The FEDs just announced a rather hawkish rate pause, with a strong possibility of another rate hike in 2023 as well as the projection of rates staying high at a median of 5.1% in 2024. Parkway Life REIT (SGX: C2PU) is hands down, Singapore’s most defensive REIT with the exception of Keppel DC REIT. Being a healthcare REIT makes them not only recession-proof but pandemic-proof as well since they own hospitals and healthcare is a non-cyclical industry. As such, Parkway Life REIT should see minimal impact as its occupancy rate should be unimpacted. In this article, I’ll be covering Parkway Life REIT, Singapore’s most defensive REIT, and whether or not it is a good buy now at its current valuation.
Portfolio Overview
Parkway Life REIT is one of the largest listed healthcare REITs in Asia with an enlarged portfolio of S$2.2 billion. The REIT is defensive with its long-term lease structures which protect its downside. It also provides a stable stream of income which is supported by regular rental revisions.
As we can see from their portfolio as of 30 June 2023, they are very diversified with properties across 3 key countries in Asia, Singapore, Japan, and Malaysia. It’s good to note that they own a total of 57 Freehold properties and 4 Leasehold properties, 3 of which are in Singapore. The 3 Singapore hospitals are well secured by its master lessee, Parkway Hospitals Singapore which is a fully owned subsidiary of Parkway Life REIT’s sponsor, IHH Healthcare.
Many people see this as a key risk because if the master lessee decides to stop renewing their lease, Parkway Life REIT will see a huge problem with finding new tenants. For me, I view this as a sign of stability because its master lessee is its sponsor, indirectly of course. The 57 nursing homes in Japan are key assets because Japan has an aging population. These nursing homes will be a key factor for Parkway Life REIT’s strong revenue growth in Japan.
1H FY2023 Results
Substantial Growth In Gross Revenue and NPI
| Year on Year Difference | 1H FY2023 | 1H FY2022 |
|---|---|---|
| Gross Revenue | S$74.402 million (+23.6%) | S$60.175 million |
| Net Property Income (NPI) | S$70.084 million (+25.1%) | S$56.036 million |
Parkway Life REIT posted strong growth in Gross Revenue and NPI due to higher rental income from the Singapore hospitals as well as additional revenue from the newly acquired properties. Even without acquiring new assets, Parkway Life REIT is well positioned to see continued double-digit growth due to its lease structure with the Singapore hospitals. To further elaborate, the Singapore assets are locked in till December 2042, with steady rental escalations in place. The rental escalations set in place are guaranteed up to 2025 (~3%). From FY2026 to FY2042, the escalation will be reviewed, with the management forecasting a 24% increase in FY2026.
Weaker Growth In Distributable Income and DPU
| Year on Year Difference | 1H FY2023 | 1H FY2022 |
|---|---|---|
| Distributable Income | S$44.084 million (+3.3%) | S$42.696 million |
| Distribution Per Unit (DPU) | 7.29 cents (+3.3%) | 7.06 cents |
The Distributable Income and DPU didn’t grow as much as the Gross Revenue and NPI. This is due to the much higher finance costs which were partially offset from net foreign exchange gains. Overall, Parkway Life REIT’s non-property expenses increased 15.2% year over year. On top of this, there was a huge decrease of approximately ~S$13.705m in net change in the fair value of investment properties as compared to last year’s ~S$1.168m. These factors combined resulted in a much weaker growth in Distributable Income and DPU.
Strong Balance Sheet
| As at 30 Jun 2023 | As at 31 Dec 2022 | As at 30 Jun 2022 | |
|---|---|---|---|
| Aggregate Leverage | 35.3% | 36.4% | 32.5% |
| Interest Coverage | 13.8x | 18.3x | 19.8x |
| Average Cost of Debt | 1.19% | 1.04% | 0.61% |
On a brighter note, Parkway Life REIT’s financials are still as stable as ever although its balance sheet has weakened over the past year due to higher costs of debt. Compared to a year ago, Parkway Life REIT saw a nearly 100% increase in its average cost of debt which definitely impacted its interest coverage ratio. Despite this, its interest coverage ratio is still strong at 13.8x.
It is good to note that with Parkway Life REIT’s current gearing of 35.3%, they have a debt headroom of S$404.3m before reaching 45% gearing and $673.6m before reaching 50% gearing. Not to mention the fact that they can also do an EFR (Equity Fundraising), the sky really is the limit for Parkway Life REIT.
Parkway Life REIT is also the only REIT in Singapore that has not yet done any form of equity fundraising be it rights issues or preferential offerings. Since its IPO in 2007, the number of outstanding units stood at 605.02 million. This is because it did not have a general mandate to issue new units.
5-Year Performance
Revenue Growth
Note: Chart figures are in S$’000
As we can see, the overall 5-year trend for Parkway Life REIT is up. There is also a notable uptick in FY2022, where its Gross Revenue grew by 7.7% mainly due to higher rents from the Singapore hospitals as they just renewed the master lease.
DPU Growth
Note: Chart figures are in S$ cents
Similarly, we can see that the overall DPU trend for Parkway Life REIT is consistently going up. It’s good to note that since Parkway Life REIT hasn’t done any Equity Fundraising (EFR) prior, investors won’t be diluted when the REIT is doing acquisitions. As such, the DPU can consistently climb as long as the REIT continues to grow its top and bottom line.
