Parkway Life REIT has announced that it is acquiring 6 nursing homes and healthcare facilities in Japan for JPY3.9b (S$60.5m). Key highlights are as follows:

• Acquisition is yield accretive. The net property yield of 8.08% is yield accretive compared to current yield of 6.97% of PREIT's existing Japan portfolio.  This comes after another acquisition of 8 Nursing homes in Nov 09 for S$77.6m at a property yield of 8.29%.  DPU will increase by S$0.16 cents/share in FY 10 and by S$0.32 cents/share from FY 11.
• Downside protection with rental guarantees and longer lease to expiry.Uchiyama and Bonheure, the sellers of the properties, will provide rental income guarantees for the lease period of the nursing homes.  The new 20 year leases signed on the nursing homes will improve the average lease term to expiry of PREIT which stands at 13.2 years as of Mar 2010.
• Financed by 2% loan. Acquisition is financed by 5-year unsecured term loan of JPY4.2b (S$64.6m) at a funding cost of 2% pa, versus recent JPY loan of 3.22% secured in Nov 09.  This will raise gearing from 28.5% to 32.2%.
• Japan properties form 28.9% of portfolio value The six nursing homes will increase the value of PREIT's Japan portfolio by 21% to S$350.5m and will bring the Japan portfolio to 28.9%, up from 25.2%, of the total portfolio value of S$1.21b.  
• Leverage on Japan's ageing population. Japan has the world's fastest ageing population, with 1 of 4 Japanese expected to be over 65 years old by 2025.  The acquisitions enjoy high average occupancy of 93.9% as at May 10.
• Clustering and partnership approach to benefit from economies of scale. PREIT is adopting a clustering acquisition approach going forward to reap critical mass for its acquisitions in Japan.

  Valuation. PREIT is well-positioned to benefit from the yield accretive purchases and also from the high demand for nursing home space in Japan.  We maintain our BUY call with a revised target price of S$1.76 (from S$1.70)  based on our two-stage dividend discount model (required rate of return: 7.15% and terminal growth rate: 2.5%).

Low beta play with growth

At a Glance

• 1Q10 DPU of 2.07 Scents (+9.4%) within our expectations

• NPI growth (+13.4%) driven by 8 nursing homes acquired in Nov’09 and higher rentals from Singapore hospitals

• Refinanced S$34m loan due 2H10 with S$50m 3-yr FRN

• Low beta play with room for growth; Buy, TP: S$1.51.

Comment on Results

1Q09 within expectations. PREIT’s 1Q10 DPU of 2.07 Scts (+9.5% yoy; 1% qoq) was within our expectations. Gross revenue grew by 14.1% to S$18.6m, largely from additional contribution from the 8 nursing homes in Japan acquired in 4Q09 (S$1.8m) as well as higher rental from Singapore hospitals, which had an upward rent revision by 4.36% (CPI+1% formula) in its Yr 3 of lease from Aug’09. NPI margin fell marginally to 92.3% arising from expenses related to the 8 new nursing homes. As a result, NPI grew by 13.4% to S$17.3m.

Issued S$50m FRN at 1.05%+6-mth SOR. PREIT has, on 23 Mar, issued S$50m FRN due 2013 at an interest cost of 1.05%+6-month SOR. Majority of the proceeds were used to repay its S$34m loan due in 2H10. Gearing stands at 28.2%, at an effective all-in borrowing cost of 3.06%.

Recommendation

A low beta play… We like PREIT’s defensive attributes with 89.8% of total portfolio having a downside revenue protection and 98.1% having rent review provision. General expectations that inflation could quicken along with the robust economic recovery bode well for PREIT’s Singapore hospitals arising from the CPI+1% formula.

…with room for growth through acquisitions. Buy, TP: S$1.51. PREIT has debt headroom of S$234.6m before reaching 40% gearing, which could be utilized for accretive acquisitions. We see Japan as a key possibility given its presence there. We adjusted our DCF-based TP slightly up to S$1.51 (WACC: 6.6%, t: 2%) as we fine-tuned our assumptions from its existing Japanese assets and lower interest costs. Our FY10F DPU of 8.3 Scts equating 6.3% yield, before any future acquisitions.

