Parkway Life REIT (PLife REIT; SGX: C2PU) has been in our portfolio for a number of years now and has given us solid capital gains and a consistent dividend yield since. This isn’t a surprise as PLife REIT enjoys a stable 15 + 15-year master lease with Parkway Hospitals in Singapore with an annual rental escalation that increases at the inflation rate + 1%. This has translated into steady distributions for PLife REIT and a distribution per unit (DPU) growth of 91.8% since its IPO. At the time of writing, PLife REIT’s current distribution yield is around 4.79%.
As at 31 Mar 2017, PLife REIT owns a portfolio of 49 properties worth $1.7 billion comprising Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital in Singapore; 45 healthcare assets in Japan; and strata-titled units at Gleneagles Intan Medical Centre in Kuala Lumpur, Malaysia.
As PLife REIT has been a solid investment for us thus far, I attended its AGM to keep tabs on the management and their outlook for the year ahead.
Here are 12 things I learned from Parkway Life REIT’s 2017 AGM:
- Gross revenue grew 7.2% year-on-year to $110.1 million and net property income grew 6.7% to $102.4 million. Singapore contributed the bulk of gross revenue at 62.4%. Japan and Malaysia contributed 37.1% and 0.3% respectively.
- Distributable income fell 8.8% year-on-year to $73.3 million. However, this was due to a special one-off distribution from a divestment gain in 2015. When we remove the one-off distribution, distributable income grew 2.8% for the year.
- As at Feb 2017, PLife REIT has an occupancy rate of 100% for its portfolio with a long weighted average lease expiry of 9.81 years. Its largest tenant is Parkway Hospitals Singapore which contributed 62.4% of gross revenue in 2016.
- PLife REIT has a gearing ratio of 36.3% and enjoys a remarkably low all-in cost of debt at only 1.4%. CEO Yong Yean Chau mentioned that 99% of PLife REIT’s loans are at fixed interest rates. PLife REIT has an interest coverage ratio of 8.7 and no major refinancing needs till 2019.
- The CEO highlighted that most of PLife REIT’s borrowings is denominated in Japanese Yen. The Japanese interest rate environment is still soft as the Bank of Japan continues to sustian its monetary stimulus of the economy. Case in point: PLife REIT recently issued a 6-year bond at a fixed interest rate of just 0.58%. PLife REIT has also hedged 100% of its Japanese Yen net income till 2020 to mitigate any volatility in currency exchange rates and ensure a stable DPU for unitholders.
- In 2016 PLife REIT divested four nursing homes in Japan to a U.S. private equity fund for ¥72 billion (approx. $48.9 million) — a 34.4% premium over the original purchase price. According to CEO Yong Yean Chau, the assets comprised non-strategic leases from smaller operators which had little further value for the REIT. The divestment gain of $5.39 million will be distributed equally over four quarters in 2017.
- Correspondingly, PLife REIT acquired five new properties in Japan for ¥4.76 billion (approx. $59.5 million) at a 9.1% discount to valuation. The acquisitions are yield-accretive with an average property yield of 6.9% compared to the overall portfolio property yield of 6.2% and will give the REIT better geographic diversification in Japan.
- The management also completed an asset enhancement initiative (AEI) for Sawayaka Kiyotakan, Japan which increased rent by 4.7% for the remaining lease term of 17 years. Besides increasing the value of a property, the CEO explained that AEIs help PLife REIT’s operators become more profitable thereby reducing the tenant default rate and allowing the REIT to charge higher rents. By helping its operators, PLife REIT also benefits.
- Even though he was happy with the extra distribution for 2017, a unitholder questioned why the management was distributing the gain from its divestments when it could have been used for the new Japanese acquisitions. He mentioned that distributing the gains would mean PLife REIT would have to take on a larger loan for the acquisitions and pointed out that the REIT’s gearing ratio had increased from the previous year. Chairman Lim Kok Hoong explained because the gain wasn’t too large an amount, its distribution wouldn’t affect PLife REIT’s capital needs. The CEO then stated that the board is aware of the matter and may decide not to distribute any gains in the future if needed.
- A unitholder asked if PLife REIT planned to further expand into markets like Malaysia, China, and India. The CEO replied that Malaysia is a key country the management is focusing on but like any potential acquisition anywhere, it would only be made if its cash flow is sustainable and there’s future rental growth. The management has no plans to for China and India at this point because the markets are not yet mature and would only be considered if PLife REIT is able to work with strong partners and/or hospital operators. To add to the point, the chairman said that PLife’s success in Japan so far is due to the good partnerships it has fostered there.
- Another unitholder asked if PLife REIT was looking to acquire any property from its sponsor, IHH Healthcare Berhad, and in particular, Mount Elizabeth Novena Hospital. The chairman said that the board is always in active discussions with its sponsor and will consider Mount Elizabeth Novena Hospital when it is stabilized. Non-executive director Dr Tan See Ling, who is CEO of IHH Healthcare Berhad, revealed that the hospital has been a success story so far and is running very well. He said there is no timeline for the acquisition to take place in the immediate future and any deal will have to be a win-win for both shareholders of IHH Healthcare and PLife REIT. It was also stated that PLife REIT has no first right of refusal for Mount Elizabeth Novena Hospital.
- A unitholder asked if PLife REIT planned to acquire hospitals/medial centres in Japan. CEO Yong Yean Chau explained that, unlike Singapore, hospitals in Japan are generally not profitable. However, the Japanese nursing home industry is very mature and profit margins in the industry are at 15-18%. With over 3,600 operators, it is easy for PLife REIT to partner with good operators who can afford the rents. And even in the unlikely case of a tenant default, the management has no problems looking for a replacement.
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