In a recent article, I discussed an underfollowed healthcare REIT based in the island nation of Singapore called First REIT (OTC:FESNF). In this article, I discussed that the REIT provides both growth potential and a solid distribution yield for investors that seek to diversify their portfolio away from more traditional American-focused healthcare property plays such as Omega Healthcare Investors (OHI) or Medical Properties Trust (MPW). In this article, I will present another Singaporean healthcare REIT for your investment consideration. That trust is Parkway Life REIT (OTC:PRKWF).
Parkway Life REIT is the largest publicly traded healthcare REIT in Asia, boasting a portfolio valued at S$1.5 billion and a market cap of S$1.397 billion at the time of writing. The trust owns and operates healthcare-related properties in both Singapore and Japan. Japan in particular offers interesting opportunities and challenges for the trust, which will be discussed in detail later in this article. This also provides an interesting contrast to its closest peer, First REIT, which operates primarily in Singapore and Indonesia as well as its American peers which are mostly restricted to the United States. Thus, this trust offers a way for investors to diversify their portfolios internationally and earn income outside of the U.S. markets and currency but it also provides exposure to what could likely be one of the best healthcare markets going forward.
Parkway Life REIT owns a portfolio of forty healthcare properties in Japan with a collective worth of S$522.3 million. This portfolio consists of one pharmaceutical manufacturing and distribution facility and 39 private nursing homes. These private nursing homes are an excellent investment for the trust to have given Japan's rapidly aging population. In a presentation given to investors on November 7, 2013, Parkway Life REIT stated that by 2050, one in every three people in Japan will be more than 65 years old. Although the REIT does not provide a source for this statistic, the Japanese Census Bureau confirms that the nation's population is indeed aging. In 1989, 11.6% of the Japanese population was 65 years old or older. At the time, the bureau projected that 25.6% of the population would be over 65 by 2030. As of February 2011, 23.1% of the Japanese population is 65 or older and 11.4% are age 75 or older. As individuals age, they often begin to become larger consumers of medical services and may eventually require the services of a nursing home. The fact that an increasing portion of Japan's population will be aging going forward means that an increasing portion of the country's large population will be requiring the services of a nursing home. Thus, Parkway Life REIT owns the right buildings at precisely the right time.
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Source: Parkway Life REIT
The trust seems to recognize the potential that these properties hold and so has been expanding its Japanese real estate holdings by purchasing more nursing homes. On July 3, 2013, the trust acquired two nursing homes in the Japanese cities of Hyogo and Toyonaka. The trust followed up these purchases with the purchase of five additional nursing home properties in the cities of Toba, Niihama, Kitakyushu, and Nigata. These acquisitions all proved to be accretive to the trust's net property income as all seven of these new properties carry an average property yield of over 7.0% based on the purchase price.
The second of these acquisitions, that of the five nursing home facilities, showcases another desirable quality that Parkway Life REIT possesses. This quality is the trust's ability to obtain excellent purchase prices for its properties. This chart summarizes the five properties acquired as well as the purchase price for them and their respective valuations:
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Source: Parkway Life REIT
As the chart shows, the trust acquired three of the five properties in this group for a price under the market valuation of the property. Although the remaining two properties (Sawayaka Seaside Toba and Sawayaka Minato-kan) were purchased at a price slightly above the fair market appraisal of the property, the total purchase price of all five properties was slightly below the fair market appraisal price. In addition, the trust managed to get a few other concessions from the seller in this deal. First, the operator in each of these properties received a fresh twenty year lease. Thus, the revenue that the trust will derive from each of these properties should be assured for the next twenty years. Additionally, the parent company of the tenant of these buildings, Uchiyama Holdings (more information about Uchiyama Holdings can be found later in this article), has agreed to guarantee the rental payments of its wholly-owned subsidiary. This sort of arrangement is standard, however, and so is not truly indicative of any negotiating advantage that Parkway Life Trust holds over other healthcare REITs. Finally, another firm, Living Platform Ltd. has entered into a backup operator agreement for these properties. I discuss the trust's backup operator agreements later on in this article as well. All of these things combined should ensure that the trust enjoys very secure income from these five properties.
The acquisition of these new properties was a major reason why the trust saw its distributable income increase in the third quarter of 2013 compared to the third quarter of 2012. In the third quarter of 2013, the trust reported total net distributable income of S$16.1 million. In the same quarter of last year, the trust reported total net distributable income of S$15.6 million. This increase in distributable income allowed the trust to increase its distribution by 3.5% compared to the prior year quarter. This gives the trust a trailing distribution yield of 4.48% based on the current stock price and the last four distribution payments (Parkway Life REIT pays its distributions quarterly).
