PLife REIT (Parkway Life REIT) is one of Asia’s largest publicly traded healthcare REITs. With a focus on healthcare and healthcare-related uses, it primarily invests in income-producing real estate and real estate-related assets like hospitals, nursing homes, and healthcare facilities.
Over the last 10 years, PLife REIT has been one of the best performing REITs with a 10 year compounded CAGR of 15.9%.
Despite the challenges and uncertainties, PLife REIT has remained a resilient and defensive investment for the past years, thanks to its long-term lease structure and downside protection built into its system.
Moving forward, with a rapidly aging population and increased need for improved quality healthcare and aged care services, the healthcare industry will continue to be vital. This puts PLife REIT, with its enlarged portfolio of healthcare assets, in a great position to capitalise on the trends.
ParkwayLife REIT’s Portfolio Overview
PLife REIT owns a portfolio of 56 high-quality healthcare and elderly care facilities worth about S$2.29 billion as of 31 December 2021. These properties are divided into three geographical areas: Singapore, Japan, and Malaysia.
Mount Elizabeth Hospital, Gleneagles Hospital, and Parkway East Hospital are the three private hospitals in Singapore. In addition, it owns 52 nursing home and care facility facilities across Japan’s prefectures. Finally, there is one in Malaysia.
The number of properties in the PLife REIT portfolio has grown over time, from three in 2007 to 56 today, owing to yield-accretive acquisitions.
Aside from that, here’s some more information about its properties.
Singapore Hospital Properties
Mount Elizabeth Hospital, Gleneagles Hospital, Parkway East Hospital
- Long-term Master Leases with Parkway Hospitals Singapore Pte. Ltd.
- The existing 15-year term runs from 23 August 2007 to 22 August 2022. A new lease has been drawn up with a 20-year renewal term from 23 August 2022 to 31 December 2042. There’s also the opportunity to extend the contract for another ten years.
- Rents are guaranteed to increase from 23 August 2022 to FY2025 under the renewal term, with a 2% and 3% step-up in rent for the interim Period and the Downtime Period from the previous year/period, respectively.
- Aside from that, the lease uses a Triple Net Lease Arrangement, which means PLife REIT is not responsible for property taxes, insurance, or operational expenses. As a result, it is unaffected by rising costs due to inflation.
- 100% committed occupancy
- Finally, the remaining lease period is still quite long, with the earliest lease term being 53 years.
Japan Properties
- Located in densely populated areas of large cities.
- Long-term lease arrangement with a 12-year weighted average lease term to expiration.
- About 95.2% of revenue from Japan portfolio is downside-protected.
- Most of its Japan properties have a backup operator in place in the event there is a vacancy.
- 100% committed occupancy.
- Except for Orange no Sato, a nursing rehabilitation centre that accounts for 1% of Japan’s net assets, all PLife REIT property in Japan is freehold.
ParkwayLife REIT’s Financial Performance
Revenue
Looking at the 5-year trend of PLife REIT’s financial performance, we can see a general uptrend with growing gross revenue and net property income increasing yearly.
Sharp-eyed investors may notice a 0.2% decline in PLife REIT gross revenue in FY2021 compared to the previous year. This drop is mainly a result of the divestiture of non-core property in Japan in January 2021 and the weakening Japanese Yen. Along with a one-off allowance for doubtful debts, PLife REIT’s net property income declined by 1.1% to S$111.2 million in FY2021.
Occupancy and Lease Expiry
PLife REIT continues to have a high occupancy rate. The REIT’s Singapore and Japan properties have committed occupancies of 100%, bringing the REIT’s overall total occupancy close to 100%. Well, it’s close to but not 100%, owing to its sole property in Malaysia, which has only a 31% committed occupancy.
Although this property only accounts for 0.2% of the portfolio, it did not stop shareholders from voicing out, querying why the property was purchased with 100% occupancy in 2012 and is now at 31%. The current low occupancy of 31%, according to management, is attributable to the non-renewal of the Level 8 space, which is primarily an auditorium arrangement. It was difficult to lease the Level 8 space with the auditorium arrangement due to the present leasing market conditions caused by COVID-19.
Regardless, the management had the auditorium converted into more medical suite units and is currently actively marketing the new medical suite units, expecting that occupancy rates would improve as Malaysia eases its border control.
