PLife – DBS

7 more nursing homes in Japan

Story: ParkwayLife REIT (PREIT) has entered into a sales & purchase agreement to acquire another 7 nursing homes in Japan for a total consideration of JPY7.9bn (S$105.7m).

Point: The average net operating yield of the properties is 6.9%. Each of the nursing homes has a long term lease agreement with an operator and the average unexpired lease term of the properties is 17 years. There is also a rental guarantee provided by vendor Kenedix Inc for a period of 7 years and 3 months, capped at 5% of the purchase price, in event of any defaults and/or late payments by the tenants. The acquisition is DPU yield accretive and will be funded by a 3-year JPY fixed rate loan.

Relevance: In our view, we feel that this is positive for the REIT as it is DPU yield accretive, further diversifies its exposure to overseas markets and maximizes its gearing head- room. In addition, given the aging population and the structure of the deal (with back-up operator, rental guarantee and long leases), downside risks are minimized, in our opinion. With the latest acquisitions, our FY09F DPU forecast is raised to 7.38 cents, from 7.17 cents. At current levels, PREIT offers a net yield of 7.0% and 7.6% for FY08F and FY09F respectively.

Maintain Buy; TP: S$1.31. Our DCF-backed TP is adjusted down slightly to S$1.31 (from S$1.35) as we factor in a higher adjusted beta in lieu of recent volatility (WACC of 6.3% and terminal growth of 1%). The counter is now trading at about 30% below its NAV. Given the defensive nature of its assets and revenue stream, particularly its Singapore hospital (downside protected by 1%+CPI), we believe it is a good opportunity to accumulate the shares.