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INTERIM FINANCIAL STATEMENTS FOR THE FULL YEAR ENDED 31 DECEMBER 2022

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Balance Sheet

    Group
31/12/22
S$'000
Group
31/12/21
S$'000
Current assets      
Trade and other receivables   15,597 12,697
Financial derivatives   470 558
Cash and cash equivalents   40,010 25,793
Advance payment   18,493 -
    74,570 39,048
Non-current assets      
Investment properties   2,205,881 2,290,751
Interests in subsidiaries   - -
Advance payment   27,740 -
Financial derivatives   33,958 15,337
Total assets   2,342,149 2,345,136
Current liabilities    
Trade and other payables   23,697 21,917
Current portion of security deposits   823 954
Lease liabilities   15 14
Loans and borrowings   56,635 94,719
    81,170 117,604
Non-current liabilities      
Financial derivatives   - 153
Non-current portion of security deposits   17,754 19,207
Lease liabilities   2,084 2,098
Loans and borrowings   793,154 731,176
Deferred income   1,732 1,860
Deferred tax liabilities   35,769 38,331
Total liabilities   931,663 910,429
Net assets   1,410,486 1,434,707
Represented by:      
Unitholders' funds   1,410,486 1,434,707
       
Units in issue (‘000)   605,002 605,002
Net asset value per unit ($)   2.33 2.37

Review of Performance

Summary of Parkway Life REIT's Results for the full year ended 31 December 2022

  Note
2022
S$'000
2021
S$'000
Inc/ (Dec)
S$'000
Inc/ (Dec)
%
Gross revenue   129,972 120,705 9,267 7.7
Net property income
  121,868 111,234 10,634 9.6
Amount Available for Distribution (a) 87,004 84,702 2,302 2.7
Amount released/(retained) for COVID-19 related relief measures (b) - 476 476 n.m.
Distributable income to Unitholders   87,004 85,178 1,826 2.1
Distribution per unit based on Distributable income to Unitholders (cents) (c) 14.38 14.08 0.30 2.1
Distribution yield (%), based on
- Closing market price of $3.76 as at 31 December 2022
  3.82 3.74   2.1

Note(s):

  1. Net of amount retained for capital expenditure on existing properties amounting to $3.0 million each year.
  2. The Group had retained $1.7 million in 2020 as part of the COVID-19 related relief measures for tenants announced in 1Q 2020 and had subsequently released the balance unutilised retention sum amounting to $476,000 in 2021.
  3. In computing the Distribution per Unit ("DPU"), the number of units in issue as at the end of each period is used.

Consolidated Statements of Total Return

2H 2022 Vs 2H 2021

Gross revenue for 2H 2022 has increased by 14.2% year-on-year to $69.8 million. The increase was due to contribution from three nursing homes acquired in July and December 2021, five nursing homes acquired in September 2022 and higher rent from the Singapore properties under the new master lease agreements which commenced in August 2022. This was partially offset by the depreciation of Japanese Yen. Correspondingly, the net property income has increased by 18.0% to $65.8 million for 2H 2022.

The Manager's management fees for 2H 2022 of $7.1 million was 7.3% higher than 2H 2021, largely due to higher deposited property value mainly led by significant valuation gains in prior year on the existing property portfolio resulted largely from the successful entry into the new master lease agreements and the renewal capital expenditure agreement for its three Singapore hospitals. Further, the Group has registered higher deposited property value from the properties acquired in December 2021 and September 2022 and higher net property income from the Singapore assets. The increase was partially offset by the depreciation of Japanese Yen. Lower trust expenses were also registered for 2H 2022 due to lower professional fees incurred during the period.

Of the net foreign exchange movement, the Group had registered a realised foreign exchange gain amounting to about $3.2 million and $1.3 million from the settlement of Japanese Yen forward contracts in 2H 2022 and 2H 2021 respectively.

Finance costs have increased mainly due to funding of new acquisitions in 2021 and 2022 and higher interest costs from Singapore dollar debts partially offset by depreciation of JPY.

The Group has step-up lease arrangements for certain of its properties which include the new 20.4- year master lease agreements for its three Singapore hospitals and the 20-year lease agreements for the 3 Japan nursing home (Palmary Inn) properties. As part of revenue recognition, the step-up lease arrangements were accounted on a straight line basis over the lease term (i.e. effective rent) since August 2022 and September 2021, respectively. This had led to corresponding increase in the gross revenue and investment properties. As property valuation is based on discounted cash flow method which deviates from effective rent accounting treatment, the Group has removed the impact of effective rent from investment properties accordingly. This resulted in adjustments in the net change in fair value of investment properties (See Note 3 to the Financial Statements). There is no distribution impact arising from the above treatment.

Overall, DPU for 2H 2022 of 7.32 cents has outperformed by 2.7% or 0.19 cents as compared with 2H 2021's DPU of 7.13 cents.