Next, PLife REIT’s portfolio lease expiration is spread out over several years. Given the long-term structure, fewer than 10% of the lease by portfolio revenue would expire in the following five years, guaranteeing the REIT’s earnings for at least the next five years.
Some of you may be concerned about the long lease, which means there is less room for rent increases. Not to fear, because there is a clear rental step-up mechanism and rent review formula in the contract, ensuring a steady increase in rental income.
Distribution Per Unit
With a growing income, distribution income and Distribution per unit (DPU) have increased with it. Total DPU for FY2021 was 14.08 cents, up 2.1% from FY2020. Overall, PLife REIT boasts an uninterrupted recurring DPU growth of 122.8% ever since its listing in 2007.
Net Asset Value
Following the successful divestment of some assets in early FY2021 and the completion of asset recycling with the acquisition of three Japanese nursing homes in the second half of FY2021, the Group now has an enlarged portfolio of 56 quality healthcare and healthcare-related properties in Singapore, Japan, and Malaysia.
Overall, the value of these assets is $2.3 billion, up from $2 billion in 2020. Net Asset Value (NAV) as of 31 December 2021 was S$2.37 per unit, up from S$1.96 in 2020.
ParkwayLife REIT’s Financial Strength
PLife REIT maintains a strong balance sheet, which allows it to pursue attractive investment opportunities moving forward.
In comparison to 2020, gearing has improved (35.4%) due to a net asset valuation increase of S$248.9 million registered for Singapore Hospitals. This leaves the Group with S$410.7 million of debt headroom before approaching the 50% gearing threshold. Aside from that, they have a 21.5x interest coverage ratio which is a very healthy number.
As seen from the figure above, PLife REIT debt maturity is also well spread out with a healthy average term to maturity.
In terms of cash, PLife REIT is in a net cash position, with cash and cash equivalent of S$25.8 million for the year, compared to S$22.7 million in FY2020. In comparison to the previous year, net cash from operating operations was fairly stable in FY2021. Aside from that, net cash from investment and financing has been quite consistent.
For these reasons, I do not foresee any cash flow problem for PLife REIT.
Strong sponsor
Parkway Holdings Limited is the sponsor of PLife REIT.
Attesting to the sponsor’s strong support and alignment of interests with the Unitholders, PLife REIT was also granted a 10-year ROFR over Mount Elizabeth Novena Hospital Property, which is likely to boost PLife REIT’s growth potential even more.
Looking forward
PLife REIT Properties in Singapore, Japan, and Malaysia are projected to benefit from the long-term trend of demographic change in the coming years.
The proportion of Japan’s population over the age of 65 is at an all-time high of 29.1%. Social security spending has risen steadily over the years, accounting for more than a third of the overall budget. While the growing older population has driven the construction of new healthcare facilities, the rate of increase has been sluggish. PLife REIT will benefit from this, and as a first mover, it will have more opportunities to shine.
Our healthcare sector in Singapore is likely to stay resilient too, owing to the high demand for and consumption of healthcare services. Apart from the issue of ageing, Singapore’s focus on high-quality healthcare has made it a popular medical tourism destination. As Singapore opens up, the prospect of healthcare tourism provides a massive opportunity for PLife REIT.
PLife REIT’s Valuation
Is PLife REIT currently trading at a good price? Let’s take a look at the company’s valuations.
Price to book
The current PB Ratio of PLife REIT is around 2.1x. Compared to its historical average of around 1.8x, PLife REIT’s valuation is definitely on the higher side now. Nevertheless, the REIT has been trading above 2x for the preceding two years, which may be the new normal given its defensive and stable nature.
Dividend yield
With an annualised dividend yield of 2.9% currently, PLife REIT seems overvalued too compared to its average return of 6%.
Nonetheless, as mentioned, given its defensive nature, we are unlikely to see this REIT return to such a high dividend yield.
My opinion
S-REITs, in general, face a lot of uncertainty moving forward. Covid-19 uncertainty, rising interest rates, inflation, and the supply chain are just a few of the many factors that could influence share price performance. Nonetheless, the S-REIT sector is proving to be durable, particularly PLife REIT, which has weathered the storm and is poised to grow in the coming years.
To be honest, I’ve been eyeing this REIT since I first began investing, but I’ve never dared to invest in it because it was always overvalued based on numerous metrics. This REIT has historically sold at a premium since it is perceived as resilient and defensive for investors. If you’re serious about investing in this REIT, one piece of advice is that this may be the best price you can get already.