Should You Invest In Parkway Life REIT [Fundamental Analysis]

In this article, we'll be conducting a fundamental analysis of Parkway Life REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having a high degree of capital preservation ability.

Information Is Accurate Up To April 24

Business Description

Parkway Life REIT is a Healthcare REIT that was listed in 2007 and owns 63 properties (3 Hospitals in Singapore, 59 Nursing Homes in Japan & 1 Specialist Clinic in Malaysia).

What I Like About Parkway Life:

Management has grown the DPU sustainably without diluting their units in issue which is a remarkable feat in the space of REITs
Defensive industry with high downside protection to rental income
Overall portfolio’s WALE is high and a high percentage of the leases have CPI-linked revision formulae and rent review provisions embedded in the tenancy contract.
Management has consistently generated yield accretive capital recycling efforts over the past 16 years and has a clear strategic direction.

What I Do Not Like About Parkway Life:

A good chunk of the revenue is subjected to foreign exchange risk (mainly Japanese Yen) which, while the demographic of future expansion/acquisition makes sense, brings about inevitable FX risks.

Updates From Recent Performance (FY 2023)

General Comments:

DPU grew by 2.7% Y.O.Y at the back of strong growth in gross revenue (13.5%) and net property income (14.1%) which was offset by higher financing costs. The growth experienced is due to contributions from the properties acquired in 2022 and 2023 as well as a higher rental reversion from Singapore hospital.
Parkway Life REIT embarked on a $350m collaboration that is jointly funded by IHH Healthcare Singapore to transform Mount Elizabeth Hospital into a modern and integrated multi-service medical hub by 2025.

Positive Headwinds:

Contribution from an additional acquisition of 2 nursing homes that is completed in 2023 should take effect in the financial year 2024.
No refinancing requirements until March 2025, of which rates are expected to come back down which should help offset the higher rates that will be experienced in Japan. Overall, the cost of borrowing should remain stable for Parkway Life REIT in the coming years.

Negative Headwinds:

The recent depreciation of the Japanese yen in 2023 (-17% YOY) against SGD will cause a drag in distribution as a result of potential foreign exchange losses and also the fact that a good portion of the income is derived from Japan. That said, given that the management has had an FX hedging strategy in place and has forward positions till 1Q 2029 as a natural hedge against FX movements.

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Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).

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