After 4.5 long years of waiting, Parkway Life REIT (SGX: C2PU) finally exercised its updated general mandate and made a new key acquisition, entering into a new key market. This will hopefully mark the first of many as they enter the European market. Given the volatile interest rate environment, REITs could skyrocket further or be beaten down hard. It all comes down to how well the management handles its balance sheet as well as organic growth to ensure the REIT can grow without acquisitions, should rate cuts be delayed further. So how well has Parkway Life REIT performed in FY2024? Let’s dive right into the FY2024 results of Parkway Life REIT and the 4 key takeaways from it.
1. Misleading Performance In Gross Revenue and NPI
| Year on Year Difference | FY2024 | FY2023 |
|---|---|---|
| Gross Revenue | S$145.268 million (-1.5%) | S$147.467 million |
| Net Property Income (NPI) | S$136.597 million (-1.8%) | S$139.084 million |
Parkway Life REIT saw its Gross Revenue and NPI weaken in FY2024 mainly due to the depreciation of the Japanese Yen against the Singapore Dollar (approximately 5+% decrease). This was partially offset by the contributions from 2 new nursing homes acquired in October 2023 and 1 acquired in August 2024 both in Japan, as well as the 11 new nursing homes acquired in December 2024 in France.
Additionally, the properties with step-up lease arrangements (3 Singapore Hospitals and 3 Japan Nursing Homes) also helped contribute higher numbers in FY2024. Analyzing it holistically, we can see that Parkway Life REIT did perform better in FY2024 but was the victim of weaker FX rates, which is a common risk for Singapore REITs that have overseas investment properties. Given how strong the Singapore Dollar is, this risk could widen if the REIT does not diversify well.
2. Stable Growth In Distributable Income and DPU
| Year on Year Difference | FY2024 | FY2023 |
|---|---|---|
| Distributable Income | S$91.419 million (+2.3%) | S$89.341 million |
| Distribution Per Unit (DPU) | 14.92 cents (+1.0%) | 14.77 cents |
Moving onto the Distributable Income and DPU, Parkway Life REIT has also managed to grow these 2 segments well by 2.3% and 1.0% respectively. Additionally, because there was an Equity Fundraising (EFR) that occurred in 2H 2024, the DPU has been diluted slightly. If we were to exclude the impact of the EFR, the DPU would be much higher at 15.11 cents, marking a 2.3% increase year over year.
It is also good to note that Parkway Life REIT has hedged the net income from Japan, which means the net drop in revenue will be compensated by the FX gains from the settlement of the forward contracts. This explains how the Distributable Income and DPU managed to grow despite a slightly weaker NPI.
3. Solid and Stable Financials
| As at 31 Dec 2024 | As at 31 Dec 2023 | |
|---|---|---|
| Aggregate Leverage | 34.8% | 35.6% |
| Interest Coverage | 9.8x | 11.3x |
| Average Cost of Debt | 1.48% | 1.27% |
Moving onto the balance sheet, we can see that Parkway Life REIT’s gearing has decreased from 35.6% in FY2023 to 34.8% in FY2024. This is mainly due to the EFR that helped pare down some of the existing debt as well as fund the recent acquisition. With its current gearing level, there is ample debt headroom, S$472.2m and S$774.3m before reaching 45% and 50% gearing respectively, for further growth acquisitions in the near future. Not to mention the fact that they can also hold another EFR to further increase their scope of opportunities.
Their balance sheet is also very stable with an interest coverage ratio of 9.8x. The debt maturity profile is very well spread out with no more than 30% of debts due in a single year. There is also no long-term debt refinancing needed until September 2026. Not to mention the extremely low cost of debt at 1.48%, Parkway Life REIT is well-positioned to continue bringing increased value to shareholders year over year.
4. Growth Potential
Parkway Life REIT updated its general mandate in June 2020. The general mandate allows the REIT to issue up to 20% of the units outstanding in a given year. Based on a pro-rata situation involving an equity fundraising or rights issue, the REIT could potentially issue up to 50% of its units outstanding in a calendar year. Since this update, I’ve been very bullish on the REIT’s growth potential. That being said, over the past few years I’ve speculated that the REIT might enter the South Korean market or the Taiwanese market due to the aging population, low interest rate, and relatively strong healthcare system.
Read Also: Is Parkway Life REIT A Good Buy Now in 2024?
Nevertheless, even though I made an incorrect prediction, with Parkway Life REIT entering the European market instead, the end goal is still met. The strategic foray into the European market, specifically France, will prove to be key to the REIT’s growth in the years to come. The acquisition was very favorable with the purchase price at a 3.5% discount to the property’s valuation. The lease is great at 12 years and it also forges a strategic partnership with DomusVi who is a reputable operator in Europe, being the 2nd largest nursing home operator in France and 3rd largest in Europe.
Although it is unclear if Parkway Life REIT has any “priority” or Rights of First Refusal (ROFR) over any assets under its parent (IHH Healthcare), investors should be confident in the management’s ability to continue growing the REIT, both organically through its strong lease agreements as well as with growth acquisitions in the near future.
Final Thoughts
Overall, Parkway Life REIT’s strong set of results shows a lot of promise for FY2025 and beyond. If not for the weakened FX rates between the Japanese Yen and Singapore Dollar, the FY2024 results of Parkway Life REIT would have been much more stellar. Despite that, it is also reassuring to know that the management has taken an active step to hedge against this, ensuring that shareholder returns are not impacted. Being in a very defensive asset class of REITs (healthcare), investors expect nothing less of stability when it comes to the DPU and overall share price performance.
Based on its last close of S$3.81, it holds a slightly more expensive PB ratio of 1.58x and a more conservative TTM yield of 3.92% which is still quite attractive. Parkway Life REIT has been a fantastic and defensive REIT to hold, though the valuation might not be attractive because of the high premium you are paying but always remember that when buying high-quality assets, a premium must be paid in order to hold such assets. You won’t be able to find an A5 Wagyu steak at the same price as a normal steak cut in the supermarket.