On 26 July 2024, Parkway Life REIT (“PLife”) announced their half year result for FY2024. There are no significant changes this quarter, therefore continuing to remain stable and boring, which gives investors a peace of mind. Take note however that in July 2024, the Bank of Japan have announced an increase in interest rates. Though the increase was not significant, it is an indication of the steps that the Bank of Japan may take for the next few quarters. This in turn may cause the cost of borrowing of PLife to increase.
Website: Financial Statements And Related Announcement::Second Quarter And/Or Half 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 | +3.5% | +4.0% |
DPU for the first half of FY2024 have increased by 3.5% to SGD0.0754 per share from SGD0.0729 per share for the same period in the previous financial year. Similar to previous quarter, the gross revenue and net property income has decreased mainly due to depreciation of the Japanese Yen, offset by the net foreign exchange gain. This metric is Favorable.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 99.7% | 99.7% |
Occupancy rate as of 30 June 2024 remains unchanged at 99.7% and this metric remains Favorable. Their Singapore and Japan assets continues to be committed at 100%, which are the major components of their assets, while PLife’s sole Malaysian medical center stood at 31%.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 35.3% | 36.4% |
Gearing ratio decreased to 35.3% as of 30 June 2024. This metric currently remains Favorable as it is still a distance from the MAS limits.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 10.6x | 11.1x |
The interest coverage decreased slightly to 10.6 times as of 30 June 2024. This metric remains Favorable and is attributable to their low cost of debt of 1.35% as their loans and borrowings are mainly Japanese Yen denominated. Take note however that the Bank of Japan on 31 July 2024 have increased the interest rate to 0.25% and hinted at possible further interest rate hikes in 2024. This has caused the yen to strengthen sharply in subsequent days. While PLife has mentioned that 90% of their interest rate is hedged, this is something investors should take note of in the event that interest rates increase significantly over the next few months.
Website: Bank of Japan raises interest rate to 0.25%, open to further hike this year
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 3.3 years | 3.4 years |
The weighted average term to maturity of their debt shortened slightly to 3.3 years as of 30 June 2024. This metric remains Favorable as there is sufficient time for the REIT to refinance their debts as they fall due.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 1.53 | 1.56 |
The Price to Book (“P/B”) ratio decreased to 1.53. This is computed using the closing share price of SGD3.59 on 16 August 2024 and the net asset value per share of SGD2.35 as of 30 June 2024. 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
| Year | Yield | Total |
|---|---|---|
| 2024 | 4.18% | SGD 0.150 |
| 2023 | 4.07% | SGD 0.146 |
| 2022 | 2.96% | SGD 0.106 |
| 2021 | 3.92% | SGD 0.141 |
| 2020 | 3.78% | SGD 0.136 |
| 2019 | 3.66% | SGD 0.131 |
PLife have announced a dividend of SGD0.0754 per share to be paid out in the second half of 2024. This brings the total dividend paid for the calendar year 2024 to SGD0.150 per share.
With the closing share price of SGD3.59 on 16 August 2024, this translates to a dividend yield of 4.18%. For my benchmark, a reasonable yield would be around 5.75%. PLife yield sounds similar to growth equity stocks from other industries. The dividend yield is Unfavorable.
Website: Reasonable Dividend Yield 2024Q3 – 5.75%
Nonetheless, there is an interesting rationale for the dividend yield to be compressed and will be covered more in the “Key Things to Note” section.
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 26 July 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.
One thing they can consider is to expand into the senior living market in China. Granted however that there may be risks venturing into a new geographical location especially with the property market crisis. There is a need to determine the risks and rewards of the opportunities there.
Website: The Opportunities Available In Senior Living Market
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 4.18% and P/B ratio of 1.53 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. With their 20 years lease, this contributes a substantial portion of their income and serves 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 64.2% 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 | +3.5% | Favorable |
| Occupancy | 99.7% | Favorable |
| Gearing Ratio | 35.3% | Favorable |
| Interest Coverage | 10.6x | Favorable |
| Debt Maturity Profile | 3.3 years | Favorable |
| Price to Book Ratio | 1.53 | Unfavorable |
| Overall | Favorable |
The overall metric remains Favorable and PLife has continued to remain stable for this quarter and continue to provide income visibility. This may give investors a peace of mind.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
Previous Post
Website: Parkway Life REIT (SGX: C2PU): 2024 First Quarter Business Update
One thought on “Parkway Life REIT (SGX: C2PU): 2024 Half Year Result”
Comments are closed.