PLife – Phillip

On An Acquisition Spree

• Buys 5 nursing homes in Japan for S$46.8 million with net property yield of 8.35%

• Enlarged portfolio consists of 32 properties; 3 Singapore, 29 Japan

• Maintain Buy, raised fair value to $1.66

In the span of just one month, Parkway Life REIT (Plife) announced the acquisition of another 5 nursing homes in Japan, following the acquisition of six nursing homes also in Japan the prior month. Looking at the purchase statistics, this purchase appears to be one up over the previous. The latest acquisition was for a total consideration of S$46.8 million, a discount of 16% off the appraised value, and at a net property yield of 8.35%. The properties have an average weighted lease term of 17.45 years with average occupancy of 94.9%. There will be a backup operator arrangement and the vendor is providing a rental income guarantee for seven years up to a maximum claim of S$2.4 million. The acquisition will be funded wholly by debt at an all-in rate of 1.8% p.a. Gearing post acquisition will increase to approximately 34.4%. For the previous acquisition, the purchase consideration was at a 2.8% discount off the appraised value, at a net property yield of 8.08%. Funding cost was also higher at an all-in rate of 2.0% p.a.

With this acquisition, Plife now has 32 properties in its portfolio with 29 in Japan. Asset value breakdown is approximately 68% Singapore and 32% Japan. On a normalized basis, revenue contribution from Japan is about 35%.

From the acquisitions Plife had made in Japan, we can see that the credit environment is getting more and more conducive. Funding cost has come down from over 300 basis points to below 200 basis points. Net property yield is also attractive at eight-plus percentage points.

Factoring in the DPU contribution, the acquisition will increase our FY10E DPU forecast by 0.7% to 8.4 cents. Subsequent years DPU increase by approximately 4%. We have also raised our fair value to $1.66 and maintain our Buy recommendation. Again, we reiterate our preference for Plife. Our only concern now is the creeping gearing, notwithstanding that 35% is still a comfortable level.