2022 Vs 2021

Gross revenue for 2022 has increased by 7.7% year-on-year to $130.0 million. The increase was due to contribution from three nursing homes acquired in July and December 2021, five nursing homes acquired in September 2022 and higher rent from the Singapore properties under the new master lease agreements which commenced in August 2022. In 2021, the Group provided for one-off allowance for doubtful debts of $1.0 million resulting in a lower net property income. The increase in 2022 was partially offset by the loss of income from the divestment of a pharmaceutical product distributing and manufacturing facility in Japan ("P-Life Matsudo") in January 2021 and depreciation of Japanese Yen. Correspondingly, the net property income has increased by 9.6% to $121.9 million in 2022.

The Manager's management fees for 2022 of $13.8 million was 7.2% higher than 2021. This was due to higher net property income and deposited property value during the period following the significant valuation gains in 2021 on the property portfolio largely from the successful entry into the new master lease agreements and the renewal capital expenditure agreement for its three Singapore hospitals. Further, the Group has registered higher deposited property value and higher net property income from the properties acquired in 2021 and 2022. This increase is partially offset by the depreciation of Japanese Yen.

Of the net foreign exchange movement, the Group had registered a realised foreign exchange gain amounting to about $5.1 million and $2.1 million from the settlement of Japanese Yen forward contracts in 2022 and 2021 respectively.

Overall finance costs have increased mainly due to funding of new acquisitions in 2021 and 2022, higher interest costs from Singapore dollar debts partially offset by depreciation of JPY.

At the reporting date, the Group has outstanding forward exchange contracts with aggregate notional amounts of approximately $109.8 million. The change in fair value of $5.2 million gain was charged to the statement of total return.

Valuations were performed by independent professional valuers for all investment properties as at 31 December 2022. During the year, the Group has recognised a net change in fair value of investment properties of $59.4 million in the Statement of Total Return, which includes fair value loss of $47.5 million and impact from straight-line rental adjustments and amortisation of right-of-use assets amounting to $11.9m. The valuation loss is largely attributed to the higher capital expenditure for the Singapore hospitals as a result of inflation and synchronised regular capital expenditure works for Mount Elizabeth Hospital ("MEH"). The Group will be synchronising the execution of MEH's regular capital expenditure works, where possible, with the closure of the hospital to commence the 3-year Renewal Capex Works, to minimise further inconveniences and reduced prolonged operational disruptions. Any fair value adjustments (surplus / deficit) in respect of the revaluation would not be taxable / deductible on the basis that the fair value changes are unrealised and the properties are held for long-term purposes. As such, these fair value adjustments (surplus / deficit) would be adjusted out when determining the distributable income to the Unitholders.

In 2021, the Group has recognised a gain of approximately $5.1 million (net of disposal costs and before withholding tax) from the disposal of P-Life Matsudo. Correspondingly, a net withholding tax payable of $0.9 million imposed on the P-Life Matsudo's disposal gain was also recognised in 2021 income tax expenses.

The Group had retained $1.7 million in 2020 as part of the COVID-19 related relief measures for tenants and had subsequently released the balance unutilised retention sum amounting to $476,000 in 2021.

Overall, DPU for 2022 of 14.38 cents has outperformed by 2.1% or 0.30 cents as compared with 2021's DPU of 14.08 cents

Consolidated Statements of Financial Position

The current and non-current advance payment in 2022 arose from an advance payment of about $46.2 million to the contractor1 in relation to the Renewal Capex Works for MEH. As part of the agreement with the contractor, the contractor is obliged to provide an irrevocable on-demand performance bond from a bank for a sum equivalent to the advance payment, for the due performance of the agreement ("Advance Payment Bond"). As at 31 December 2022, the Group has in its possession an Advance Payment Bond in its favour amounting to a sum same as the advance payment.

Higher trade and other receivables in 2022 mainly due to GST receivable of $2.6 million.

The decrease in investment properties was largely due to the depreciation of the Japanese Yen and valuation loss on the property portfolio. Excluding the impact from straight-line rental adjustments and amortisation of right-of-use assets amounting to $11.9 million, a fair value loss of $47.5 million was recognised in the Statement of Total Return, representing a loss of 2.1% in the total portfolio value. This was largely attributed to the higher capital expenditure for the Singapore hospitals as a result of inflation and synchronised regular capital expenditure works for MEH. This was partially offset by the acquisition of five nursing homes in Japan in September 2022.

The overall increase in loans and borrowings was mainly due to the issuance of fixed rate notes and drawdown of long term revolving credit facility for funding of acquisitions and working capital purposes partly offset by depreciation of the Japanese Yen.

In 1H 2022, the Group has drawn down a 5-year committed and unsecured loan facility to term out the short term loans amounting to JPY7,710 million (approximately $79.3 million) on its maturity on 15 March 2022. In 2H 2022, the Group issued 2 fixed rate notes of (i) JPY6,040 million (approximately $61.4 million) for 7 years till 2029, to fund the acquisitions in September 2022 and (ii) JPY5,000 million (approximately $50.9 million) for 6 years till 2028, to term out fixed rate note of JPY3,000 million (approximately $30.5 million) in advance of its maturity in June 2023 and fixed rate note of JPY2,000 million (approximately $20.4 million) upon its maturity in June 2023.