The trust's Japanese real estate portfolio enjoys considerable diversification among tenants. As of September 30, 2013, the trust's 39 Japanese nursing home facilities were leased to sixteen different nursing home operators. This is beneficial for the trust as it is not entirely dependent on one operator for all of its revenue. For example, if the trust only leased its facilities out to a single tenant and the trust's relationship with that single tenant soured then it would be very adversely affected as the departure of that single tenant from its facilities would represent a huge loss of monthly revenue that the trust would be hard pressed to replace on short order.
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Source: Parkway Life REIT
However, with that said, the trust does have a large percentage of its overall monthly rental income coming from a single tenant: The K.K Sawayaka Club. This single tenant, the largest nursing home operator in Japan, pays the trust a total monthly rent of approximately four times that of the second largest tenant, K.K Asset. Thus, any reduction in the relations between K.K. Sawayaka Club and the trust would prove to be hazardous to the net property income of the trust. However, the risk of this is relatively low. There are two reasons for this. First is that the trust has a very good working relationship with the parent company of the K.K Sawayaka Club. The K.K Sawayaka Club is owned by the publicly traded Japanese company Uchiyama Holdings Co., Ltd. This company itself actually owns nursing homes which it has been selling. Parkway Life REIT has the right of first refusal to purchase any nursing homes sold by Uchiyama Holdings. This means that the trust must decline to purchase any nursing home sold by Uchiyama before any other buyers can step in and purchase the property. This is an indication that Parkway Life REIT is the preferred landlord of Uchiyama's K.K. Sawayaka Club division as it would make no sense for the large holding company to enter into such a deal with the trust if it was not. The second reason why the potential loss of rental income is less of a concern than it would otherwise be should the trust's relationship with K.K Sawayaka sour is that the trust has backup operator arrangements in place for several of its nursing home properties in Japan. Thus, another tenant is ready to move in should any of its nursing home properties become vacant. This provides some comfort that the trust's revenues are sustainable (as the new operator would stand ready to pick up the lease) and significantly reduces the risk that would otherwise be present should there be a problem with any of the current tenants of its nursing home properties.
The REIT is also exposed to some risks due to its Japanese investments that it would not have were all of its properties located in Singapore. One of the most significant of these is currency risk. For quite some time now, the Bank of Japan has been flooding the market with enormous quantities of yen in the hopes of boosting both investment and inflation. The strategy has worked, at least to some degree, as the market has punished the yen, resulting in it losing value against most other currencies. One of the currencies against which the yen has lost value is the Singapore dollar.
Source: Oanda
This devaluation of the yen has proven to be quite problematic for the trust. This is because the trust reports its results and pays its distributions in Singapore dollars. However, the tenants of its nursing homes in Japan pay their rent in Japanese yen. Therefore, when the trust converts this yen back into Singapore dollars, the lower value of the yen measured in Singapore dollars results in the trust receiving less Singapore dollars for its yen than it did when the yen had a higher value. This would normally result in declining net property income from its Japanese nursing homes when measured in Singapore dollars.
Fortunately, the trust has taken steps to protect itself against the brunt of the damage from a declining exchange rate. According to the trust's third quarter 2013 results, it has entered into foreign currency forward contracts to hedge its exposure to the decreasing JPY/SGD exchange rate. Additionally, the trust uses interest rate swaps and foreign currency forward contracts to hedge its exposure to the Japanese Yen-denominated loans that it entered into in order to purchase its forty buildings in Japan. As of September 30, these hedges prevented the declining yen from having any impact on the trust's results. This greatly enhanced the stability of the trust's revenues, important since roughly 33% of the REIT's revenues originate in Japan. However, it does not appear that all of the company's Japanese revenues are protected against further declines in the yen going forward. According to the aforementioned November 2013 investor presentation, only 73.4% of the trust's revenue is protected against declines due to these hedges. The remaining 26.6% of the trust's Japanese revenues are fully exposed to further declines in the yen. Thus, if the Japanese yen continues to decline against the Singapore dollar, as it most likely will, then the trust will likely see its revenues from these Japanese properties decline slightly due to fluctuations in the currency exchange rate. Of course, should the Singapore dollar decline against the yen, then the exact opposite scenario would occur and the trust would see its Japanese revenues increase when measured in Singapore dollars (but only from that percentage of the trust's revenues not subject to these hedges).
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Source: Parkway Life REIT
Disclosure: I am long OHI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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