Parkway Life REIT is one of the most expensive REIT traded in the SGX if you rank it by price to book value, one of the common property company valuation metrics.
There may be a reason for trading at a high valuation. If you look at their care facilities, hospitals in Singapore, Japan they are built with long tenant lease of 15 to 20 years.
So cash flow is predictable unless the counterparty defaults on them.ark
I have not covered this area, but I suspect the operators of these facilities have some form of government support. Government support is good generally as it affirms the sturdiness of this long duration lease not defaulting, but the fat tail risk is, changes in government budget policies might have an effect.
However, if you do not pay rent, you cannot operate, so the operator must be in pretty dire straits to be in that condition.
Acquisition of Care Facilities
Parkway Life REIT have recently entered into a TK Agreement, a Godo Kaisha Samurai 11 (what a name), which is a limited partnership agreement to purchase Silver Heights Hitsujigaoka Ichibankan & Niban-kan, a nursing home in Sapporo City, Hokkaido Prefecture.
This nursing home will be operated by Kabushiki Kaisha Silver Heights Sapporo.
The cost of the acquisition is 1,100 million Yen or SG$13.6 million.
This will grant the operator to operate with a 20 year lease at a gross rental yield of 88 million Yen or SG$1.1 mil.
Under the agreement, there is a backup operator in place should the current operator cancel the lease.
The property is located within a residential district and is 94% occupied.
Based on the net property income divided by the contractual purchase price, the net property income yield is 6.7%. I thought it will be lower, since the gross rental yield is 8%, and we usually apply a 50% margin after all the costs and taxes.
This is accretive, since according to my Dividend Stock Tracker, the cost of capital, specifically equity, for current share holder, is 5.1%, compare to 6.7% NPI yield for this acquisition.
There is no mentioned whether during the 20 year lease, there are adjustment to rental based on consumer price index (CPI), which is a hallmark of these long lease properties.
6 year Unsecured Fixed Rate Notes
Parkway Life REIT also announces that they issued JPY3,300,000,000 6-year Senior Unsecured Fixed Rate Notes Due 2022. This is the second series of notes (the “Series 002 Notes”) issued under the S$500 million Multicurrency Medium Term Note Programme (the “MTN Programme”) established by the Issuer on 18 August 2008.
This note will probably fund the above acquisition but also renew some of the existing loan.
The note will mature in 2022, and it will bear a fixed interest rate of 0.58%.
Very long lease properties, and taking advantage of very cheap loans. The loans if you compared to business trust Croesus Retail Trust, is even lower.
The reason for that would probably be due to the nature of the business assets, and the duration of the loan, and the operator.
This means that Parkway Life is in a unique situation where they can borrow at extremely low rates versus a current NPI yield of 6-7%. However I think this asset must be a rare find for this kind of NPI yield.
So they earned a good spread.
Unfortunately the shareholders will bear the interest rate risks there to earnings converted to Singapore dollars.
When the share price is trading at a premium to book value, the cost of capital makes it a lower hurdle to acquire a property that is accretive.
Parkway Life REIT is like a 5.1% bond, your only worry is what happens when competitive investment assets, be it new bonds, preference shares, that are of similar risk levels, starts yielding more when rates go up. The share price would have to adjust accordingly.
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