PLife – CIMB
Acquires seven nursing homes in Japan
S$105.7m worth of acquisitions. Parkway Life REIT announced last night that it has completed the acquisition of seven nursing homes in Japan for S$105.7m from Yugem Kaisha KSLC, a wholly-owned subsidiary of Kenedix Inc. The net initial yield of the portfolio is 6.9%, with individual yields ranging from 6.7% to 7.2%. All the assets have freehold tenures.
Long lease structures of 17 years. All seven properties have average lease terms of 17 years with an operator, with five having back-up operator arrangements. The average occupancy level of the portfolio is 94%.
Rental guarantee from vendor. Kenedix Inc., a Japanese real estate asset manager with S$11.3bn of assets under management, has granted PLife a rental guarantee for seven years and three months, which would cover any deficit in revenue from any of the seven properties, capped at 5% of the purchase price. This is a provision separate from the long-term lease agreements with the nursing-home operators. Management assures that the provision was given as an additional safety precaution and there has been no default payment in the last three years. There are also market rent reviews at 2-5-year intervals specified in the leases.
100% debt funding; current debt to be refinanced on 3-year tenure. PLife will be financing the acquisition with debt, drawn temporarily from a short-term facility. This raises its total debt to about S$200m (inclusive of S$94m short-term debt as at 2Q08). However, management will be refinancing the S$200m debt with a 3-year bilateral loan within one month. Half of the loan has been committed while the other half has received in-principle approval pending documentation. All-in cost of debt for the 3-year facility is 3%, below our assumption of 3.2% for FY08. The debt will be fixed at this level over its full tenure. Borrowing currency is the Japanese yen, providing a natural hedge.
Asset portfolio exceeds S$1bn; gearing rises to 19.7%. With the completion of this portfolio, PLife’s assets increase from S$902m to S$1bn. Full funding with debt will increase its asset leverage from 10.2% to 19.7% after the acquisition. This is still significantly lower than the optimal level of 45% and regulatory limit of 60%.
Growth of Japanese nursing home industry. Japan has one of the fastest aging populations in the world. The company forecasts that the number of people over 65 years of age is expected to reach 34.7m in 2015, or 26% of Japan’s population, up from 18% in 2002. According to management, the Japanese nursing-care industry has blossomed since the implementation of the National Nursing Care Insurance System in 2000. Under this system, the government subsidises about 50% of the nursing-care expenses of the elderly. In a nursing home, a cash deposit or bond equivalent to five years’ payment of fees (excluding nursing-care fees) is typically collected from residents on admission. This bond may vary with the age of the resident and the type of accommodation provided. Subsidies from the government and the high level of cash deposits collected underpin the cash flows of nursing homes, while an aging population should ensure the relative resilience of the nursing-home industry in Japan.