PLife – DBS

Two more in Japan

Story: ParkwayLife REIT announced that it is participating as an investor in the acquisition of two nursing homes in Japan for a total consideration of JPY2.617bn (S$34.9m). The investment is in relation to (1) Bon Sejour Shin Yamashita (Yamashita facility) for JPY1.44bn (S$19.2m); and, (2) Bon Sejour Ibaraki (Ibaraki facility) for JPY1.177bn (S$15.7m). Acquisition will be funded by debt and is yield accretive.

Point: The Yamashita facility has a net operating income yield of 6.1% while the Ibaraki has a net operating yield of 6.7%. The vendor of both homes is nursing home operator ZEC Community Co. Ltd. There is also a back-up operator agreement with Japan Care Services Co. Ltd. The lease agreement is for a period of 15 years with an option to extend the lease for an additional 5 years. Rentals are index-linked to Japanese inflation (on an upward basis only) and there are rent reviews every five years.

As indicated previously, these investments are part of the REITs drive for asset diversification within the healthcare space (hospitals, pharmaceutical logistics/ production facilities, nursing homes, medical suites, etc). While acquisitions are relatively small in size, it seems like management is looking at “building up volume with small numbers first”, in our opinion. As such, we still retain our view that there will be more to come in the months ahead. There is also an attractiveness in the Japan market given the high proportion of elderly citizens – 1 in 5 are
above 65 years of age in 2006, projected to go up to 1 in 3 by 2050 – and the relatively mature market.

Relevance: The acquisition will bring its gearing from 8% to 11%, which still allows significant debt headroom for further acquisitions in the future. BUY, TP adjusted slightly up to S$1.51. Dividend yield is 5.52% (FY08) and 5.68% (FY09) at current price of S$1.23. We continue to like PREIT as a defensive play, providing potential upside from hospital revenue while downside protection via 1%+CPI% growth.