PLife – DBSV

On Life’s trail in Japan

• Additional 5 nursing homes acquired for JPY3.1bn ($48.6m); 11 in total over 5 weeks

• NPI yield at 8.35%, favourable against existing Japanese portfolio’s 7.16% and cost of funds at 1.8%

• FY10F DPU raised to 8.6 Scents (from 8.3 Scents), equating to 6.2% yield

• Maintain Buy; TP raised to S$1.59

5 more in bag, total of 11 in 5 weeks. PREIT announced that it has entered into an agreement to acquire 5 nursing homes in Japan for JPY3.1bn (c.S$48.6m), bringing total to 11 over the past 5 weeks. The 5 assets have a net property income (NPI) yield of 8.35%. The REIT will fund the acquisition via a 5-year revolving facility, swapped to an all-in cost of 1.8%. Gearing for the REIT will increase to 34.4%, from 32.2%. With this latest acquisition, the REIT will have 29 nursing homes valued at c.S$400m in Japan.

Long leases with rental deficit support. As per previous deals, the nursing homes have long-term lease agreements with the operators. It has a weighted average lease term to expiry of 17.45 years. Kenedix will provide rental deficit support for 7 years, capped at 5% of the purchase price (i.e. JPY154.4m or c.S$ 2.4m).

The right size for now. With a nursing homes asset size of c.S$400m, we believe this marks a temporary pause on acquisitions in Japan, though management will continue to look for opportunities in other markets, such as Australia and Malaysia. Management would be looking to embark on asset enhancement initiatives, as well as conversion into a TMK (Tokutei Mokuteki Kaisha) structure to enjoy 15% reduction in withholding tax, though the latter may take up to a year to materialise.

Maintain Buy, TP raised to S$1.59. The acquisition will be DPU accretive for unitholders with FY10F DPU at 8.58cents, from 8.3cents previously. This equates to a current yield of 6.2%. We raise our TP to S$1.59 (from S$1.51) as we factor in this and the previous acquisition in June, still based on DCF (WACC 6.6%). We continue to like PREIT for its defensive traits, while leveraging on the aging population.