Category: PLife
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.
REITs – DBS
Examining trough valuations
Going for high risk aversion. We re-iterate our view that the S-reit sector has been de-rated sufficiently for the prospects of slowing earnings growth momentum and possibility of capital value write-downs as well as refinancing concerns. The sector is trading at 7.6% FY08 yield or a 450bps above the current Singapore 10-year bond yield and a hefty 3.7% pt ahead of our projected peak bond yield of 3.9%. The 0.94x P/RNAV already reflects an average 20% cut in capital values across all property sub-segments. S-reits are also trading between 3.5-12% implied cap rates, as investors priced in a bear case scenario.
Office and hospitality sectors may lag: Granted that at this period of higher investor risk aversion, volatile capital value outlook and tight credit conditions, valuations are unlikely to approach previous highs in the short term, we believe that at the current level, much of the anticipated risks are factored in the S-reits lowered valuations. In terms of the various segments, the office and hospitality space poses the most downside risk given the former’s strong correlation to GDP growth and skewed supply/demand dynamics as well as limited earnings visibility in the short-stay accommodation segment.
Go for defensive: While we believe DCF-based measurements are still valid to give investors a longer term total return picture, we are ascribing a discount to these values to derive our price targets given current uncertain environment. Our strategy would be to prefer the more defensive S-reits, particularly those in the healthcare, industrial and retail space. Our top picks are Parkway Life Reit, which offers a highly defensive earnings model with minimal earnings downside risks and exposure into the growing aging population. While stock liquidity may be an issue, we believe this can likely be addressed progressively in the long term. Amongst the larger cap names, we maintain our buy rating on A-reit for its long lease expiry profile and CMT, Suntec and FCT as a suburban retail players with a diversified tenant base. Share prices of ART had been bashed down significantly and at the present level, we see value emerging given its steep discount to RNAVs.
Parkway Life Reit (PREIT SP, TP $1.35)
ParkwayLife REIT (PREIT) offers an exposure to the region’s growing need for healthcare facilities due to an aging population. It is currently trading at 0.8x of book NAV and offers a net dividend yield of 6.4% for FY08F and 6.8% for FY09F. Earnings downside risk is negligible thanks to its revenue model that is based on the higher of i) base rental of S$30m plus 3.8% of the adjusted hospital revenue; or, (ii) preceding year’s rental multiplied by [1+(1%+CPI of preceding year)]. Our DCF-derived target price of S$1.35 (6.3% WACC, 1% terminal growth) offers potential upside of 29%. In addition, refinancing risk is minimal with a low gearing of
10.2%. Maintain Buy.
CapitaMall Trust (CT SP, TP $2.96)
CMT remains one of our key picks due to its strong operational history with a proven expertise in optimizing asset yields through their various AEI activities. Moving forward, catalyst for growth will derive from I) rental reversion from the expiry of 69% of its portfolio income over FY09-10, ii) planned AEI activities amounting to $288m, largely from SSC and JEC, should boost bottomline in the medium term and iii) The Atrium purchase, which is pending completion, should grow NPI further when plans to re-position the asset is completed in 2010.
Ascendas REIT (AREIT SP, TP $2.33)
We like AREIT for its i) quality portfolio of industrial assets, which are enjoying occupancies in excess of 98%, ii) business and science parks exposure that is expected to remain robust on the back of over-spilling demand from office space crunch in the CBD. This segment makes up 25% of its total portfolio. iii) proven development capability which will are higher yielding compared to asset purchases. In this aspect, AREIT has S$309m worth of development assets in the pipeline. Iii) financial flexibility, AREIT management has adopted a prudent capital management strategy which is reflected in its gearing of 38.2%.
Frasers Centerpoint Trust (FCT SP, TP S$1.26)
Frasers Centerpoint Trust (FCT) offers exposure to Singapore’s suburban retail sector through its 3 sub-urban retail malls located in major population catchment areas in Singapore. Earnings should remain resilient given that it derives mainly from non-discretionary spending. In terms of portfolio growth, acquisition of Northpoint II scheduled to TOP by by 08/early 09 kickstarts its portfolio growth plans with other properties such as Yew Tee Mall and Bedok Mall to follow suit in 1H09 and 2010/11 respectively. FCT is expected to tap debt and capital markets for these purchases.
Suntec Reit (SUN SP, TP $1.55)
Suntec Reit offers investors exposure to a more defensive business model of office and retail assets through its portfolio of 1.9msf NLA. DPU growth over the next 2 years is derived from office lease reversions and higher retail rents. Plans to enhance Park Mall and add 67000sf of GFA could provide further upside to our projections in the medium term. Refinancing concerns have been largely allayed by putting in place a $420m club loan. Our price target offers total return of 15%.
