REITs are lauded as an asset class that provides a steady dividend stream for income-seeking investors.
The stability of their rental income, coupled with the need to pay out at least 90% of their earnings as distributions, makes them suitable income instruments that generate a stream of passive income.
What’s more, some REITs can boast steadily increasing distribution per unit (DPU) over the years as they grow their distributable income through acquisitions, positive rental reversions, and asset enhancement initiatives.
One REIT that has consistently grown its core DPU over the years is Parkway Life REIT (SGX: C2PU).
The healthcare REIT currently owns 61 properties in Singapore, Japan and Malaysia with assets under management of S$2.35 billion as of 30 September 2022.
Can Parkway Life REIT continue to post higher DPU in the years ahead? Let’s find out.
An impressive track record
Source: Parkway Life REIT’s 3Q2022 Business Update
First, let’s look at a little history.
The chart above shows the steady progression of Parkway Life REIT’s DPU over the years.
The rise of its core DPU has been uninterrupted, going from an annualised S$0.0632 in fiscal 2007 (FY2007) to S$0.1408 in FY2021.
The compound annual growth rate (CAGR) stood at 6% over these 14 years.
For the first half of FY2022 (1H2022), Parkway Life REIT continued to grow its DPU.
Gross revenue inched up 1% year on year to S$60.2 million while distributable income increased by 1.5% year on year to S$42.7 million.
DPU rose 1.5% year on year to S$0.0706, continuing the tradition of steadily-rising DPU.
For its 3Q2022 business update, Parkway Life REIT reported a slight 1.3% year on year dip in gross revenue to S$89 million.
However, net property income (NPI) edged up 0.1% year on year to S$82.8 million.
A new master lease agreement
Last year, Parkway Life REIT signed new master lease agreements for its three Singapore hospitals, namely Gleneagles Hospital, Parkway East Hospital, and Mount Elizabeth Hospital.
These new lease agreements will run for 20.4 years from 23 August 2022 till 31 December 2042, thus enhancing rental income visibility for the healthcare REIT.
Beyond this period, Parkway Life REIT has the option to renew the agreements for another 10 years.
As part of the deal, a one-time capital expenditure of S$150 million will be set aside to renew and renovate all three hospitals to enhance their attractiveness.
Rents are guaranteed to increase by 3% from next year onwards due to a step-up rental escalation clause.
By the end of year four (i.e. 2026), rental income is projected to jump by 25.2% year on year to S$99.2 million.
Thereafter, an annual rent review formula will be applied which is the higher of either 3.8% of annual hospital revenue or the consumer price index plus 1%.
These mechanisms will ensure that Parkway Life REIT’s Singapore hospital rental income will see a steady rise and then jump sharply by FY2026.
Scooping up Japanese nursing homes
Let’s not forget Parkway Life REIT also has a quality portfolio of 57 Japanese nursing homes worth around S$872.9 million.
These properties are not only fully-occupied but close to 96% of them have downside rental protection, with an “up-only” rent review provision.
This clause states that rents cannot be revised downwards but will either stay constant or increase.
Parkway Life REIT has been busy acquiring more nursing homes to grow its portfolio.
In September alone, it announced the acquisition of a total of five nursing homes in the Hokkaido and Tokyo regions.
Both purchases are expected to be yield-accretive.
Last year, the REIT acquired a total of three nursing homes in Japan while divesting an industrial property in the same country.
These moves show that management is active in sourcing suitable properties to add to the REIT’s portfolio to boost DPU.
As of 30 September 2022, the gearing level stood at 34.7% with a very low cost of debt of just 0.72%, opening the REIT up to tap on debt for further acquisitions.
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