Saturday, August 25, 2007

Parkway Life REIT

Well Positioned Industry

The Singapore medical services industry is well positioned for continued growth in the years ahead. Singapore’s strong supporting infrastructure and regulatory environment encourages the industry to flourish. In addition, the medical services industry is part of the larger drive to shape Singapore into a knowledge-driven services economy, and this will allow the country to continue to attract medical tourists from abroad. Singapore will benefit from wealthy patients coming in from the emerging economies in the region such as India, China and Indonesia.

Strong Competitive Position & Management Track Record

Parkway has a strong reputation and track record within the hospital management industry. Two of the three hospital assets that the REIT will start out with, Mount Elizabeth and Gleneagles, are premier hospitals with a strong supporting specialist base which uses the facilities. The large pool of medical specialists housed in the neighbouring medical centres to the hospitals more or less guarantees a steady flow of patients and utilization of the hospitals. I cannot say the same for East Shore hospital as less is known about it. By inference, however, we shall assume that there is at least a sufficient level of medical care provided in the hospital to attract patients to it as well.

Capital Structure

The debt-to-asset ratio of the REIT is currently 4.6%. It has a lot of room to take on debt, unlike comparative REITs which are much more highly leveraged, with anywhere from 20-40% gearing ratios. Higher gearing will enable the REIT to achieve higher returns on unitholder's funds.


The main issue to be considered is the valuation of the REIT. At the issue price of $1.28, the REIT is projected to yield around 4.77% in FY2007, with low debt. Considering that REITs as an asset class are expected to yield 7-8% (leveraged) on average over the long term, this valuation is still not cheap. Some of the premium is made up by the fact that Parkway REIT has quality properties under its management and that it is a strong business. However, even factoring this into the picture, we should not expect outsized gains from the original IPO price.


Investors in Parkway REIT should hold the stock and not panic if the price of the stock falls. The business is fundamentally sound. However, given the premium valuation, investors should not expect outsized gains. The REIT will make a sensible long term investment with reasonable dividend yield and should be treated as such.

If the price of the REIT falls further, investors may like to consider buying more of the stock, perhaps somewhere in the region of $0.90-$1.00.

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