Date: 23 September 2024
Broker: OCBC Investment Research

Company Overview

Parkway Life REIT (PLIFE) is one of Asia’s largest listed healthcare real estate investment trusts (REITs), specializing in income-producing real estate assets primarily used for healthcare and healthcare-related purposes. The REIT owns a diversified portfolio of 63 properties, valued at approximately SGD 2.32 billion as of 31 December 2023.

PLIFE’s portfolio includes:

• Hospitals and medical centers (67.8% of the portfolio) in Singapore, such as Mount Elizabeth Hospital, Gleneagles Hospital, and Parkway East Hospital.
• High-quality nursing homes (32.2%) located in various prefectures of Japan.
• Strata-titled units in MOB Specialist Clinics, Kuala Lumpur, Malaysia.

The REIT is managed by Parkway Trust Management Limited and has been listed on the Singapore Stock Exchange since August 2007.

Acquisition in Japan

On 7 August 2024, PLIFE completed the acquisition of Hibisu Higashi Sumiyoshi, a newly built nursing home property in Osaka, Japan. This acquisition is expected to be accretive to the distribution per unit (DPU) and increase income diversification within the REIT’s portfolio. Key details of the acquisition:

• 138-bed nursing home with a lease term of around 30 years.
• Annual gross rental of JPY 127.2 million (~SGD 1.1 million).
• The acquisition increased PLIFE’s weighted average lease expiry from 16.05 years to 16.17 years as of 30 June 2024.

The purchase price of JPY 2.4 billion represents a 9.1% discount to the property’s independent valuation of JPY 2.7 billion. The acquisition was fully funded by JPY debt, raising PLIFE’s leverage ratio from 35.3% to 35.9% on a pro forma basis. Management expects the acquisition to positively impact the REIT’s DPU.

Financial Performance & Valuation

PLIFE has consistently grown its distributions since 2007 through organic rental growth, accretive acquisitions, and prudent capital management. For FY2023, the REIT posted the following financial highlights:

• Gross revenue: SGD 147.5 million
• Net property income: SGD 139.1 million
• Distributable income: SGD 89.3 million
• DPU: 14.77 Singapore cents

The fair value (FV) estimate for PLIFE was revised upwards to SGD 4.48 per unit from SGD 4.29, following the acquisition in Japan. However, the REIT’s valuations appear less compelling due to its recent rally, with the share price rising 14.2% since the last update in July 2024. As of 20 September 2024, PLIFE is trading at a price-to-book (P/B) ratio of 1.7x and a forward 12-month dividend yield of 3.6%, both aligned with its five-year historical averages.

Investment Thesis

PLIFE is well-regarded for its long-term lease structures, providing a stable stream of rental income and downside protection during market downturns. With 63 high-quality healthcare assets across Singapore, Malaysia, and Japan, the REIT benefits from secular megatrends, such as the rise in foreign medical tourism in Singapore and an ageing population in Japan.

The REIT is also supported by growth potential from rental escalations and upside sharing agreements with tenants. Looking ahead, significant DPU growth is expected in FY2026 and beyond, following the completion of renewal CAPEX works at Mount Elizabeth Hospital.

Investment Risks

• Rising Interest Rates: Higher interest rates, especially with a hawkish Bank of Japan, could increase PLIFE’s funding costs and dampen future acquisition opportunities.
• Tenant Risks: The risk of tenant default or non-renewal of leases could negatively impact revenue.
• Cost Overruns: Potential cost overruns from asset enhancement initiatives or other capital expenditure programs may affect profitability.

ESG Updates

In December 2023, PLIFE maintained its ESG rating, although it lags behind peers in certain areas such as corporate governance. Specifically, it lacks a majority independent board and formal engagement and talent pipeline development measures. However, the REIT does promote energy conservation among tenants and has a robust business ethics framework, including whistleblower protection.

Conclusion

PLIFE continues to demonstrate strong long-term fundamentals and defensiveness in the healthcare REIT sector. While its valuation appears less compelling due to the recent price rally, long-term investors might consider gaining exposure on pullbacks, particularly ahead of the expected DPU growth in FY2026.