PLife – Kim Eng

Flourishing in the Land of the Rising Sun

Event

• Our recent visit to ParkwayLife REIT’s (PREIT) nursing homes in Japan and the discussions with their operators have bolstered our confidence in the strength of PREIT’s portfolio. Not one to rest on its laurels, management is stepping up efforts on its asset enhancement initiatives (AEIs) and is eyeing acquisitions in Australia and Malaysia. The recent entry of Newton Investment as a substantial shareholder at $1.56/unit lends further support. Reiterate BUY with a higher target price of $1.94.

Our View

• PREIT’s nursing homes in Japan, which target the low‐ to mid‐end market, are relatively new and enjoy a strong operational occupancy rate of 95% on average. The long waiting list for the homes is clear evidence of the robust underlying demand, boding well for the operators/lessees who lease the properties from PREIT based on a 100% committed occupancy for 17 years on average. All this renders PREIT the benefit of a stable rental income.

• Apart from the inflation‐linked rental growth, organic growth will come from the AEI programme. This includes converting common areas into bedrooms and building annexes to house more beds. In some cases, these activities can fetch a return on investment of 30%. We estimate the AEI capex to be around $30m over the next two years.

• We expect PREIT to acquire a few more nursing homes from its operators, given their attractive yield of about 8% and the low credit spread the REIT can get for its term loans. Its recent term loans of 4‐5

years have been signed at a low credit spread of about 110bps. We understand that PREIT will have no refinancing needs until FY13.

Action & Recommendation

We have factored in an additional $200m worth of acquisitions (fully debt funded) over the next two years, with hospitals and medical centres in Australia and Malaysia (including the Pantai hospitals) being the potential targets. Rolling over our estimates to FY11 valuations, we raise our target price from $1.64 to $1.94. Reiterate BUY.