Ascott Residence Trust (ART SP, TP S$0.94)
Ascott Residence Trust (ART), as the first Serviced Residence REIT, offers exposure to the Asean booming serviced residence industry. We believe ART presents the least earnings risks amongst the hospitality peers with a regional portfolio exposure that reduces country specific risks. In addition, its average portfolio lease of 8 months should delay an impact of a downside in spot rates. In addition, potential acquisition
Link – Table
PLife – CIMB
Above the crowd
• Good exposure to healthcare assets. PLife is a healthcare real estate investment trust with six healthcare-related assets located in Singapore and Japan. It is the largest private hospital owner in Singapore with a 24% share of the private market. We expect demand for this asset class to grow strongly on the back of a greying Asian population, blooming medical tourism in the region and the Singapore government’s initiatives to establish a biomedical industry.
• Resilient income streams in inflationary environments. PLife’s income streams are protected by long lease periods of 15 years for all its assets, built-in rental adjustments linked to inflation rates, quality tenants and low property expenses.
• Lowest gearing among S-REITs, ready for acquisition growth. PLife has the lowest gearing among S-REITs, at 10% in 2Q08. With moderating borrowing costs and credit lines in place, it is equipped to grow through acquisitions in the near term.
• Initiate with Outperform and DDM-derived valuation of S$1.46. Using DDM valuation, we initiate coverage with a target price of S$1.46 (discount rate 8.1%, terminal growth 2%). This offers a total prospective return of 43.9% from potential price upside of 37.7% and a forward yield of 6.2%. PLife trades at a 22% discount to its NAV of S$1.36, representing a reasonable entry point in view of possible shortterm catalysts from acquisitions. PLife replaces A-REIT as our top pick in our SREIT universe.
PLife – UOBKH
Defensive and resilient
Enhancing contributions from Singapore Hospitals. Parkway Life REIT has embarked on asset enhancement initiatives to improve the returns from low revenue yielding space. Space previously occupied by management and support functions has been decanted to create centres of excellence. Renovation works are ongoing to set up Parkway Cancer Centre at Mount Elizabeth Hospital, Parkway Heart Centre and Obstetrics & Gynaecology wards at Gleneagles Hospital and Women Centre at East Shore Hospital. The enhancement allows the hospitals to hire more specialist consultants, thus increasing patient admission and variable rent. Parkway Life REIT does not have to bear cost incurred for refurbishment, as the lessee, Parkway Holdings, is responsible for capex till Dec 09.
Protection against slowdown. CPI was 2.1% in 2007. The minimum rent payable from Singapore hospitals this year would be 3.1% (CPI + 1%) higher than levels in 2007. The downside protection kicks in on 23 Aug 08, a year after listing. Parkway Life REIT is protected against fluctuation in admission of international patients due to slower growth in regional countries. Revenue contribution from Mount Elizabeth, Gleneagles and East Shore hospitals increased by only a marginal 0.8% qoq to S$12m in 2QFY08. This comprises a base rent of S$7.5m and a variable rent of S$4.5m.
Diversification from acquisitions in Japan. Parkway Life REIT has acquired a pharmaceutical production and distribution facility in Matsudo City, Chiba prefecture and two nursing homes located in Yokohama City and Ibaraki City for S$69.4m. In particular, rental income from the two nursing homes is index-linked to inflation with rent reviews every five years. These acquisitions allow Parkway Life REIT to gain exposure to Japan where the population is ageing rapidly. Revenue contribution from the Japan properties was S$0.5m in 2Q08 (1.5- month contribution from Matsuda facility, 1-month contribution from nursing homes). The Japan properties will provide full-quarter contribution in 3Q08.
Low gearing provides significant room for acquisitions. Parkway Life REIT will partner sponsor Parkway Holdings to expand in the region with Parkway Life REIT acquiring third-party hospital buildings and Parkway Holdings taking over as operator. The company’s gearing is low at only 10%. There is headroom of S$570m for growth via acquisitions if it utilises debt capacity for optimal debt level of 45%. Parkway Life REIT targets to double the size of its portfolio to S$1.6b by end-09. It also plans to diversify into medical offices, research & development (R&D) facilities and warehouse and manufacturing facilities for biomedical and pharmaceutical industries.
Reiterate BUY. We like Parkway Life REIT for its healthcare focus. It provides strong defensive qualities as rental income from hospitals in Singapore and nursing homes in Japan is linked to inflation. Our target price is S$1.54 based on the discounted dividend model (required rate of return: 7.6%; terminal growth: 2.8%). The stock is trading at a 12.7% discount to NAV/share of S$1.34. Parkway Life REIT declared DPU of 1.66 cents, which will be paid on 27 Aug 08.