It’s amazing how much wealth you can generate if you hold on to the right stock over many years.
Compounding is one of the wonders of investing that you rely on to grow your wealth if you have patience and discipline.
We demonstrated this logic with United Overseas Bank Ltd (SGX: U11) and found out that you can garner a total return of 113.3% over 10 years.
If you had done the same with Haw Par Corporation Limited (SGX: H02), which owns the Tiger Balm brand, your returns will be been even more impressive at 177% over a decade.
This feat isn’t limited to just blue-chip banks or conglomerates, though.
It is possible to repeat the same achievement with REITs, too.
One great example is Parkway Life REIT (SGX: C2PU).
The healthcare REIT has increased its core dividend consistently and without fail since its IPO in 2006.
Let’s take a look at how much you will have if you parked S$10,000 in Parkway Life REIT a decade ago.
A steady compounder
10 years ago, Parkway Life REIT’s unit price was trading at S$2.36.
A S$10,000 investment will buy you around 4,237 units of the healthcare REIT.
The unit price has soared by 67.8% in the last decade to close at S$3.96 recently.
Your initial S$10,000 would have grown to around S$16,779.
But let’s not forget the many years of distributions you will receive from owning the REIT for 10 years.
These distributions add up to an impressive S$1.2934 per unit, which translates into cash of S$5,480 that will flow directly into your bank account.
If you add up the S$16,779 with the distributions you receive, you will get a total value of S$22,259.
When compared with your initial capital of S$10,000, this works out to a total return of 122.6%.
The compound annual growth rate (CAGR) for your investment stands at 8.3%, which more than beats the core inflation rate of 5.5% that was reported in January 2023.
Enjoying enduring tailwinds
You may argue that this impressive return is historical, and you will be right.
However, it’s useful to dig a little deeper into this REIT to assess if it has the characteristics to repeat its stellar performance.
The REIT’s portfolio comprises three Singapore hospitals worth S$1.44 billion along with 57 nursing homes in Japan valued at around S$758.5 million as of 31 December 2022.
Both Singapore and Japan have populations that are ageing rapidly.
In Singapore, the proportion of citizens aged 65 and above rose from 11.1% in 2012 to 18.4% in 2022 and is projected to make up a quarter of the population by 2030.
Japan faces a similar problem as roughly 40% of its population will be 65 and older by 2050.
Because of this trend, Parkway Life REIT will enjoy a long-term tailwind as its assets will cater to this demographic.
Insulated against higher interest rates
In an environment of rising interest rates, you may be concerned that Parkway Life REIT may have to grapple with higher finance costs that may erode its distributable income.
A quick check shows that the healthcare REIT’s all-in debt cost was very low at just 1.04% as of 31 December 2022.
Moreover, the REIT enjoyed a very high interest cover of 18.3 times and had just issued two floating-rate notes at an interest rate of below 1% per annum.
With these metrics, Parkway Life REIT should be confident of insulating itself from a sharp rise in finance expenses.
New master lease agreements
Parkway Life REIT recently announced the signing of new master lease agreements for its three Singapore hospitals.
These leases will run for 20 years up till 31 December 2042 with an option to extend for another 10 years.
These new agreements provide more certainty for the REIT’s rental income and the manager has projected that its distribution per unit (DPU) will rise from S$0.1379 in 2020 to S$0.1826 by the end of the fourth year after the transaction closes.
Get Smart: Keep calm and carry on enjoying the dividends
Parkway Life REIT has been a solid compounder over the last decade.
If you had parked S$10,000 in the REIT back in March 2013, you will end up with a tidy sum of S$22,259.
The healthcare REIT looks well-positioned to continue growing its DPU and is also insulated from economic headwinds.
Investors can look forward to healthy returns if they buy and hold the REIT for the next decade.
Is it a good time to buy into Singapore REITs? If you’ve thought about it, then our latest REITs guide will be an essential read. This exclusive pdf report shows you why REITs are still excellent assets, what sectors to look out for and how to find good REITs today. The info inside can help you build a solid retirement portfolio. Click here to download it for FREE.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.