Category: PLife
PLife – CIMB
More reasonable valuations
PREIT has de-rated 5% to more reasonable valuations since our downgrade. Fundamentally, it remains one of the most stable REITs with long leases, downside protection and CPI-linked rental reviews. There is further room for acquisitions given a healthy balance sheet at 35% gearing and debt headroom of S$131m-287m at 40%-45% gearing. We maintain our DDM-based target price (discount rate: 7%) and upgrade PREIT on valuation grounds. We have yet to factor in any acquisitions but estimate that a S$100m acquisition at NPI yield of 7% could lift our target price by 5% to S$2.53. Re-rating catalyst will be yield-accretive acquisitions.
What Happened
PREIT has de-rated 5% since our downgrade on 2 May 14, which was largely premised on expensive valuations.
What We Think
Fundamentally attractive. Aside from being in a resilient industry, PREIT benefits from favourable lease structures such as a long-lease term to expiry (>10 years), downside protection for 91% of its revenue and CPI-linked rental review for 67% of its portfolio. The Singapore hospitals alone should drive organic growth of 2.7% over the next two years assuming a CPI of 3%.
Further room for acquisitions. PREIT’s exposure in Japan (>30%) positions it as a proxy for Japanese reflation. More importantly, its early entry and good working relationship with Japanese nursing home operators allow PREIT to consistently make yield-accretive acquisitions despite rising competition. We expect more acquisitions given its healthy gearing of 35% and debt headroom of S$131m-287m. Aside from Japan, Australia and Malaysia are potential markets.
More reasonable valuations. The yield spread for PREIT against 10-year government bond yields has widened from 175bps (during our downgrade) to 275bps. While this remains below the S-REITs simple average of 3.8%, we believe this is a more reasonable level given PREIT’s stability.
What You Should Do
Hold for a stable REIT with c.5% dividend yield. We have only factored in organic growth, but estimate that a S$100m acquisition at NPI yield of 7% could raise our target price by 5% to S$2.53.
PLife – DBSV
Acquires another 5 nursing homes in Japan
- Acquires a further 5 nursing homes in Japan
- Initial net yield of 7%, similar to existing Japan assets
- Acquisition price of JPY4.5bn (S$59.2m) funded fully via 6-year JPY debt
- Maintain HOLD, TP adjusted marginally to S$2.51
Expanding further into Japan. PREIT announced that it has entered into 2 conditional sales and purchase agreements to acquire a further five nursing homes in Japan for a total consideration of JPY4.5bn (S$59.2m). The average net property yield is 7%, and is roughly in line with its existing Japan assets. The purchase will be fully funded by a 6-year unsecured JPY loan at a cost of c.1.75%. With this acquisition, the REIT’s gearing will increase to about 34.8%, from 32% as of 31 July 2013.
Leveraging on an ageing population. The acquisition is expected to complete by end Oct 2013. With this latest acquisition, the PREIT’s Japan portfolio stands at 32.9% of the Group’s portfolio. The rationale for investing further in Japan is consistent with its past strategy and to leverage on Japan’s ageing population.
Fresh 20-year leases. Each of the nursing homes will enter into a fresh 20-year building lease with the operator. This will raise PREIT’s weighted lease expiry further to 11.14 years, from 10.69 years (as at July 2013), thus providing long term stability to the REIT’s lease structure.
PLife – OSK-DMG
Offers steady DPU growth
We recently hosted PREIT at our Singapore REIT Conference. Key takeaways are: (1) ceteris paribus, DPU would continue to rise, due to its lease structures that have downside protection; (2) PREIT will continue to look for acquisitions in the region, with more focus on Japan; (3) balance sheet remains healthy, with gearing at 33%. We continue to like PREIT for its stable DPU growth and defensive nature. However, we think its prospects and resilience has been priced in. Maintain NEUTRAL with TP of SGD2.46.
Lease structure has revenue downside protection. Currently, 90% of PREIT’s leases have downward protection – leases are either pegged to CPI (with a min. 1% growth in rental) or have upward rental revision only. The remaining 10% is open to negotiation at prevailing market rate. With such a feature, revenue is likely to continue growing, which would translate into higher DPU. Going forward, new leases (from new acquisitions) are likely to have upward rental revision only (instead of being pegged to CPI). This may be a good move, given that the demand for services at its assets (e.g. nursing homes) is strong, which could support a stronger growth in rent.
Still looking for acquisitions in Japan. PREIT aims to have Japan contribute 50% of its overall portfolio (currently 31%) eventually. Hence, it plans to focus more of its acquisition strategy towards nursing homes in Japan. With funding cost in Japan relatively low, management is confident that it would still be able to obtain a 7% NPI yield from Japanese assets. Another sign of the growing popularity of Japanese nursing homes is that PREIT is seeing more competition (from other real estate funds) for nursing homes. Management is unfazed, as PREIT has first mover advantage, having established a presence in Japan a few years ago.
Healthy balance sheet would be able to support acquisitions. With gearing at 33%, PREIT has debt headroom of SGD320m for further acquisitions, before breaching its internal target of 45%