PLife – OSK-DMG

Offers steady DPU growth

We recently hosted PREIT at our Singapore REIT Conference. Key takeaways are: (1) ceteris paribus, DPU would continue to rise, due to its lease structures that have downside protection; (2) PREIT will continue to look for acquisitions in the region, with more focus on Japan; (3) balance sheet remains healthy, with gearing at 33%. We continue to like PREIT for its stable DPU growth and defensive nature. However, we think its prospects and resilience has been priced in. Maintain NEUTRAL with TP of SGD2.46.

Lease structure has revenue downside protection. Currently, 90% of PREIT’s leases have downward protection – leases are either pegged to CPI (with a min. 1% growth in rental) or have upward rental revision only. The remaining 10% is open to negotiation at prevailing market rate. With such a feature, revenue is likely to continue growing, which would translate into higher DPU. Going forward, new leases (from new acquisitions) are likely to have upward rental revision only (instead of being pegged to CPI). This may be a good move, given that the demand for services at its assets (e.g. nursing homes) is strong, which could support a stronger growth in rent.

Still looking for acquisitions in Japan. PREIT aims to have Japan contribute 50% of its overall portfolio (currently 31%) eventually. Hence, it plans to focus more of its acquisition strategy towards nursing homes in Japan. With funding cost in Japan relatively low, management is confident that it would still be able to obtain a 7% NPI yield from Japanese assets. Another sign of the growing popularity of Japanese nursing homes is that PREIT is seeing more competition (from other real estate funds) for nursing homes. Management is unfazed, as PREIT has first mover advantage, having established a presence in Japan a few years ago.

Healthy balance sheet would be able to support acquisitions. With gearing at 33%, PREIT has debt headroom of SGD320m for further acquisitions, before breaching its internal target of 45%