to 6.25% given the current environment. A yield of 4.09% sounds similar to growth equity stocks from other industries.
Website: Reasonable Dividend Yield 2024Q1
Nonetheless, there are some interesting rationale for the dividend yield to be compressed and will be covered more in the “Key Things to Note” section.
The dividend yield is Neutral.
Possible Expansion Targets
Third Pillar
There are currently 2 pillars supporting PLife REIT. They are:
- The Hospitals in Singapore
- The Nursing Homes in Japan
Since the previous years, PLife have mentioned they will be looking to venture into a new market and develop a new stream of revenue. Based on the announcement of 1 February 2024, management is still keen to build a 3rd Key Market which can contribute enhanced growth for PLife in the mid to long term.
While the timing of this is uncertain, in my opinion it is certainly welcoming. This will allow for them to diversify their revenue and not rely on a single tenant for a large proportion of their revenue.
Based on their financial results, they are in a good position to do so. PLife is still trading at a high P/B ratio and it will not be difficult for them to find a yield accretive target. It was worth noting as well that it will work in management’s favor to issue rights to capitalize on the high P/B ratio should they choose to do so.
Key Things to Note
Expensive getting more expensive
There is no denying that PLife is a relatively more expensive REIT compared to others that are available in the market. An expected yield of 4.09% and P/B ratio of 1.56 exposes investors to higher risks. Given the straightforward business of REITs, their fair value usually should trade around their net asset value.
The key thing to note however, unlike most other REITs, PLife have income visibility. Especially with the renewal of 20 years lease, which contributes a substantial portion of their income and servers as a bulwark for PLife as they explore new initiatives. Not to mention that this lease agreement also takes into consideration the Consumer Price Index (“CPI”) and is designed to increase overall rent payable based on the CPI. This is an effective hedge against inflation, which has been breaking historic highs recently.
Based on its dividend records, we can also see that they have steadily increase dividend payout over the years. Its stability and transparency are the reason for its high premium.
Nonetheless, it is still expensive, and something that investors should take note off and decide if they are comfortable with it before investing. If the market decides to crash, PLife’s can easily lose 50% of its market value as it is trading at a price that is close to double its book value.
Tenant concentration
Parkway Hospitals Singapore Pte. Ltd. is their top tenant contributing 62.6% of gross revenue. This indicates a heavy concentration of revenue and puts the REIT at the mercy of their customer.
While they have renewed the lease for 20 years, they are still dependent on the financial position of their customers. Cashflows have been tightening for all businesses and rental expense is one of the significant overheads that tenants will wish to cut down on. This might adversely affect the DPU of the REIT moving forward.
It is worth nothing however that the top tenant is a wholly owned subsidiary of Parkway Pantai Limited, who is a wholly owned subsidiary of Kuala Lumpur-based IHH Healthcare, Asia’s largest private healthcare group. IHH Healthcare is also in a good financial position, based on their latest financial highlights.
Website: IHH Healthcare Financial Highlights
The largest shareholders of IHH Healthcare are Mitsui of Japan (one of the largest sogo shosha in Japan) and then followed by the Malaysian government’s sovereign wealth fund Khazanah Nasional. This leads me to not expect the tenants to run into cash flow problems in the short term.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | +2.7% | Favorable |
| Occupancy | 99.7% | Favorable |
| Gearing Ratio | 35.6% | Favorable |
| Interest Coverage | 11.3x | Favorable |
| Debt Maturity Profile | 2.8 years | Favorable |
| Price to Book Ratio | 1.56 | Unfavorable |
| Overall | Favorable |
PLife continues to remain stable, and the metrics indicate that it is favorable to invest in PLife, as healthcare continues to be in demand and aging population becomes a widespread problem. Notwithstanding the relatively high share price, the income visibility of PLife may provide investors with a peace of mind.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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Website: Parkway Life REIT (SGX: C2PU): 2023 Third Quarter Business Update
