PLife – UOBKH

Acquiring pharmaceutical distributing facility in Japan

Taking a small bite in Japan. Parkway Life REIT has executed an agreement to acquire a pharmaceutical production and distribution facility in Japan for total cash consideration of ¥2.59b or S$35m. The two-storey freehold building is located in Matsudo City, Chiba prefecture with net lettable area of 34,875sf. Nippon Express has a master lease at the premise with unexpired lease term of nine years. The building is currently occupied by Inverness Medical Japan, which is involved in drug development, manufacturing, export and sales. Nippon Express provides logistics and distribution support and has a back-to-back lease with Inverness Medical Japan. Inverness Medical Japan utilises the facility to manufacture, sell and distribute medical test kit devices.

Potential to redevelop the site. The acquisition provides initial net yield of 5.3%. The ratio of the building’s floor area to the land area is about 40% compared to allowable ratio of 200 % based on current zoning regulation. There is therefore potential to redevelop the site to maximise returns. The acquisition will be funded by debt, which increases gearing from 4% to 8%.

We like Parkway Life REIT for its healthcare focus and strong defensive qualities. It benefits from revenue growth at Mount Elizabeth Hospital, Gleneagles Hospital and East Shore Hospital as variable rent is 3.8% of adjusted hospital revenue. Our target price is S$1.82 based on the discounted dividend model (required rate of return: 6.75%; terminal growth: 2.5%).