Income investors devote their search to finding the “Holy Grail” for REITs — one that has continued to raise its distribution per unit (DPU) without fail over the years.
While Singapore is famous for being a REIT hub, not many REITs can lay claim to consecutive increases in DPU through thick and thin.
A myriad of factors, including the Global Financial Crisis and the current pandemic, have negatively impacted many REITs and their tenants.
However, Parkway Life REIT (SGX: C2PU), or PLife REIT, can certainly make this bold claim.
The healthcare REIT, which owns a diversified portfolio of 55 properties located in Singapore, Japan and Malaysia, has been a bastion of consistency when it comes to paying out distributions.
Since its IPO in 2007, the REIT has increased its recurring DPU every single year without fail.
PLife REIT’s prospective dividend yield, however, stands at a mere 2.9%.
The question now is – should investors buy into this REIT now?
Can it continue its stellar track record well into the future?
High-quality, dependable assets
First off, PLife REIT owns a portfolio of high-quality properties that have demonstrated resilience against downturns.
The REIT’s three private hospitals in Singapore, namely Gleneagles, Mount Elizabeth and Parkway East, are worth S$1.2 billion and contributed close to 60% of gross revenue as of 30 June 2021.
These three hospitals are well-known among Singaporeans for excellent healthcare services, thus ensuring their revenue remains stable through economic cycles.
In addition, the hospitals are on a triple net lease arrangement, which means PLife REIT is not responsible for any operating expenses related to their upkeep.
Over in Japan, the REIT owns 49 nursing homes worth around S$768.8 million that are strategically located in residential districts within major cities.
These assets enjoy 100% committed occupancy and also have a favourable rent structure, with around 88% of Japanese gross revenue protected by “up-only” rental agreements that stipulate rental rates either remain constant or are adjusted upwards.
With such a strong asset profile, investors should feel assured that revenue will remain intact and that demand should remain strong for the REIT’s hospitals and nursing homes.
Strong financial profile
As mentioned earlier, PLife REIT has managed to post uninterrupted DPU growth over the last 12 years.
The REIT’s DPU was S$0.0683 in 2008 and by 2020, it had more than doubled to S$0.1379. This performance works out to be a compound annual growth rate of 6%.
For its latest fiscal 2021 first half (1H2021) earnings, the REIT has once again posted a year on year increase in DPU, continuing its impressive track record.
Although gross revenue and net property income dipped slightly year on year, distributable income rose 4% year on year to S$42.1 million.
As a result, DPU also increased by 4% year on year to S$0.0695.
Aside from DPU, the REIT also has strong financial metrics.
Gearing stood at 37% as of 30 June 2021, allowing for debt headroom of S$523.6 million before the REIT hits the 50% leverage threshold set by the central bank.
The all-in effective cost of debt is also very low at just 0.56%, while interest coverage stands at 21.6 times.
Growth strategies in place
Just two months ago, PLife REIT announced new master lease agreements for its three Singapore hospitals.
These new agreements will extend the lease terms by around 20 years till 31 December 2042.
In addition, the REIT will also commit S$150 million in renewal capital expenditure (capex) to spruce up the three hospitals to maintain their competitiveness.
These proposed transactions are expected to bump up PLife REIT’s DPU from the current S$0.1379 to S$0.1826 by the end of the fourth year.
At the same time, the REIT’s sponsor will also grant the right of first refusal for Mount Elizabeth Novena Hospital for 10 years.
This high-quality private hospital could potentially be injected into the REIT in the future, thereby further boosting its portfolio and DPU.
As a recap, PLife REIT’s sponsor is Parkway Holdings, a fully integrated healthcare provider with interests in and/or operates 15 hospitals in Singapore, Brunei, India, and Malaysia.
Get Smart: Look beyond current yield
Income-seeking investors should look beyond PLife REIT’s current yield and take note of its many strong attributes.
Not only does the REIT own a portfolio of recession-resistant, high-quality assets, but these properties also have favourable rent structures in place that will enable DPU to keep growing.
As DPU rises over time, yield also should increase in tandem.
Furthermore, the REIT has a reputable sponsor and favourable financial metrics that could result in future growth through acquisitions.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.