Investing 2019 May (Part 3) ... Parkway Life & Sasseur
[Disclaimer: I am an amateur investor and not a financial advisor. I blog here to chronicle my investment journey. My stock purchases and sales are unique to my temperament, life situation, risk appetite and investment goals. All information that you find on my blog such as ideas, commentaries, predictions, or stock picks, whether expressed or implied, are not to be construed as personal investment advice. I repeat, I am only an amateur investor. I cannot and will not be held liable for any action that you take as a result of what you read here. Do your own due diligence and/or seek the help of a qualified financial advisor.]
I love REITs. Most SG investors do. REITs provide a consistent flow of passive income, and they come with the potential for some moderate to high capital appreciation.
I am allocating 25% of my portfolio to REITs and I want to slowly build up this portion of my portfolio. Currently these REITs are in my portfolio:
* Capital Commercial Trust
* Capital Mall Trust
* First REIT
* Mapletree Industrial Trust
Like I mentioned before, I plan to add Ascendas and Mapletree Commercial Trust to the mix again, after having sold them early in May for some capital gain.
After much researching, I settled on 2 REITs.
1. Parkway Life REIT
This REIT is no stranger to most SG investors. It owns Mt E, Gleneagles and Parkway East Hospital in Singapore. Its overseas properties include the Gleneagles in Kuala Lumpur and 46 properties (mainly nursing homes) in Japan. GingWen, the guru on REIT investing, has done an excellent write-up on Parkway Life (https://www.probutterfly.com/blog/parkway-life-reit-invest-in-2019-with-peace-of-mind)
With talks about the recession occurring in the near future, I want to own something defensive, and when it comes to REITs, healthcare is the most defensive. I believe healthcare REITs are defensive in these 2 aspects:
A. Nature of demand
It does not matter whether the economy is in boom or in recession, or in between, for people will always need healthcare. In bad times, people might reduce their shopping (retail REITs) and vacation time (hospitality REITs); companies might stock less (industrial REITs) and seek cheaper office rentals (commercial REITs).
In sickness, people need to see their doctors and/or have operations done. Sure, in Singapore, most people go to government restructured hospitals. But there is a sizeable number of people who prefer private hospitals. I also know of friends and colleagues who fly in to Singapore for our excellent healthcare services. With an ageing population both within and beyond our shores, the demand for healthcare services can only go up.
That said, Singapore is no longer the go-to destination for medical tourists (https://asia.nikkei.com/Business/Waning-medical-tourism-forces-rethink-in-Singapore). Still, for highly complex surgeries and treatments, medical tourists prefer Singapore over Malaysia (mainly for screening) and Thailand (general surgeries or cosmetic treatments). Singapore just have more experienced doctors and a higher standard of equipment in our hospitals and treatment facilities. Singapore healthcare services can only move up the value chain and forget about catering to patients with less complex health needs.
B. Nature of lease
Healthcare trusts usually ink long-term master leases with healthcare providers. In the case of Parkway Life (Singapore operation), the lease is set at 15 years with an option for renewal of another 15 years under a triple net lease arrangement. Parkway Life does not have to worry about tenant turnover for a long time. And under a NNN lease arrangement, Parkway Life does not have to concern itself with paying estate taxes, building insurance and building maintenance.
In Singapore, government approval is needed for building hospitals, thus making an oversupply of hospitals a far and remote occurrence. With limited hospital infrastructure, it is highly unlikely for healthcare providers to relocate their operations. The cost and logistics of doing so are totally prohibitive and mind-boggling.
Thus I settled on Parkway Life as a permanent defensive constituent of my REITs portfolio.
Parkway Life has a gearing of 36% and that gives it sufficient debt headroom for acquisitions and growth. NPI has grown over the years, from $93,775,000 in 2014 to $105,404,000 in 2018. The dividend yield is below 5%, at 4.6%.
I bought Parkway Life shares @2.89, which I believe is fair valuation (between $2.75-$2.95 based on different growth and discount rates). Any price below $2.40 will be great (the 52 week low is $2.56).
With potential for steady growth, and potential acquisitions, notwithstanding interest rate and currency risks (Parkway Life has 40% of its assets in Japan), Parkway Life makes it as a reasonably good buy for me.
2. Sasseur REIT
Sasseur REIT, being a retail REIT, is not exactly a defensive stock. Far from it. Things could go wrong any time with this REIT should the trade war between China and USA further intensify and affect retail consumption in China. This REIT will probably not be a permanent constituent of my REITs portfolio, but the dividend yield of 6.4%, low gearing at 29%, increasing sales and DPU, makes it an attractive REIT for now.
Sasseur REIT owns 4 outlet malls that are well located close to fast-growing Tier-2 cities in China (Chongqing, Bishan, Hefei and Kunming). The main target of Sasseur malls is middle class income families and tourists (in-country) that are drawn to international and luxury brands offered at steep discounts. These outlet malls also offer experiences such as indoor zoos and/or movie screenings. I'd like to think that should the trade war worsen and a recession results, the Chinese will continue to flock to outlet malls to hunt for bargains. Again, GingWen has an excellent article on Sasseur (https://www.probutterfly.com/blog/why-we-finally-invested-in-sasseur-reit).
I bought it at its IPO price of $0.80. At this price, it is grossly undervalued (>50% discount off $1.80), which is absolutely wonderful.