Two more in Japan

Story: ParkwayLife REIT announced that it is participating as an investor in the acquisition of two nursing homes in Japan for a total consideration of JPY2.617bn (S$34.9m). The investment is in relation to (1) Bon Sejour Shin Yamashita (Yamashita facility) for JPY1.44bn (S$19.2m); and, (2) Bon Sejour Ibaraki (Ibaraki facility) for JPY1.177bn (S$15.7m). Acquisition will be funded by debt and is yield accretive.

Point: The Yamashita facility has a net operating income yield of 6.1% while the Ibaraki has a net operating yield of 6.7%. The vendor of both homes is nursing home operator ZEC Community Co. Ltd. There is also a back-up operator agreement with Japan Care Services Co. Ltd. The lease agreement is for a period of 15 years with an option to extend the lease for an additional 5 years. Rentals are index-linked to Japanese inflation (on an upward basis only) and there are rent reviews every five years.

As indicated previously, these investments are part of the REITs drive for asset diversification within the healthcare space (hospitals, pharmaceutical logistics/ production facilities, nursing homes, medical suites, etc). While acquisitions are relatively small in size, it seems like management is looking at “building up volume with small numbers first”, in our opinion. As such, we still retain our view that there will be more to come in the months ahead. There is also an attractiveness in the Japan market given the high proportion of elderly citizens – 1 in 5 are
above 65 years of age in 2006, projected to go up to 1 in 3 by 2050 – and the relatively mature market.

Relevance: The acquisition will bring its gearing from 8% to 11%, which still allows significant debt headroom for further acquisitions in the future. BUY, TP adjusted slightly up to S$1.51. Dividend yield is 5.52% (FY08) and 5.68% (FY09) at current price of S$1.23. We continue to like PREIT as a defensive play, providing potential upside from hospital revenue while downside protection via 1%+CPI% growth.

Parkway Life to acquire nursing homes in Japan

A MONTH after making its maiden foray in Japan, Parkway Life Reit has agreed to buy another two properties there for a total of 2.62 billion yen (S$34.3 million).

The target acquisitions are a nursing home in Yokohama City and another in Osaka’s Ibaraki City. Both are owned by vendor ZECS Community Co, which has agreed to lease them back for 15 years with an option for a further five years. Its parent company Zecs Co will guarantee the leases.

At a price of 1.44 billion yen, the Yokohama facility has a net operating income yield of 6.1 per cent. The freehold, five-storey building is next to a scenic canal. It has 74 lettable units spread over a gross floor area of 3,273 sq m.

The Ibaraki nursing home is in a four-storey, 50-year leasehold property beside the University of Osaka and Ibaraki Country Club. It has a lettable area of 3,706 sq m and 94 units. At 1.18 billion yen, its net operating income yield is 6.7 per cent.

Explaining the acquisitions, Justine Wingrove, CEO of the Reit’s manager Parkway Trust Management, said demand for quality nursing homes in Japan will grow with the ageing population. ‘By 2050, it is estimated that one in three Japanese will be over 65,’ she noted.

Rents at both properties are index-linked to Japan’s inflation rate on an upward-only basis. Rents may also be revised by mutual agreement at five-year intervals.

Expected to be completed this month, the investments will be made through special purpose vehicle Parkway Life Japan2, a wholly owned subsidiary of Parkway Life Reit. They will be funded by debt, raising the Reit’s gearing to 11 per cent from 8 per cent.

ZECS Community operates 30 nursing homes in Japan under the Bon Sejour brand. The leases are also protected by a back-up agreement with Japan Care Service Co, another operator of nursing homes.

Parkway Trust Management did not say how much the acquisitions will add to the Reit’s distribution per unit (DPU). ‘As the deal size is only $35 million, the increase to DPU is not significant,’ said Ms Wingrove.

Last month, the Reit made its first investment in Japan – a pharmaceutical warehousing and distribution facility in Chiba that cost 2.59 billion yen.

Following yesterday’s announcement, Parkway Life Reit ended one cent higher at $1.23.

Possible Scenarios

Hopefully Next One Will Be In S’pore

Parkway Life Reit agrees to buy property in Japan

It will acquire a distributing facility in Matsudo city for 2.59b yen

PARKWAY Life Reit will soon add an overseas property to its portfolio, following an agreement to buy a distributing facility in Japan for 2.59 billion yen (S$35 million).

The Reit’s manager, Parkway Trust Management, yesterday said Parkway Life Reit has agreed to acquire a two-storey building named J-REP Matsudo II with a net lettable area of about 3,240 square metres.

The freehold property, in Chiba prefecture’s Matsudo city, offers an initial net yield of 5.3 per cent. Parkway Trust said there is potential to increase the net lettable area as the current ratio of the building’s floor-to-land area is only 40 per cent, while the allowable ratio is 200 per cent.

Completed in 2005, the building is currently leased by logistics firm Nippon Express Co, which has an A2 credit rating. Nippon, in turn, has a back-to-back lease with its partner Inverness Medical Japan Co. Inverness uses the property to manufacture, sell and distribute its diagnostic test kits and medical devices.

‘We are very excited about Parkway Life Reit’s first investment in Japan,’ said Parkway Trust Management CEO Justine Wingrove. ‘This is a key market for us as the demand for good quality healthcare real estate assets is expected to grow, driven by the fact that by the year 2050, it is predicted that one in three Japanese will be over 65 years of age.’

The master tenancy agreement with Nippon will expire in nine years’ time. The property was valued by Colliers Halifax to be worth about 2.619 billion yen, as at last month.

Parkway Life is making the investment through its wholly owned subsidiary Matsudo Investment Pte Ltd. The seller of the property is J-REP Co, whose majority shareholder is Macquarie Goodman Asia.

The investment, to be funded through debt, will increase Parkway Life’s gearing to 8 per cent, from 4 per cent. With its ‘BBB+’ credit rating, the Reit can have about $1.2 billion worth of additional debt capacity.

Parkway Life did not reveal how much the investment will add to its distribution per unit (DPU), only saying it is ‘yield-accretive’.

Between last August, when it was listed, and end-December, Parkway Life posted a distributable income of $13.64 million, leading to a DPU of 2.27 cents.

Shares of Parkway Life ended two cents down at $1.19 yesterday.