1QFY10 Results

• 1QFY10 revenue of $18.6 million, net property income of $17.2 million, distributable income of $12.5 million.

• DPU of 2.07 cents

• Maintain Buy, fair value of $1.57

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Steady as a rock

Parkway Life REIT reported a set of results which is very much within expectations. Revenue and DPU have grown steadily throughout the quarters. The REIT registered 1QFY10 revenue of $18.6 million (+14.1% y-y, +5.1% q-q), net property income of $17.2 million (+13.4% y-y, +4.5% q-q) and distributable income of $12.5 million (+9.7% y-y, +0.9% q-q). Revenue increased due to full quarter revenue contribution from the eight nursing homes in Japan that were acquired in Nov 2009 as well as the increase in rental from the annual rent revision. DPU for the quarter was 2.07 cents (+9.5% y-y, +1.0% q-q). Revenue from Singapore accounted for 72.1% while Japan contributed 27.9%. With the Japan properties acquisition, there is greater diversification of the revenue streams.

Balance sheet remains healthy. Parkway Life REIT has total debt of $336.3 million. The REIT refinanced $34 million of its debt which will be due in 2H2010, during the quarter with proceeds from the issue of $50 million of the MTN programme. With the refinancing, there is no debt maturing within the next one year. The next repayment is $206.3 million which is due in 2H2011. Current gearing is 28.2%.

The financial results of Parkway Life REIT present very little surprise to us and this is also the reason that we like it. 88.9% of the portfolio has a downside revenue protection from the inflation-linked leases and 98.1% of the total portfolio has a rent review provision. The terms ensure that revenue will grow steadily over time. The other reason we like the REIT is on the prudent debt management. We think management has held a conservative acquisition strategy that has not stretched the balance sheet, keeping a comfortable gearing level. We make slight revisions to our loan interest assumptions which raise our DPU forecast for FY2010 by less than 1% from 8.22 cents to 8.24 cents, translating to a dividend yield of 6.2%. Correspondingly our fair value is raised slightly from$1.56 to $1.57. Maintain Buy recommendation.

PLife Reit’s DPU up 9.7% to 2.07 cents in Q1

PARKWAY Life Real Estate Investment Trust (PLife Reit) saw its distribution per unit (DPU) for the first quarter ended March 31 rise 9.7 per cent to 2.07 cents, from 1.89 cents in the previous corresponding quarter.

This translates to an annualised DPU of 8.28 cents and an annualised distribution yield of 6.09 per cent for 1Q10 based on the share price of $1.36 at the market’s close on March 31.

The DPU will be paid on June 9.

In the first quarter, gross revenue rose 14.1 per cent year-on-year to $18.65 million on the back of additional revenue contribution of $1.8 million from eight nursing homes acquired in Japan in 4Q09 as well as higher rent from existing properties.

Property expenses for 1Q10 were around 27 per cent higher at $1.4 million as a result of the newly acquired nursing homes.

PLife Reit owns three hospitals in Singapore and 18 healthcare assets in Japan.

Meanwhile, distributable income was 9.7 per cent higher at $12.5 million. Earnings per unit were 2.01 cents for 1Q10 compared with 1.76 cents a year earlier.

In March, the group issued a $50 million three-year floating rate note (FRN) – under its multi-currency medium-term note programme established in 2008 – and part of the proceeds were channelled towards paying $34 million in bank borrowings due in the second half of 2010. This lengthens the weighted average term to maturity for all of PLife Reit’s debts to 2.48 years as at March 31, 2010.

Meanwhile, the remaining proceeds raised from the FRN will be used for general working capital and funding purposes, it said.

‘Riding on the economic recovery and increasing demand for quality healthcare assets, PLife Reit will continue to leverage on our strong fundamentals to propel acquisitive growth, by actively seeking assets that enhance the overall stability and yield-generating ability of our portfolio,’ said Yong Yean Chau, chief executive of Parkway Trust Management Limited, which manages PLife Reit.

PLife Reit plans to boost its presence in the region by also venturing into other markets that are seeing high growth in the healthcare sector.

PLife Reit closed unchanged at $1.32 in trading yesterday.