PLife – CIMB

Optimising Japanese exposure

• Maintain Outperform and target price of S$1.57. PLife REIT has acquired 11 nursing homes in Japan for S$107.3m at an average net property yield of 6.6% after withholding tax. With this acquisition, income contributions from Japan had increased to 38% from 28% in 1Q10. We maintain our DDM-based target price of S$1.57 (discount rate 7.2%) as we had earlier factored in S$170m of acquisitions for FY10. Stock catalysts could include early debt refinancing on lower costs in 2H10 and a change of the holding structure for its Japanese assets in 1H11 which would lower the withholding tax for its Japanese assets.

• Still opportunities for interest cost and tax savings. Management believes the REIT will be able to refinance a portion of its Japanese debt due next year by 2H10 on lower costs and longer debt tenure. Separately, PLife REIT has reached its minimum required size for issuing a change of holding structure which would enable it to lower its withholding tax from 20% to 5%. We anticipate a 6-12-month time frame for this change.

• Asset leverage at 35%. With its last announced acquisitions, asset leverage has reached 35%. While this is way below the regulatory cap of 60%, management aims to keep asset leverage under 40% in the long term. Hence, raising equity for the next sizeable acquisition is highly likely, in our view.