PLife – UOBKH
Protected against inflation
Strong defensive qualities. Parkway Life REIT provides strong defensive qualities as the minimum rent increase for Gleneagles Hospital, Mount Elizabeth Hospital and East Shore Hospital is set at CPI + 1%. Assuming that CPI is 5.5% in 2008 (mid-point of CPI inflation forecast by MAS), the minimum rent increase for the three hospitals in Singapore would be 6.5% in 2009. Where CPI is negative for any given year, then it is deemed to be zero. This ensures that rental income from hospitals in Singapore is always increasing.
Diversification from acquisitions in Japan. Parkway Life REIT has acquired a pharmaceutical production and distribution facility in Japan for a total cash consideration of ¥2.59b, or S$35m. The two-storey freehold building is located in Matsudo City, Chiba prefecture with a net lettable area of 34,875sf. Tenant Inverness Medical Japan utilises the facility to manufacture and distribute medical test kit devices. The acquisition provides an initial net yield of 5.3%. There is potential to redevelop the site as the ratio of the building’s floor area to the land area is about 40% compared with the allowable ratio of 200%.
Parkway Life REIT will be acquiring two nursing homes located in Yokohama City and Ibaraki City, Japan for S$34.9m. Nursing home operator ZECS Community Co Ltd will lease back the properties for 15 years with option to extend for an additional five years. The Yokohama facility has lettable area of 35,230sf and provides net operating income yield of 6.1%. The Ibaraki facility has lettable area of 39,890sf and provides net operating income yield of 6.7%. Rental income is index-linked to inflation with rent reviews every five years.
The acquisition in Japan will be funded by debt. We estimate that gearing will increase from 4% to 10.8% after the acquisitions are completed. The acquisitions allow Parkway Life REIT to gain exposure to Japan where population is aging rapidly. It is estimated that one in every three Japanese will be above 65 years of age by 2050.
Reiterate BUY. We like Parkway Life REIT for its healthcare focus. It provides strong defensive qualities as rental income from hospitals in Singapore and nursing homes in Japan is linked to inflation. The company also has a low level of gearing. Our target price is S$1.52 based on the discounted dividend model (required rate of return: 7.68%; terminal growth: 2.8%).