SINGAPORE (Feb 10): ParkwayLife REIT closed at $3.58 on Jan 31, up 6.2% in January alone. Since its IPO in 2007 at $1.28 per unit, ParkwayLife REIT’s unit price has more than doubled. The REIT has never had a rights issue, or a preferential equity offering in the almost 13 years since its IPO. Unitholders have recouped their initial investment in dividends alone. Although its current yield, based on a full-year distribution per unit of 13.19 cents (up 2.5% y-o-y) for FY2019, is below 4%, its DPU yield on cost is more than 10%. The DPU has grown by 108.7% since the IPO.
Interestingly, the clock has started ticking on ParkwayLife REIT’s 15-year master lease for its Singapore portfolio comprising Gleneagles Hospital, Mount Elizabeth Hospital and Parkway East Hospital.
According to ParkwayLife REIT’s prospectus, for the next 15 years, the revised rent for the first year should not exceed 15% of the adjusted hospital revenue for FY2021. Clarity on the next 15 years is likely to be seen either this year or the next.
ParkwayLife REIT was listed in August 2007, when its lease agreement with the then Parkway Holdings – which has since been renamed IHH Healthcare – was signed. The master lease agreement was for an initial 15 years. At the time of IPO, the REIT’s sponsor has the option to renew the master lease for a further 15 years by giving written notice 12 months prior to the lease’s expiration date which is August 2022. The REIT’s trustee will then grant an extended term of 15 years with the revised rent. Unitholders’ approval is required for the extension of the master lease.
Currently, the master lessee pays whichever is the higher of: the base rent+variable rent comprising 3.8% of the master lessee’s adjusted hospital revenue; or {1+(CPI+1%)}×the total rent payable for the immediate preceding year. In 2007, the total rent was $45 million comprising a base rent of $30 million and variable rent of $15 million (which was 3.8% of adjusted hospital revenue in 2007). In FY2019, gross revenue rose 2.1% to $115.22 million.
The Singapore hospitals contributed $68.49 million to revenue; the portfolio of around 49 Japanese properties, which are mainly aged-care homes, contributed $46.36 million. However, revenue from the Malaysian properties, comprising of 23.1% of MOB Specialist Clinics Kuala Lumpur, fell by almost 30% to $366,000.
Net property income (NPI) rose 2.7% in 2019 to $108.2 million, with the Singapore hospitals contributing $65.9 million, and Japanese nursing homes $42.6 million. Part of the increase in NPI was because of the “upward minimum guarantee rent revision of Singapore hospitals by 1.61%” for the period August 2019 to August 2020. In a footnote to its financial statements, ParkwayLife REIT said: “Higher revenue and NPI were driven by the higher rent under the inflation linked CPI + 1% rental review mechanism. In addition, Parkway East Hospital’s adjusted hospital revenue for the 12th-year lease (23 August 2018 – 22 August 2019) has outperformed its minimum guarantee rent, contributing to the increase in revenue from Singapore.”
In the meantime, market watchers are wondering whether ParkwayLife REIT could acquire Mount Elizabeth Novena Hospital, valued at RM3.89 billion ($1.32 billion) as at Dec 31, 2018. The NPI yields of Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital as at Dec 31, 2019 are 5.3%, 5.4% and 5.7% respectively. Since Mount Elizabeth Novena Hospital is newer with longer land tenure, yields are likely to be more compressed.
At Mount Elizabeth Novena Hospital’s 2018 valuation of $1.32 billion, and based on a gearing of around 38%, ParkwayLife REIT would need to raise around $800 million. Its total assets stood at $1.96 billion as at Dec 31, 2019, and its market cap as at Jan 31 was $2.2 billion.
Any form of equity raising would provide unitholders with the opportunity to acquire more units in this REIT.
