Yong Yean Chau, the CEO of the manager of Parkway Life REIT (PLife REIT), has maintained an enviable track record of delivering consistent growth of its distribution per unit (DPU), registering an increase of 122.8% since its IPO back in 2007.
With a 17.2% CAGR growth in shareholders’ returns over the three years taken into consideration, PLife REIT has been named winner for the Billion Dollar Club 2022 — Returns to Shareholders over 3 Years category amongst its REITs peers.
Included in the FTSE EPRA NAREIT Global Developed Index since 2020, PLife REIT remains one of the largest listed healthcare REIT in Asia. With a quality and diversified portfolio across its key markets particularly in Singapore and Japan, PLife REIT owns three of the leading private hospitals in Singapore (Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital) and has been steadily acquiring a string of nursing homes in Japan since its maiden entry into the market in 2008. As at Sept 30, the value of assets under management (AUM) has more than doubled from its IPO to 61 properties totalling approximately $2.35 billion.
Yong says that there is no “secret” to the REIT’s success. PLife REIT is today known as one of the leading REITs on the Singapore Exchange (SGX) as a result of the collective strength of his team. He proudly points out that his team members has each served an average of nine years with the REIT. “I believe in the kampung spirit,” adds Yong, who was born in Ulu Sembawang.
Yong says that he spends a considerable amount of effort in aligning the interests of all stakeholders who share different perspectives. Making conscious efforts to listen and comprehend different standpoints and working out mutually effective solutions together is at the very heart of success at PLife REIT. The adage “Whoever wins the people, wins the war” holds true to Yong. “I am glad I have a good and committed team,” says Yong.
With the pre-eminence of delivering continual strong returns to unitholders, the other critical role played by Yong is to build trust with the REIT’s sponsor, healthcare giant IHH Healthcare Berhad, and its bevy of tenant-operators of the nursing homes in Japan. Committed to working hand in hand with its tenant-operators to support their operational growth, PLife REIT has recently concluded the lease renewal for the Singapore hospitals and over the years rolled out several asset enhancement initiatives through additional or conversion of spaces at its Japan nursing homes to create revenue-generating areas such as daycare centres.
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Of course, unitholders like PLife REIT for a key reason, which hardly any other S-REIT can beat: an un-interrupted recurring DPU growth since its IPO back in 2007. “We aspire to be the most defensive amongst the defensive. Our key focus is on the long-term sustainability of our DPU.”
Yong points out that PLife REIT does not acquire new properties with the key objective of increasing its AUM. Instead, each bolt-on acquisition must be underpinned by strong fundamentals and be yield-accretive to contribute positively to the REIT’s DPU growth.
To maintain this sterling growth track record, Yong is careful and selective in the assets he acquires. Apart from the property attributes and strength of the operators, he examines the cash flow and occupancy costs of the properties, so as to ensure the rental is affordable and that there is minimal risk of default.
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Nonetheless, it is impossible to guarantee that operators will not default. To protect PLife REIT’s exposure in such unforeseen events, Yong makes it a point to diversify the exposure.
PLife REIT’s nursing homes are diversified across various prefectures in Japan. While there is still some form of concentration risks from a country-risk perspective, there is logic behind this as well. According to Yong, focusing on Japan is a calibrated strategy to achieve better economies of scale for its AUM. Japan has become a market the REIT is familiar with and in the unlikely event of default, replacement operators may be readily sourced within the same market.
This, perhaps, is the reason why PLife REIT is not as active in building up a portfolio of nursing home properties in Singapore despite it being its home ground.
The way Yong sees it, unlike Japan, the market for long-term care in Singapore is not as developed, with limited good operators. In contrast, there is a wide spectrum of experienced operators in Japan and checking into nursing homes is a conventional lifestyle choice, which underpins the sustained demand for nursing homes. Japan’s stable economy is another plus point, which contrasts with emerging markets where more political risks exist — Yong’s answer to an often-asked question if the REIT is planning to enter a third key market. “That is why we focus on mature markets with a large pool of operators,” he explains.
Hedging
Yong is unfazed by the recent weakening of the yen. For a start, the REIT has already hedged 100% of its projected cash flow to 2027 and so its DPU remains stable.
He explains that because of the interest rate differential, banks are effectively paying the REIT to hedge long-term. Other currencies may not be the same. For other currencies, a REIT typically hedges only 6–12 months forward as longer tenure hedging comes with higher costs.
He notes that while any depreciation in yen will reduce his top line revenue, the REIT remains well-protected as it will recognise a hedging gain in its books.
Yong says his current all-in cost of debt is 0.72%. Whilst interest rates in the US are speedily creeping up, the Bank of Japan still maintains a loose monetary policy, hence Japan’s interest rate is not expected to go up significantly. “On average, close to 80% of our interest rate exposure has been hedged,” he says.
Growth potential
Yong agrees that there are some investors who perceive PLife REIT as too “expensive”, given that its relatively low yield is almost equivalent to the practically risk-free Singapore Government Bonds. However, he points out that with the renewal of the master leases for its three Singapore hospitals sealed, one could expect a total rental growth of almost 40% for the Singapore portfolio by the end of FY2026 (vis-a vis the expiring rent). As core revenue contributing assets, there will be some positive uplift to PLife REIT’s forward yield. “So, there is an element of sturdy organic growth. The DPU is not going to be static,” he says.
Yong also reminds long-term investors to look at the REIT manager’s historic track record in driving growth and value. Take, for example, its portfolio in Singapore, cemented by clear rental structure and its unique rent review formula of CPI+1% intact, there will be sustained growth for the REIT over the long-dated renewed lease of 20.4 years.
PLife REIT stands out from other REITs in another significant aspect: it has not gone back to unitholders for more capital. Yet, it has managed to increase both DPU and NAV.
Yong explains that the REIT does not plan pre-emptive equity fundraising without a deployment plan, as that kind of exercise would merely be value-destructive to unitholders. If and when he does one, it must be because there is something meaningful to acquire, the asset’s quality must be good, and that existing unitholders must benefit. “That is the principle we faithfully stand by,” says Yong.
Next, the REIT’s structure is such that it is on a long-term stable rental with certain growth mechanisms. With rental growth, the DPU and asset values will grow alongside. “If you can ignite rental growth, your asset values will correspondingly increase and gearing will also improve. So, we continue to seek out good and stable assets with potential to appreciate. The acquisitions we made over the years have helped to improve the NAV without the need to raise equity for funding,” says Yong.
Nonetheless, Yong adds that if there are “chunky” acquisitions, then there may come a time where it is necessary to tap unitholders for more equity. But of course, that deal should withstand scrutiny, be DPU-accretive and benefit the existing unitholders, he stresses.
Now, one such “chunky” acquisition might be the Mount Elizabeth Novena Hospital — which belongs to the REIT’s sponsor IHH Healthcare, which the REIT was granted a right of first refusal (ROFR). The 10-year ROFR over Mount Elizabeth Novena was first announced back in July 2021, as part of the strategic collaboration with IHH Healthcare in relation to the master lease renewal of the Singapore hospitals.
While the sponsor has their own considerations, Yong notes that the REIT can play a role in supporting the sponsor on its growth journey via an asset light strategy. “The strategic arrangement for the Singapore hospitals has marked a solid step in our growth journey and we look forward to replicating the success through further collaborations with IHH Healthcare and other partners,” says Yong.