Notwithstanding the net current liabilities position, based on the Group's existing financial resources, the Group believes that it will be able to refinance its borrowings and meet its current obligations as and when they fall due.

The Aggregate Leverage of the Group as at 31 December 2022 was 36.4% (31 December 2021: 35.4%) of the Group's Deposited Property. This complied with the stipulated Aggregate Leverage limit. The interest coverage ratio (ICR) and adjusted ICR2 stood at 18.3 times at of 31 December 2022.

Consolidated Statement of Cash Flows

Net cash from operating activities has increased in 2022 as compared to 2021, mainly due to higher rental income from the nursing homes acquired in July 2021, December 2021 and September 2022 as well as higher rent from the Singapore properties.

Net cash outflow on purchase of investment properties (including acquisition related costs) was as follows:

The acquisition related costs paid in 2022 were in relation to the nursing home properties acquired in July 2021, December 2021 and September 2022.

Net cash used in investing activities as of 2022 included payment of capital expenditure on existing properties and an advance payment to the contractor in relation to the Renewal Capex Works for MEH.

Net cash from financing activities in 2022 was mainly from the issuance of fixed rate notes and drawdown of loan facility to finance the property acquisitions in September 2022, partially offset by payment of distributions to Unitholders and repayment of borrowings.

Commentary

Moving into 2023, global growth is expected to decelerate, reflecting synchronous policy tightening aimed at containing very high inflation, worsening financial conditions, and continued disruptions from Russia's invasion of Ukraine3.

Amid the macroeconomic uncertainties and challenges, Parkway Life REIT remains prudent as the Group continues to proactively manage its portfolio and strategically navigate for growth opportunities.

In September 2022, Parkway Life REIT strengthened its presence in the Japan's aged care market with the acquisition of five nursing homes and the initiation of a new collaboration with Daiwa House, a reputable real estate developer in Japan. The group started year 2023 on an exciting note with the wall breaking ceremony on 3 January 2023, to mark the commencement of the major refurbishment works at Mount Elizabeth Hospital, named "Project Renaissance". The expansive S$350 million Project Renaissance, jointly funded by Parkway Life REIT and IHH Healthcare Singapore will span three years. Reflective of the extension of strategic collaboration, Project Renaissance upon completion, will enable both Parkway Life REIT and IHH Healthcare Singapore to sustain competitiveness and ride the growth potential of Singapore's healthcare industry.

Parkway Life REIT adheres to a disciplined financial management framework to mitigate any potential refinancing risk as well as actively manages any exposure to interest rate and foreign currency risks on an ongoing basis. Despite the challenging financial market environment, the Group has successfully issued a 6-year JPY5.0 billion and a maiden 7-year JPY6.04 billion notes (the "Notes") in December 2022 at attractive fixed rates of 0.85% and 0.97% per annum respectively. With the proceeds of the Notes to be used for the pre-emptive terming out of the existing fixed rate notes due in 2023 as well as the JPY short-term loans drawn down for the five properties acquired in 2022, the Group has effectively managed its debt maturity profile with no immediate long-term debt refinancing need till February 2024. On an ongoing basis, the Group manages interest rate risk by largely hedging long-term committed borrowings using interest rate hedging financial instruments or issuance of fixed rate notes to strengthen Parkway Life REIT's resilience against interest rate hikes. In the face of rising interest rate trends, it has increased its proportion of fixed-rate interest bearing borrowings to 80% as of 31 December 2022, from 73% in September 2022, to manage Parkway Life REIT's interest rate risk. To manage foreign currency risk, the Group adopts a natural hedge strategy for its Japanese investments to maintain a stable net asset value and establishing Japanese Yen forward exchange contracts to shield against Japanese Yen currency volatility. As at 31 December 2022, the Group has put in place Japanese Yen forward contracts till 1Q 2027 to manage adverse foreign currency risk pertaining to its Japan portfolio.

Going forward, Parkway Life REIT will continue to focus on driving resilient returns backed by solid financial management. The healthcare industry will remain critically essential in a rapidly aging population with greater demand for better quality healthcare and aged care services. Parkway Life REIT's assets place it in a good position to benefit from the resilient growth of the healthcare industry in the Asia Pacific region.

1 On 29 November 2022, Parkway Life REIT has announced that that the Renewal Capex Works have been awarded to a non-related third party building contractor in Singapore within the Renewal Capex Costs, with estimated completion by December 2025.

2 As PLife REIT has no hybrid securities as of the reporting date, there is no difference between ICR and Adjusted-ICR.

3 Source: World Bank Global Economic Prospects, 6 January 2023