In April 2009, I bought a Singapore-based REIT that would go on to provide me with an 18% dividend yield on the cost I paid for its units. That REIT is Parkway Life REIT (SGX: C2PU).
People were selling during the depths of the Great Recession in 2019. For me, it was the perfect opportunity to buy strong companies at low prices. And as I look back at how the ParkwayLife REIT has performed over the last decade, I believe that there were three key factors that helped produce the fat dividends that I am seeing today.
I am sharing my lessons today, so that you, our smart reader, can look out for similar traits in the REITs you want to invest in.
1. Tailwinds, not headwinds
REITs earn their revenue by collecting rentals from their tenants. And tenants are able to better afford their rent if their industry is doing well. It follows that we could do better if we look at industries that are enjoying tailwinds on their back, instead of fighting headwinds at the front.
ParkwayLife REIT portfolio is centred around Singapore, where it has three hospitals and Japan, where it has 45 nursing homes and one pharmaceutical plant. Both countries are facing an ageing population. Based on UN projections for Singapore, elderly folks above 65 years are expected to make up 28% of the total population by 2030 and 47% by 2050. In Japan, 40% of its population is expected to be 65 years or above by 2050.
Healthcare needs are increasing as the population ages. The Singapore government expects healthcare expenditure to increase from 2.2% of gross domestic product (GDP) to nearly 3% by 2028 to support its ageing population. Meanwhile, the Japanese government is facilitating the arrival of 60,000 immigrants for nursing care jobs.
2. Favourable lease structure
To be sure, a REIT that operates in an industry with tailwinds is not a sure win.
We have to look at how the REIT is able to grab its fair share of the positive tailwinds. For 2018, ParkwayLife REIT generated almost 60% of its gross revenue from its three Singapore hospitals with another 40% from its Japanese properties.
For its Singapore properties, the REIT has a lease structure which effectively guarantees a 1% annual rental escalation, based on a (consumer price index + 1) formula. Note: the CPI component will be set to zero should it fall to negative figures. Over in Japan, the vast majority of its leases are downside protect with only 13.1% of its properties subject to rental revisions every two to three years.
Overwhelmingly, most of ParkwayLife REIT’s leases are protected from downside but offer the potential for upside in the form of rental increases.
3. Patience to hold for the long term
The final ingredient does not come from the REIT but from you.
I did not get my 18% yield-on-cost right away. But I had to have the patience to let the REIT run its business over the past decade while collecting the distributions that keep rising over the years. Below is a summary of the distribution per unit increases since 2008.
Source: ParkwayLife REIT’s presentation
The neat thing about rising dividends is that the REIT’s unit price tends to follow the upward trajectory, rewarding patient investors with both capital gains and dividends. At a unit price of S$3.25 today, I am sitting on capital gains of 445%. Dividends collected, by my calculation, has amounted to over 150% of my original capital invested.
Get Smart: Be patient and let your investment thesis play out
All the results above were possible because I decided to stay put and not be tempted into moving in and out of shares.
Nothing, in my mind, is an easier and more satisfying way to invest and gain the results that you want. We simply have to look out for major trends that would last for decades, figure out how the companies can tap on it — and as a final step, have the patience to wait it out for the results to appear.
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None of the information in this article can be constituted as financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.
