Author: tfwee
PLife – DBS
7 more nursing homes in Japan
Story: ParkwayLife REIT (PREIT) has entered into a sales & purchase agreement to acquire another 7 nursing homes in Japan for a total consideration of JPY7.9bn (S$105.7m).
Point: The average net operating yield of the properties is 6.9%. Each of the nursing homes has a long term lease agreement with an operator and the average unexpired lease term of the properties is 17 years. There is also a rental guarantee provided by vendor Kenedix Inc for a period of 7 years and 3 months, capped at 5% of the purchase price, in event of any defaults and/or late payments by the tenants. The acquisition is DPU yield accretive and will be funded by a 3-year JPY fixed rate loan.
Relevance: In our view, we feel that this is positive for the REIT as it is DPU yield accretive, further diversifies its exposure to overseas markets and maximizes its gearing head- room. In addition, given the aging population and the structure of the deal (with back-up operator, rental guarantee and long leases), downside risks are minimized, in our opinion. With the latest acquisitions, our FY09F DPU forecast is raised to 7.38 cents, from 7.17 cents. At current levels, PREIT offers a net yield of 7.0% and 7.6% for FY08F and FY09F respectively.
Maintain Buy; TP: S$1.31. Our DCF-backed TP is adjusted down slightly to S$1.31 (from S$1.35) as we factor in a higher adjusted beta in lieu of recent volatility (WACC of 6.3% and terminal growth of 1%). The counter is now trading at about 30% below its NAV. Given the defensive nature of its assets and revenue stream, particularly its Singapore hospital (downside protected by 1%+CPI), we believe it is a good opportunity to accumulate the shares.
PLife – CIMB
Acquires seven nursing homes in Japan
S$105.7m worth of acquisitions. Parkway Life REIT announced last night that it has completed the acquisition of seven nursing homes in Japan for S$105.7m from Yugem Kaisha KSLC, a wholly-owned subsidiary of Kenedix Inc. The net initial yield of the portfolio is 6.9%, with individual yields ranging from 6.7% to 7.2%. All the assets have freehold tenures.
Long lease structures of 17 years. All seven properties have average lease terms of 17 years with an operator, with five having back-up operator arrangements. The average occupancy level of the portfolio is 94%.
Rental guarantee from vendor. Kenedix Inc., a Japanese real estate asset manager with S$11.3bn of assets under management, has granted PLife a rental guarantee for seven years and three months, which would cover any deficit in revenue from any of the seven properties, capped at 5% of the purchase price. This is a provision separate from the long-term lease agreements with the nursing-home operators. Management assures that the provision was given as an additional safety precaution and there has been no default payment in the last three years. There are also market rent reviews at 2-5-year intervals specified in the leases.
100% debt funding; current debt to be refinanced on 3-year tenure. PLife will be financing the acquisition with debt, drawn temporarily from a short-term facility. This raises its total debt to about S$200m (inclusive of S$94m short-term debt as at 2Q08). However, management will be refinancing the S$200m debt with a 3-year bilateral loan within one month. Half of the loan has been committed while the other half has received in-principle approval pending documentation. All-in cost of debt for the 3-year facility is 3%, below our assumption of 3.2% for FY08. The debt will be fixed at this level over its full tenure. Borrowing currency is the Japanese yen, providing a natural hedge.
Asset portfolio exceeds S$1bn; gearing rises to 19.7%. With the completion of this portfolio, PLife’s assets increase from S$902m to S$1bn. Full funding with debt will increase its asset leverage from 10.2% to 19.7% after the acquisition. This is still significantly lower than the optimal level of 45% and regulatory limit of 60%.
Growth of Japanese nursing home industry. Japan has one of the fastest aging populations in the world. The company forecasts that the number of people over 65 years of age is expected to reach 34.7m in 2015, or 26% of Japan’s population, up from 18% in 2002. According to management, the Japanese nursing-care industry has blossomed since the implementation of the National Nursing Care Insurance System in 2000. Under this system, the government subsidises about 50% of the nursing-care expenses of the elderly. In a nursing home, a cash deposit or bond equivalent to five years’ payment of fees (excluding nursing-care fees) is typically collected from residents on admission. This bond may vary with the age of the resident and the type of accommodation provided. Subsidies from the government and the high level of cash deposits collected underpin the cash flows of nursing homes, while an aging population should ensure the relative resilience of the nursing-home industry in Japan.
PLife – BT
Parkway Reit buys Japan nursing homes
PARKWAY Life Real Estate Investment Trust (P-Reit) said yesterday that it has agreed to buy seven nursing homes in Japan for a total of 7.85 billion yen (S$105.7 million).
The current turmoil in the financial markets has opened up opportunities, said P-Reit manager Parkway Trust Management (PTM). ‘P-Reit is taking advantage of current soft market conditions, to negotiate the purchase of a very high-quality nursing home portfolio on very favourable terms,’ said PTM chief executive Justine Wingrove. ‘There are few markets in Asia where an investor can enjoy a 400 basis point spread between the net initial yield and cost of debt.’