NAV Growth
Note: Chart figures are in S$ dollars and are adjusted after excluding Distributable Income
The 5-year trend shows that Parkway Life REIT has managed to grow its NAV/share year on year consistently by 20.21% across the 5 years. This growth comes from the aggressive acquisition and strategic divestments of the Japan assets they own over the years. There were several acquisitions and divestments made every year to help Parkway Life REIT aggressively grow its NAV/share. The majority of the growth also came in FY2021 whereby the overall portfolio had a valuation gain of S$239.2m.
Looking at the chart, we can see that there is a slight drop in the FY2022 NAV/share which was mainly due to the depreciation of the Japanese Yen against the Singapore Dollar and valuation losses on the property portfolio. In FY2022, Parkway Life REIT saw a net decrease of S$59.381m in terms of fair value of investment properties.
Despite this small decrease in NAV/share, it’s also good to note that despite all the acquisitions and divestments, Parkway Life REIT has managed to consistently grow its Gross Revenue, NPI, and DPU, bringing consistent and increasing value to shareholders.
Acquisition In New Key Markets
As mentioned in an older article here, I talked about the strong possibility that Parkway Life REIT will enter into a new key market. In the recent 1H FY2023 earnings, the management has hinted at the possibility as well.
Taking this into consideration, let’s re-look into the 2 possible markets that I think Parkway Life REIT might enter next. If Parkway Life REIT is planning to go into another Asia market, I’m guessing they will go for either Taiwan or South Korea.
Why Taiwan
Fantastic Healthcare System
Taiwan’s healthcare facilities are considered to be of a high standard, easy to access, and very affordable. The current healthcare system in Taiwan, known as National Health Insurance (NHI), was instituted in 1995. The government-run, single-payer scheme provides patients easy access to a large network of contracted hospitals and clinics, most of which are privately owned. The system promises equal access to healthcare for all citizens, and the population coverage reached 99% by the end of 2004.
With patients enjoying universal access to high-quality healthcare services and abundant medical facilities, low out-of-pocket costs, and short waiting times, public satisfaction with the NHI is high. Health expenditure represented 6.6% of Taiwan’s GDP in 2018, lower than the OECD average of 8.8%, with the NHI accounting for 53% of total spending.
As of 2020, Taiwan had a total of 29,390 medical care institutions, of which 475 were hospitals while the remaining 28,915 were clinics and pharmacies. The total number of hospitals did drop from 669 in 2000 to 475 in 2020 due to the closure or merging of smaller hospitals. The total number of clinics grew aggressively from 17,413 in 2000 to 28,915 in 2020.
Relatively Low Interest Rate
Taiwan’s interest rate stood at a 20-year record low of 1.13% in March 2020. It has since stayed stagnant, standing at 1.875% as of the 21st September 2023 consensus. With the interest rate staying constant at such a low rate, it is great for REITs as it allows them to get access to cheap debt. Based on these factors, I believe Taiwan is a great key market to get into for Parkway Life REIT to continue bringing consistent value to shareholders.
Why South Korea
Fantastic Healthcare System
Similar to Taiwan, South Korea also has a fantastic healthcare system in place. South Korea offers world-class healthcare to not only its own citizens but tourists and visitors. Healthcare in South Korea is run by the Ministry of Health and Welfare and is free to all citizens. The system is funded by a compulsory National Health Insurance (NHI) scheme which covers 97% of the population.
South Korean hospitals are very well equipped, with a good doctor-to-patient ratio, and the so-called Big Four – Seoul National University Hospital, the Samsung Medical Centre, Asan Medical Centre, and Yonsei Severance Hospital – boast some of the best facilities in the region, if not the world.
As of 2016, according to the Ministry of Health and Welfare, South Korea had about 65,000 medical institutions, 341 of which are large general hospitals, 1,386 are long-term care hospitals, 1,510 are hospitals and 30,157 are clinics. The remaining included 3 tuberculosis hospitals, 1 leprosy hospital, 42 mental hospitals, 223 dental hospitals, 16,996 dental clinics, and many others.
Aging Population
South Korea is ranked 41st in the top 50 countries with the largest percentage of older adults, with 15.1% of its total population being aged 65 and older. With an aging population, similar to Japan, Parkway Life REIT can look into not only acquiring hospitals and clinics but also nursing homes.
Current Valuation
Of course, before we invest in any company, we should always do it at the right price and valuation. Let’s take a look at Parkway Life REIT’s current valuation based on its closing price ($3.62/share) today. Based on its last closing price, Parkway Life REIT is priced with a 1.602x PB ratio and a 4.01% annualized dividend yield. It is good to note that there are no significant REITs that we can use to make comparisons other than First REIT, and as such, there will be no comparison being done as the numbers won’t be meaningful.
Based on its current valuation, we can see that Parkway Life REIT is priced at a pretty high premium and has a relatively low yield. This makes investors rethink about investing in this REIT because the return is so low but most investors fail to realize that the yield is so low because of how defensive the REIT is. Even in the worst times, with multiple macro trends and factors involved, Parkway Life REIT has managed to grow its DPU and NAV year over year.
Final Thoughts
Parkway Life REIT is 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.
Given the looming thought of a recession hitting the economy, it might be wise for risk-averse investors to seek shelter in Parkway Life REIT.
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