Parkway reit sets sights on local market

Group to explore opportunities for nursing homes collaboration

PARKWAY Life Reit is eyeing the local nursing home market after its forays into properties that provide long-term elderly care services in Japan.

‘We are looking to explore opportunities to collaborate with credible nursing care operators locally and regionally, as well as to expand the availability of quality nursing homes in Singapore to cater to people with different needs,’ said Yong Yean Chau, CEO of Parkway Trust Management, which manages the reit.

Plans are preliminary, but the trust’s manager is looking to discuss possible working models with interested parties. On a recent site visit to the reit’s nursing homes in Japan, Mr Yong expressed interest in helping them export their expertise to Singapore.

Like Japan, Singapore has a rapidly ageing population that will drive demand for nursing home places in the longer term, he said. ‘In Singapore, about 9 per cent of the population is currently aged 65 and above – the highest in South-east Asia.

‘The growing prevalence of nuclear families in modern societies also means fewer people will be available to take care of the needs of the elderly in future.

‘Nursing homes are increasingly becoming good alternatives for people to enjoy care, shelter and companionship outside of the family in their old age.’

Singapore has about 60-70 nursing homes, about half of which are run by the private sector and the rest by voluntary welfare organisations.

This is not sufficient to support the ageing population, with the number of people aged 65 and over expected to increase three times from 300,000 now to 900,000 by 2030, according to a Ministry of Health paper in 2006.

In a speech last year, Health Minister Khaw Boon Wan said the number of nursing home beds here will be boosted to 14,000 by 2020, from 9,200. The Health Ministry is already working with three existing nursing homes on rebuilding programmes that will increase bed numbers.

Besides the need to boost capacity, Parkway Trust Management’s Mr Yong says there is room for greater market segmentation and sophistication in the local nursing home sector.

‘With more product offerings, coupled with public education, we believe the perception and acceptance of nursing homes in Singapore will improve over time,’ he said.

‘Parkway Life Reit is keen to share its experiences and is at the preliminary stages of exploring the feasibility of collaborating with various stakeholders.’

Through a series of acquisitions in the past two-and-a-half years, the reit owns 29 properties in Japan, 28 of which are nursing home and care facilities.

These properties are leased mostly to nursing home operators that pay a guaranteed monthly rent, which may be pegged to inflation rate.

In Singapore, the reit’s assets include Mount Elizabeth, Gleneagles and Parkway East hospitals. For the quarter ended June, its assets in Japan accounted for 28 per cent of its net property income of $17.3 million.

Life has positive surprises ahead

• Acquisitions should continue to fuel growth; we factor in S$200m for FY11F

• Funding likely to be part equity, part debt; maintaining gearing slack for opportunistic purchases

• Asset enhancement opportunities in Japan and Singapore could supplement growth

• Raised DPU by c.5% even after factoring potential new units; Maintain Buy, TP raised to S$1.84

Japan and Malaysia on Life’s radar. From our visit to PREIT’s nursing homes in Japan last week, we believe the opportunities for investment continue to be strong there. We have factored in S$200m acquisitions for FY11F (Japan/Malaysia). We believe management is keen to continue its strategy in Japan, as well as expand into other countries, namely Malaysia, given the recent resolution of ownership at Parkway.

AEIs in Japan and Singapore. PREIT is also exploring asset enhancement initiatives (AEI) in Japan, such as converting common areas into more rooms. In Singapore, we believe PREIT could look to increase GFA of existing hospitals given recent initiatives by Raffles Medical for its hospital.

Equity raising likely for acquisition. Equity raising to fund future acquisitions is probable, in our view. While PREIT still has debt headroom of S$121m before reaching 40% gearing, we believe management is likely to maintain some slack to avail for quick response to opportunistic acquisitions. Along with our acquisition assumption, we have assumed $140m proceeds raised through equity and S$60m funded through debt in FY11, maintaining its gearing level at c.35%.

TP raised to S$1.84, Buy. YTD, counter is up c.34%, given its accretive acquisitions, astute management and defensive profile, among others. We believe there is further upside as management continues to pursue accretive acquisitions. Our TP is raised to S$1.84, after factoring in S$200m acquisitions (funded by 30%/70% debt/equity), lower all-in interest costs to 2.15% and rolling our valuations to FY11F. Our DCF TP is S$1.84 (WACC 6.3%, t=2%), representing 18% total return upside.

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.

• Newton Investment, the British arm of Bank of New York Mellon, has emerged as the buyer of the entire block of 56.25 mln units sold by TPG on Sept 22nd at $1.56 each.

• We are positive about this development, given that Newton Investment is known for its thematic style of investments, and also for having a reputation as one of the most vocal and active institutional investors.

• Our confidence in the healthcare reit is therefore enhanced by the extra “eyes” watching over it.

• Based on DPU of 2.09 cents for Q2, the yield is still attractive at 5.2%.

• Maintain BUY.

• It took TPG 6 days to announce it has sold out of PLife at 41.56 a unit on Sept 22nd but “crossed” on the 23rd.

• As the 56.25 mln units crossed on Sept 23rd matched the holdings of TPG, the latter’s exit had not come as a surprise to us.

• As the block represents 9.3% of PLife’s issued, a single buyer would have to identify itself. As such, we believe the 56.25 mln units went to more than one party, hence the “discount” to the $1.67 market price the day before the “crossing”.