Investing in Parkway Life REIT – Buy or Sell?
Asset Portfolio of Singapore Private Hospitals
Parkway Life REIT (PREIT) is the largest healthcare SREIT in Singapore. When it was spun off and listed by its then corporate parent Parkway Holdings in 2007, PREIT’s asset portfolio consisted of the three Singapore private hospitals owned by Parkway Holdings (Mount Elizabeth, Gleneagles and Parkway East Hospital). PREIT has since then embarked on an acquisition path to expand into the Japan nursing homes sector and its asset portfolio has since grown to 49 healthcare related properties.
Japan Nursing Homes and Healthcare Facilities
Other than its original portfolio of three Singapore hospitals (which accounts for 61% of its revenue), the rest of PREIT’s current portfolio is mainly in Japan nursing homes and healthcare-related facilities (with the exception of one medical centre in Malaysia). Thus, PREIT is exposed to JPY risk although it uses FX hedging contracts to manage such FX risks. While PREIT does not embark on frequent asset enhancement initiatives (AEIs), it has managed to enhanced the value of its Parkway East Hospital by increasing its medical centre space. In addition, PREIT has embarked on asset recycling exercises for its Japan properties and has rewarded shareholders by distributing the divestment gains of such exercises.
Unique Rental Arrangement
Among the SREITS, PREIT has a unique rental arrangement with the master lessee of its three Singapore private hospitals, which is Parkway Pantai (a wholly-owned subsidiary of IHH Group). IHH Group, which is one of the largest hospital operators in the world, also owns a 36% stake in PREIT. Under the master lease agreement with IHH Group, PREIT will receive a minimum rental that is adjusted upwards yearly (by CPI [consumer price inflation] + 1%) or a percentage of the Singapore hospitals operating revenue, whichever is higher. In addition, most of PREIT’s Japanese nursing homes are under long-term rental contracts with periodic rental escalation reviews. Thus, PREIT’s rental revenue stream is highly stable with some growth potential. And due to its favourable rental lease structure, PREIT tends to trade at a premium to its SREITs peers.