Why Parkway Life REIT is the Largest Holding in my Dividend Portfolio when it has the Lowest Yield?

Parkway Life Reit (C2PU.SGX) is one of Asia's largest listed healthcare REITs.  It invests in income-producing real estates and real estate-related assets used primarily for healthcare and healthcare-related purposes.  As at 31^st December 2021, Parkway Life REIT's total portfolio size stands at 56 properties, including hospitals and medical centres in Singapore (prized properties are Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital), Malaysia, and 52 healthcare-related assets in Japan, totalling approximately SGD 2.29 billion.  It is a relatively small REIT compared to other REITS listed on Singapore Exchange.

Parkway Life REIT is firmly guided by its principle of staying prudent and focused in its growth strategy, focusing on targeted investment, proactive asset management and prudent capital and financial management.  Through these focuses, the REIT aims to maintain strong financial position to ensure continuous access to funding at optimal cost, maintain stable distributions to unitholders and achieve a steady net asset value.  Parkway Life REIT's gearing stands at 35.4% and interest coverage ratio at 21.5 times as of end 2021.  Moreover, as the REIT's revenue is forecasted to grow at CPI + 1%, this ensures that its rental income keeps pace with inflation growth.  Although there is currency risk from Japanese Yen (JPY) due to its earnings from nursing homes in Japan, Parkway Life REIT has hedged its JPY net income to minimize foreign exchange volatility.

Despite the positives mentioned above, there are many dividend investors who are staying away from this REIT.  The main reason is the low yield.  Based on the FY2021 dividend of 14.08 cents, and closing share price of $4.70 on 31^st March 2022, Parkway Life REIT has a dividend yield of only 2.996%, way below the 4-5% yield that many income investors are seeking.  As a dividend investor myself, I was also actively looking for dividend shares that pays 4-5% yield when I was building up my dividend portfolio.  If so, why did I make Parkway Life REIT the largest holding in my portfolio, taking up around 12.31% of my capital allocation?

1)     Strong Sponsor- IHH Healthcare.

IHH is one of the world's largest healthcare networks. With a 35.56% shareholding in Parkway Life REIT, it shows the commitment of the sponsor to constantly improve this REIT as their interests are in line with the retail shareholders. 

Moreover, with the latest announcement of strategic collaboration between IHH Healthcare and the REIT in mid-2021 regarding the extension of master leases of its three Singapore hospitals, that will cumulatively drive total rental growth to 39.4% for Year 4 of the 20-year lease term, and rental escalation is set at CPI + 1% from Year 4 to Year 20.  This is definitely a long term positive for the REIT, especially with its gradually increasing distribution per unit (DPU)!

2)    Resilient Sector.

Though it is a REIT, which is still very much affected by market volatility and interest rates, being in the healthcare sector proves to be more resilient.  Unlike retail REITs or commercial REITs that have to deal with higher frequency of tenant loss and hence lower occupancy rates during times if unfavourable economic conditions, this is less so for healthcare REIT.  Moreover, approximately 58% of Parkway Life REIT's revenue comes from the 3 major hospitals in Singapore.  I believe this will continue to be a strong support for its revenue moving forward (though some may see it as concentration risk).

3)     Room for Further Growth

Based on UOB Kay Hian analyst, there might be a possibility that the sponsor IHH Healthcare divest the hospital block of Mount Elizabeth Novena Hospital to Parkway Life REIT.  Parkway Life REIT has been granted the right of first refusal (ROFR) by sponsor to acquire the hospital block for a period of 10 years.  Based on the analyst, if Parkway Life REIT goes ahead with the acquisition for $1.286 billion, it could allow the REIT to increase its distribution per unit (DPU) by 17%!  It is important to note that since IPO, Parkway Life REIT has never done any capital raising from shareholders via preferential offering or even private placement.  I will be thrilled if the REIT ever decides to do a major financing via preferential offering to complete this acquisition! 

4)     Strong Share Price Performance.

Parkway Life REIT IPOed and commence trading on 23^rd August 2007, at $1.28.  On 4^th January 2022, its share price has reached its all time high closing price of $5.20.  Excluding dividends collected over the entire 14 years period, this already represents a capital gain of 406%!  Including dividends collected over the entire period, the total gains would be a whopping 532% (excluding compounding effects)!!!

5) Improving Dividends Year-on-Year.

From FY 2008 to FY 2021, the annual dividends paid has more than doubled from 6.83 cents per share to 14.08 cents per share. 

Although the dividend yield based on recent share price is only approximately 2.996%, investors should look long term, and look at dividend yield based on the purchase price of their shares instead of the current price.  For instance, a potential investor was interested to buy shares on 3^rd January 2020 at $3.33 per share, with 3.961% yield based on FY 2019 dividends. If he decided not to purchase the shares as yield is less than 4%, what he will miss out is a 4.228% yield based on FY 2021 dividends collected (14.08 cents) on the purchase price. If this doesn't sound exciting, imagine buying shares during IPO and holding till today. That translates to 11.00% yield based on IPO price at $1.28 per share!!!

In my opinion, Parkway Life REIT is a strong and stable REIT, generating stable income for its shareholders. Being a great REIT, Parkway Life REIT has what it takes to command a premium in its share price, which is the main reason for its depressed dividend yield. I believe it will be a norm for this REIT to give a dividend yield between 2.5 to 3.5% on average in the long term. If investors remain patient and continue to invest and hold on to this REIT, they will definitely be rewarded in the long run. I believe in time to come, by continuously reinvesting the dividends collected to compound it, the dividend yield of this REIT, based on my purchase price, will exceed 5% in the long term.  With that, Barista FIRE, here I come...!