Parkway Life REIT (SGX: C2PU) is a REIT that everyone talks about, but most people would never buy due to its premium valuation.
I believe it is frequently cited as the best REIT role model.
Back then I had only 2 issues to nitpick – lack of acquisitions and a lofty valuation. However, I might need to cross out one of these concers, as Parkway Life REIT has announced it will acquire 11 nursing homes in France.
Now on paper, and based on the announcement, it seems like great news for existing shareholders.
But as share prices dropped after the news, I decided to dig deeper to see if it’s really as good as it seems.
What and why?
PLife REIT is buying up 11 nursing homes in France in one transaction, making its maiden venture into Europe. The properties will be purchased from DomusVi, France’s third-largest and unlisted nursing home operator. The properties will be leased back to DomusVi, under a 12-years lease term. The total acquisition cost will be S$159.9 million.
PLife REIT notes that demand for nursing homes in France is strong as it is facing an ageing population problem. It cites that the proportion of people aged 65 and above has increased from 17% in 2009 to 22% in 2023.
How?
Since the acquisition will be funded via a private placement, retail investors will not have the opportunity to partake in the equity-raising exercise. This could also explain why there was no presentation deck, just a simple black-and-white exchange announcement.
The purchase price of S$159.9 million represents an approximate 3.6% discount from the properties’ independent valuation of about S$165.8 million.
The estimated issue price range is between S$3.80 and S$3.88 per new unit, representing a discount of around 2.7% to 4.7% to the volume-weighted average price (VWAP) of S$3.99 per unit on the day before the the news was announced.
Unit price has since dipped to close at S$3.85 on 23 October.
Quantum of growth
Acquisition and growth go hand in hand. No retail investor would want to see their investment holdings destroyed by REIT managers’ missteps.
With the 11 nursing homes under its belt, PLife REIT’s pro forma DPU will inch up by 1.4% to $0.0764 for 1H’2024. A simple annualised simulation would give a full-year DPU of S$0.1528. At the closing price of S$3.85 per unit, market price for the REIT will be at an annual distribution yield of 3.97%. Decent, but still not cheap.
NAV per unit accretion will improve by 4.3% to S$2.441 against its NAV per unit in FY 2023, which stood at S$2.34. PLife REIT’s latest unit price would still be at 1.6x P/B ratio.
The price correction hardly made a dent in PLife REIT’s valuation. It has become slightly cheaper, but not by much.
Why the unit price correction?
There can be many reasons, and it may be a near term overreaction. But to justify the correction, I can think of a handful of reasons.
Firstly, while the accretiveness is quantitative significant, but qualitative wise, it doesn’t really move the needle much on a per unit basis.
Which then leads to the potential second reason, which is the risk of entering uncharted waters. Questions may arise about why DomusV is opting to sell off its property and lease them back.
It is a shame that even though DomusVi is France’s third largest nursing home group, it is also unfortunately unlisted, which means its balance sheet is opaque. The silver lining of this sale-and-leaseback deal is that DomusVi is relatively too-large-to-fail, albeit not at a financial contagion level.
That kind of gives off an asymmetric risk-to-reward ratio, where risks shines in brighter amber colour versus the reward, which is a paltry accretiveness per unit basis.
My thoughts?
I am always been, and will forever remain, in the pro-growth camp. It is best for the acquisition and the REIT manager to prove themselves with the passing of time, rather than penalise them upfront based on pro forma figures alone.
While it’s true that staying just at its comfort zone means lesser risks and concerns, PLife REIT could easily underperform against other stocks or benchmark indices. The increased level of uncertainty may actually open the door to more potential and better acquisitions down the road.
And we all know that an aging population is a growing issue that will only intensify with time.
But with PLife REIT still trading at pretty unreasonable levels, my tl;dr is this: “Relatively good move, thanks for making me eat my words on your growth strategy, but sorry, you are still too pricy!”
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