The acquisition of the nursing homes is yield accretive to unit-holders, P-Reit said. The net initial yield of the portfolio is 6.9 per cent, with individual yields ranging from 6.7 per cent to 7.2 per cent. P-Reit said that the acquisition will be funded by debt, which will increase its gearing from 10.3 per cent to 19.7 per cent. The trust said that it is drawing down committed debt facilities that are already in place.
Japan has the world’s fastest-growing population of elderly people. According to Japanese government statistics, 39.6 per cent of the country’s population will be over 65 by the year 2050, compared with just 21.5 per cent last year.
The aged-care industry is expected to grow as a result. P-Reit cited Japanese government forecasts that in 2015 and 2025, nursing care insurance payments are estimated to cost 12 trillion yen and more than 20 trillion yen respectively.
‘We have observed the exponential growth of the nursing care market in Japan and will continue to pro-actively seek similar yield-accretive acquisitions to diversify our asset portfolio and grow our income stream,’ said Ms Wingrove.
The seven nursing homes are located across Japan, including Tokyo, Chiba, Saitama, Kanagawa and Hyogo. All of them are managed by established operators in Japan.
P-Reit bought the homes through its wholly owned subsidiary Parkway Life Japan3 from a wholly owned subsidiary of Japanese property investment company Kenedix.
P-Reit, with a portfolio of $902 million at June 30, is the largest healthcare Reit in Singapore by asset size. It was set up to invest mainly in income-producing real estate and real estate-related assets in the Asia-Pacific region that are used primarily for healthcare purposes.
CRCT – BT
CRCT buys Beijing mall’s basement extension
CAPITARETAIL China Trust (CRCT) has entered into a conditional agreement to acquire Xizhimen Mall Basement 1 Extension (Phase 2) for 163.5 million yuan (S$32.7 million).
CRCT said yesterday it will acquire the property from Beijing Finance Street Construction Development Co for a total consideration – including the purchase price, capital expenditure and related costs – of about 195 million yuan.
In February, CRCT acquired Xizhimen Mall for $336 million. This involved an agreement for it to purchase, when completed, the planned Phase 2 from the vendor, subject to conditions.
CRCT said the acquisition will be fully funded through external debt and internal cash reserves.
Following the acquisition, CRCT’s gearing is expected to be 32.3 per cent.
Wee Hui Kan, deputy CEO and CEO designate of CRCT manager CapitaRetail China Trust Management, said Xizhimen Mall’s total gross rentable area will increase to 83,074 sq m. The mall is expected to benefit from, ‘higher shopper traffic and enhanced rental income growth over time’, he said.
Assuming 100 per cent occupancy and current average rental rates commanded by Basement 1 of Xizhimen Mall, Phase 2 is expected to achieve a net property income yield of 9.1 per cent. Phase 2 will add 9,217 sq m of gross rentable area to the existing Basement 1.
The acquisition is expected to be yield-accretive to CRCT unitholders compared with CRCT’s implied net property income yield of about 8.8 per cent, based on the trust’s closing unit price of $0.725 on Sept 26.
Xizhimen Mall is part of Xihuan Plaza, a mixed-use development that comprises three office towers, a small commercial block and a seven-level retail podium.
CMT – OCBC
Sailing through choppy waters
Strong REIT managers will shine in difficult times. The completion of 651,000 sqm of retail space between 3Q08 and 2011 would inevitably put downward pressure on rental rates. But during the slump in retail rental rates in 2001-2003, CMT had been able to raise its rental rates through asset enhancement initiatives (AEIs) and space reconfiguration despite challenging operating condition. As such, we think strong retail mall managers can still ride out the tough period through well-executed asset management and enhancement.
Expecting a smooth transition in stewardship. Last week, Mr Pua Seck Guan, the CEO of CMT, announced his resignation with effect from 1st November 2008 and Mr Lim Beng Chee will take over Mr Pua’s role as the new CEO. Transition in stewardship should be smooth as Mr Pua had already made known to CapitaLand of his intention to pursue personal interest since last year and this would have given CapitaLand ample time to prepare for the transition.
Growth unlikely to be derailed with management change. Mr Pua had been instrumental in the growth of CMT since its IPO. With his departure, concerns have been raised on the outlook of CMT, which was evidenced in the sharp decline in CMT’s share price after the announcement. We think such concerns have been overdone. With plans for future AEIs in place, we do not think the change in management will derail the progress of AEIs going forward.
Yield discount attributable to size difference. While CMT is still trading at FY08 yield discounts of 1.3% to 2.0% to other retail REITs, we note that this yield discount correlates to the size of the REIT and this is also prevalent in office and industrial REIT sectors. For CMT, this yield discount is expected to narrow in FY09 with the increase in DPU.
Fair value lowered to S$3.05. We do not see significant change in the fundamentals of CMT’s retail malls, but we are lowering our fair value to S$3.05 (previously S$3.21) after raising our office cap rate from 4.5% to 5% and lowering our office rental forecasts, in line with our cautious stance for the sector. Share price could stay depressed for a while as the market awaits further clarity on the direction of CMT under the new CEO and yield spread over 10-year bond could stay wide under the tight credit market condition. We are keeping our BUY rating.