Month: July 2010
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.
PLife – BT
PLife Reit buys five nursing homes to boost Japan portfolio
PARKWAY Life Real Estate Investment Trust (PLife Reit) is expanding its presence in Japan with the 3.1 billion yen (S$48.3 million) acquisition of five nursing home properties, through its wholly owned subsidiary Parkway Life Japan3 Pte Ltd.
PLife Reit is buying the five properties from Yugen Kaisha KSLC, a subsidiary of Japan- based real estate asset manager Kenedix Inc, whom the Reit had previously acquired 15 nursing home properties from in 2008 and 2009. Kenedix will be appointed asset manager of the five properties in a separate deal.
The acquisition, which will be completed by July 23, will be funded through a five-year revolving credit facility of up to 3.2 billion yen, which will increase PLife Reit’s gearing from 32.2 per cent to 34.4 per cent.
‘Firmly guided by our principal investment strategy of building a ‘healthcare eco-system’ with value-enhancing buys, this acquisition provides an expected net property yield of 8.35 per cent. It will also improve income diversification and deliver stable and sustainable distributions to our unitholders,’ said Yong Yean Chau, CEO of Parkway Trust Management Ltd. This is higher than the current property yield of 7.16 per cent for PLife Reit’s existing Japan portfolio.
As at June 30, the five properties had an average occupancy rate of 94.9 per cent. Each of the properties has a long-term lease agreement with the operators, with a weighted average lease term to expiry (by gross rental income) of 17.45 years, as at June 30. This will boost PLife Reit’s portfolio weighted average lease term to expiry from 13.42 years to 13.63 years.
Yugen Kaisha will also be providing a rental income guarantee for seven years with a cap of 5 per cent of the purchase price, offering certainty for the Reit’s future distributions, PLife Reit said.
This latest acquisition adds to the six nursing home and care facility properties in the Fukuoka and Akita prefectures which the healthcare Reit acquired recently.
‘Upon achieving a good 29 properties in our Japan portfolio today, we are ready to further generate synergies and sharpen our focus towards establishing a mark in our other core countries, which will certify a boost in geographical diversity,’ Mr Yong added.
SREITs – OCBC
Guidance could diverge at 2Q10 results
Strong economic numbers at home. Singapore is likely to become Asia’s fastest-growing economy this year
on the back of increasing tourism numbers, rising employment, and strong manufacturing numbers. Economists are increasingly turning positive on Singapore, with their GDP estimates now trending on the upper end of, or even higher than, the official Ministry of Trade & Industry estimate of 7-9% growth for 2010. The median forecast, according to Bloomberg, for real GDP growth this year is 10.65% with estimates ranging from 9.7% to 13%.
Guidance could diverge at 2Q10 results. Singapore’s strong growth numbers are being achieved against a backdrop of moderating global growth. Mixed economic data in the US and the threat of fiscal austerity measures being employed to address sovereign debt worries in Europe could portend sluggish global economic growth in 2H10. While Singapore is also vulnerable, dynamics at home are still going strong. As such, we believe we may see a divergence in guidance given by REIT managers as Singapore-listed REITs begin reporting 2QCY10 earnings from this week onwards. This divergence could be driven by the degree of the REIT’s exposure to Singapore versus other economies. Multi-geography REITs, in our view, could be quicker to adopt a cautious tone on the outlook for earnings performance this year. In contrast, Singapore-skewed retail or industrial REITs may report stronger guidance and/or more aggressive growth plans.
Focusing on value. We remind investors that while market attention has been on a correction, the FTSE REIT index is, in fact, up 2.3% year-to-date at 632.16 points – a gain of 126% against its March 2009 low. Valuations for several REITs, especially the larger cap plays that are trading at a significant premium to book value, are increasingly looking fairly priced, in our opinion. As such, we are maintaining our NEUTRAL view on the S-REIT sector. We prefer mid-to-large cap REITs that have a stable-to-positive earnings outlook, strong balance sheets, and that are still trading at attractive yields and discounts to book value. Under these criteria, we like Starhill Global REIT, which trades at a 30% discount-to-book and derives some 60% of its gross revenue from Singapore where it holds stakes in Wisma Atria and Ngee Ann City. We also like Frasers Centrepoint Trust (FCT), which focuses exclusively on suburban retail in Singapore. At 2Q10 results, FCT is likely to disclose details on the proposed asset enhancement of Causeway Point, which could potentially lift passing rents and income at its largest asset, unlocking value for unitholders.
CDL H-Trust – CIMB
Acquisition in the near horizon
• Maintain Outperform, target price reduced to S$2.04 (from S$2.20). Recent tourism data points on occupancy and room rates, reinforced our positive view on the hospitality sector in 2010. We factor in dilution from CDLHT’s recent private placement and see DPU fall 5-7% in FY10-12. Our DDM target price falls accordingly to S$2.04 (from S$2.20), our reduced DPU forecast of 10.8cts for FY10 representing a 6.1% yield for CDLHT. Despite our lower target price, we remain positive on the company as we believe the strengthened balance sheet points to acquisition on the near horizon. Other stock catalyst could include a better than expected performance at its 2Q results to be released at end July, and refinancing on more favourable terms.
• Boom time for Singapore hotels. Singapore saw its 6th consecutive month of record visitor arrivals. Y-o-y, REVPAR rose 53.5% in May boosted by a 17%-pt rise in occupancy to 85% and a 13.6% increase in room rates island-wide. We believe that mega events in 2H10 will enable hotels to raise rates further in the year. Management commented that its Singapore hotels’ portfolio occupancy levels are also nearing the last peak of 89% in 2007/2008.
Cambridge – Daiwa
Executing its articulated strategy in 2010
2 (Outperform) rating maintained
• We maintain our 2 (Outperform) rating and six-month target price of S$0.58, based on parity to our RNG valuation (a finitelife Gordon Growth model). We expect management to continue to show progress in realising its strategy of capital management, divestments, and asset-enhancement opportunities (we expect some imminent announcements in this area) while maintaining a stable quarterly DPU and net-property-income profile.
We expect the valuation discount to narrow steadily
• As long as Cambridge can maintain the momentum of delivering predictable quarterly results while gradually improving its capital position and mitigating its debt-refinancing risk in February 2012, we expect its DPU yield and price-to-NAV differential to narrow relative to its industrial-property peers.
Major risk: lease renewals from FY13
• We believe Cambridge has a favorable short-term lease-renewal profile, with only about 6.9% of leases (by revenue) up for renewal in FY10-12. However, renewals will be a challenge (in our view), with 93.1% of its leases expiring from FY13, although we believe Cambridge has sufficient breathing room to manage these future expiries through pro-active forward leasing or other measures. We also believe its concentration in the CWT (Not rated)/YCH group (24% of gross revenue) does not pose a major concern if the leases are not renewed as the specifications of the properties are of a high quality and their current passing rents are below market rents, according to management.