Company Review - ParkwayLife REIT
Overview
ParkwayLife REIT (C2PU.SI) is one of two healthcare-focused REITs that are listed on SGX, with the other being First REIT. Since being listed in 2007, ParkwayLife has chalked up an impressive track record, delivering consistent and growing value to shareholders.
Business Model
a) Portfolio Overview
ParkwayLife operates in two main regions, Singapore and Japan, with a negligible presence in Malaysia, with the following breakdown by geographic regions, using revenue contribution:
Breaking down the portfolio by asset usage type gives a similar distribution as the one we see above, as all 3 Singapore properties (Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital) are classed as 'Hospital and medical center', and the majority of the Japan properties are classified under 'Nursing home with care service'.
In terms of land tenure, the Singapore properties have between 55 to 63 years left, while the Japan properties are mostly freehold, with the others having 99 years to go.
Apart from the 3 Singapore properties, which are all leased to Parkway Hospitals Singapore, all other tenants contribute less than 10% based on 2019 gross revenue, which lowers tenant risk in Japan.
b) Lease Characteristics
The Singapore properties are on a 15+15 year lease arrangement, which started in 2007, which leaves them with 15 years to go. The Japan properties have a weighted-average lease expiry (WALE) of 11.44 years as of Dec 2020.
The Singapore hospitals are on a triple-net lease structure, meaning that ParkwayLife REIT does not bear bear costs related to property tax, property insurance and property operating expenses. This insulates them from rising operating costs, bringing additional stability.
Most of properties in Japan have an 'up-only' rental review provision in the agreements, and the Singapore hospitals are on a CPI+1% rent review formula, meaning that most ParkwayLife's rental income is downside protected.
Furthermore, all the nursing homes in Japan have back-up operators in place to provide further rental security.
NPI has been growing steadily, along with distributable income (excluding the one off bonus in FY17 from divestment gains). With no rights issue since listing, DPU has been rising in line with distributable income as well.
Drivers & Risks
These are some factors that are favorable to long-term investors of ParkwayLife:
1. Population trends
As overall standard of living and healthcare improves worldwide, the elderly healthcare demand and market is projected to increase steadily in most countries. Taking Japan for an example, 40% of her total population will comprise seniors above the age of 65 by 2050. This provides a long-term trend for ParkwayLife to ride on, as a pure-play healthcare REIT.
2. Financial muscle
With Japan's low interest rate environment, ParkwayLife's all-in-cost of debt stands at an absurdly low value of 0.8% pa. Together with a gearing of 39.3%, this means that ParkwayLife will be able to tap on over $250 million in loans before reaching the old gearing limit (pre-COVID) of 45%, without adding too much strain to her finances.
On the flipside, consider these risks for a more balanced picture of where ParkwayLife stands currently:
1. Rental renewal for Singapore hospitals
As the 3 Singapore hospitals come close to the end of the first 15 years of their lease, there will be negotiations going on which will decide how the lease arrangement will be like for the next 15 years. While it's unlikely that the operator will pull out, there is a chance that the renewed lease could be less favorable to ParkwayLife.
Parkway Hospitals Singapore, which operates the Singapore hospitals, is 100% owned by Parkway Pantai, through a subsidiary, which is turn is 100% owned by IHH Healthcare. I traced the ownership, and looked into IHH's Annual Report 2019, to see how the hospitals are faring. This is necessary to figure out the hospitals' performance, as ParkwayLife REIT only sees the downside protected rental income.
Do note that the above figures are reported in RM, instead of SGD, and the figures include a fourth hospital (Mount Elizabeth Novena) that isn't part of ParkwayLife REIT's portfolio. Nonetheless, I think the numbers speak for themselves, showing that the Singapore hospitals are profitable and operating well.
Comparing the above growth in revenue and EBITDA with Singapore's CPI at 0.4% and 0.6% in 2018 and 2019 respectively, I personally think that the CPI+1 rental terms could easily be maintained or even increased for the next 15 years. However, this is just my guess, and so the upcoming renewal still presents a short-term risk that investors need to be mindful of.
2. Malaysia property
While the Malaysia asset takes up a negligible portion of ParkwayLife's portfolio, it is still a drag on her performance. Committed occupancy is low at 31%, and 2019 gross revenue dipped 29% compared to 2018. The long term trend has been poor as well, with the only silver lining being that the appraised value is still higher (6% increase in terms of SGD) than the purchase value, meaning that divestment gains can be recorded if they could let go of the property somehow.
Thanks for reading this piece! Personally, I view ParkwayLife REIT in a very favorable light, due to the sector that it's in and the steady performance that it has produced over the years. This is in line with general market sentiments, as ParkwayLife REIT always trades at a heavy premium compared to other REITs, in terms of metrics such as P/NAV and Dividend Yield.
However, with this stability and popularity, buying this counter now will give a low yield of roughly 3.5%, so it's up to you, the investor, to decide if this is a worthwhile trade-off!
Cheers,
InvestingNugget
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