PLife – DMG

Adds another five Japanese nursing homes

Further enhances presence in Japan. PREIT bought another five nursing home properties in Japan, for a total of JPY3.1b (~S$46.8m). These properties come with an expected net property yield of 8.35%. We estimate that this acquisition (expected to be completed by 23 Jul 10), would boost our FY10 DPU to 9.3 S¢, from 9.1 S¢. With this acquisition, PREIT’s Japanese assets will have a value of S$408m, which is what management has been building towards. With the additional contribution from the new assets, based on our DDM valuation we derive a TP of S$1.66 (from S$1.62), which would translate into 5.6% FY10 yield. PREIT currently trades at 6.8% FY10 yield. Maintain BUY.

Achieves minimum asset size of S$400m. PREIT has been building up towards a minimum asset size of S$400m for its Japan portfolio, which is one of the requirements to allow it to switch tax structure. Its Japan assets are acquired under the “Tokumei Kumiai” (TK) structure. Switching to the “Tokutei Mokuteki Kaisha” (TMK) structure could allow PREIT to lower its withholding tax from 20% to 5%. The TMK structure issues bonds (TMK bonds) or preferred shares to its investors. Hence, the other requirement to consider, for a successful switch to the TMK structure, is the Japanese bond market’s reception to the bond issue. Hence, even though PREIT has achieved the minimum asset size needed, it does not need to immediately switch structure.

Gearing still below 40%. The acquisition of these five nursing homes will be funded entirely by debt. PREIT’s gearing would rise to 34% at end FY10. This leaves it with debt headroom of ~S$140m before crossing 40% gearing.