PLife – UOBKH

Parkway Life REIT has announced that it is acquiring 6 nursing homes and healthcare facilities in Japan for JPY3.9b (S$60.5m). Key highlights are as follows:

• Acquisition is yield accretive. The net property yield of 8.08% is yield accretive compared to current yield of 6.97% of PREIT's existing Japan portfolio.  This comes after another acquisition of 8 Nursing homes in Nov 09 for S$77.6m at a property yield of 8.29%.  DPU will increase by S$0.16 cents/share in FY 10 and by S$0.32 cents/share from FY 11.
• Downside protection with rental guarantees and longer lease to expiry.Uchiyama and Bonheure, the sellers of the properties, will provide rental income guarantees for the lease period of the nursing homes.  The new 20 year leases signed on the nursing homes will improve the average lease term to expiry of PREIT which stands at 13.2 years as of Mar 2010.
• Financed by 2% loan. Acquisition is financed by 5-year unsecured term loan of JPY4.2b (S$64.6m) at a funding cost of 2% pa, versus recent JPY loan of 3.22% secured in Nov 09.  This will raise gearing from 28.5% to 32.2%.
• Japan properties form 28.9% of portfolio value The six nursing homes will increase the value of PREIT's Japan portfolio by 21% to S$350.5m and will bring the Japan portfolio to 28.9%, up from 25.2%, of the total portfolio value of S$1.21b.  
• Leverage on Japan's ageing population. Japan has the world's fastest ageing population, with 1 of 4 Japanese expected to be over 65 years old by 2025.  The acquisitions enjoy high average occupancy of 93.9% as at May 10.
• Clustering and partnership approach to benefit from economies of scale. PREIT is adopting a clustering acquisition approach going forward to reap critical mass for its acquisitions in Japan.

  Valuation. PREIT is well-positioned to benefit from the yield accretive purchases and also from the high demand for nursing home space in Japan.  We maintain our BUY call with a revised target price of S$1.76 (from S$1.70)  based on our two-stage dividend discount model (required rate of return: 7.15% and terminal growth rate: 2.5%).