Parkway Life REIT vs First REIT

Updated: Oct 17

In our previous article, we compared the first and second runners of Singapore’s Retail REIT, in this article, we’ll be doing a 1-vs-1 comparison between the only two healthcare REITs listed in Singapore – Parkway Life REIT and First REIT.

I will be comparing these two REITs based on the following criteria and coming out with a conclusion based on the assumption that I can only invest in either one of the REITs without any consideration of valuation:

Type and Location of Underlying Property Allocation
Occupancy Rate & Weighted Average Lease Expiry (WALE)
Distribution Behaviour and Breakdown
Balance Sheet Health

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The article is best viewed on a desktop. Without further ado let’s get started.

1. Type and Location of Underlying Property Allocation

Parkway Life REIT

Parkway Life is a hospitality REIT that operates mainly across Singapore and Japan. Parkway Life Singapore property mainly comprises hospitals such as Parkway East, Gleneagles and Mount Elizabeth hospitals while their Japan properties mainly comprise nursing homes.

First REIT

First REIT is a hospitality REIT that operates mainly in Indonesia and has only recently expanded into Japan as of 2022. Their properties in Indonesia mainly comprise hospitals while their properties in Singapore and Japan mainly comprise nursing homes.

Winner: Parkway Life REIT

For the metrics of underlying properties, I would prefer Parkway Life REIT over First REIT for two key reasons.

Firstly, Parkway Life REIT's portfolio operations are concentrated in Singapore, mitigating foreign exchange rate risks relative to First REIT, which primarily operates in Indonesia. Additionally, the historical weakness of Indonesia's Rupiah, in contrast to stronger currencies such as the Japanese Yen, increases the foreign exchange rate risk for First REIT compared to Parkway Life REIT.

Secondly, unlike First REIT which had only recently changed its portfolio strategy to move into Japan, Parkway Life REIT already has a proven track record for their operation in Japan. As such, there is less uncertainty in terms of Parkway Life REIT operations in Japan as opposed to First REIT.

2. Occupancy Rate & WALE

Parkway Life REIT

Parkway Life REIT’s occupancy rate and WALE have exhibited strong resiliency over the years and their master lessee has exhibited strong resiliency over the year and throughout the COVID-19 pandemic.

First REIT

On the surface, First REIT’s occupancy rate and WALE had also exhibited strong resiliency over the years.

However, beyond the indicators, their master lessee encountered strong financial headwinds back in 2020 which posed a material risk to First REIT’s operation such that they were forced to undergo a drastic master lease restructuring and absorb significant DPU deterioration for the REIT to continue its operations.

Winner: Parkway Life REIT

For the metrics of property resiliency, beyond the indicators alone, I’d prefer Parkway Life REIT given that their master lessor is significantly stronger and much healthier which is vital in ensuring their ability to fulfil the obligations under the master lease.

3. Distribution Behaviour & Breakdown

Parkway Life REIT

Among all the REITs listed in Singapore, Parkway Life REIT stands out for its exemplary distribution strategy and transparency. The REIT has consistently achieved growth by reinvesting retained earnings, avoiding any artificial inflation of distribution figures through management fees paid in units.

First REIT

As previously mentioned, back in 2020, First REIT’s master lessee encountered financial issues which resulted in a drastic restructuring of the existing master lease agreement. This severely impacted the nature and behaviour of their DPU.

As a result of the new master lease, which now has a lower base rent and higher variable rent component, First REIT’s distribution is now much more sensitive and unproven post-COVID versus how things were pre-COVID.

Winner: Parkway Life REIT

For the metrics of distribution behaviour and breakdown, the clear winner is Parkway Life REIT. Not only has the management proven its ability to deliver stable distribution to the unit holders, they managed to do the impossible of consistently growing its DPU organically solely from the limited retained earnings without having to issue new units.

4. Balance Sheet Health

Parkway Life REIT

Over the years, the financial health of Parkway Life REIT has remained relatively stable from the gearing ratio angle, though the interest coverage ratio has deteriorated largely due to a higher borrowing cost.

First REIT

On the other hand, First REIT’s financial health encountered significant stress back in 2020 as a result of the sudden depreciation of the valuation of their properties. This resulted in the need to recapitalise which was performed via additional unit issues that had significantly diluted the existing shareholding base as seen from the distribution behaviour above.

Similarly to Parkway Life REIT and all other REITs, the interest cover ratio and average cost of debt had also deteriorated as a result of the higher for longer interest rate environment.

Winner: Parkway Life REIT

For the metrics of financial health, I would say that Parkway Life REIT’s situation is better though investors should pay attention to how the future increase in borrowing cost would impact the bottom line performances.

This is because given the low base for the cost of borrowing, an incremental increase in interest rate will have a higher impact on the bottom line. (e.g. a 100 basis point or 1% increase in cost of borrowing would increase overall borrowing cost by 100%).

Overall Winner: Parkway Life REIT

If I could only invest in either Parkway Life REIT or First REIT, I’d have to go with Parkway Life REIT as they are the prime example of what a near-perfect REIT would look like – stable and growing DPU in a highly defensive industry.

That being said, I’d pay close attention to the impact of their cost of borrowing given the current interest rate environment in Japan which points to a much higher for much longer interest rate environment.

All things considered, when designing a REIT portfolio, things aint as simple as choosing one REIT over another, investors need to understand how each REIT will perform and contribute at a portfolio level to determine whether a REIT is investible and if so what should be the ideal allocation on a portfolio level.

I’ve written more extensively on my REIT investment methodology and how I go about designing, implementing and managing a profitable REIT portfolio for myself which you can grab a copy of for free here: