Share Price S$2.31
Target Price S$2.39
Acquires Five Japan Nursing Homes For S$59m
PLife continued with its acquisitions in Japan with a S$59m purchase of five nursing home properties at an NPI yield of 7.0% from strategic partner K.K. Sawayaka Club. Upgrade to HOLD with a higher DDM-based target of S$2.39 after factoring in the acquisitions (+3.5-3.8% accretion to 2014-15F DPU) and as valuations have become more compelling following the recent 6% price correction since 2Q13 results. Entry price is at S$2.08.
• S$59m acquisition of five Japan nursing homes. ParkwayLife REIT (PLife) has announced the acquisition of five nursing home properties in Japan for ¥4.5b (S$59.2m) (independent valuation: S$59.4m). The vendor is K.K. Sawayaka Club, with whom PLife has an established relationship, having acquired 10 nursing homes from the group since 2010, and a Right of First Refusal (ROFR) over future sales of nursing homes.
• NPI yield of 7.0%. The properties are expected to generate a NPI yield of 7.0% and each of the properties will be leased back to K.K. Sawayaka Club for a term of 20 years.
• Fully-financed by 6-year Japanese yen-denominated loan. The acquisitions will be fully-funded via a 6-year Japanese yendenominated term loan with an all-in interest cost similar to its current all-in funding costs of 1.5-1.7%. This will increase PLife’s gearing by 2.8ppt to 34.8% from 32.0% as at end-Jul 13.
• Completed terming out of outstanding Japanese yen-denominated loan facilities due in 2H14. PLife also announced the successful terming out of its remaining debt facilities due in 2014 via a 4-year ¥4b (S$52.6m) term loan at a credit spread of below 1%. Following the refinancing exercise, PLIfe will have no refinancing requirements until 2015. Management highlighted that despite the headlines arising from Fed tapering, PLife will benefit from interest savings from refinancing as all-in costs for new loans are lower than that of the loans they are replacing.
• DPU accretive. We estimate that the acquisitions will increase 2014-15F DPU by 3.5%-3.8%.
• Japan portfolio stands at 33% of total AUM following the acquisitions. The acquisitions will boost the total portfolio size by 4.3% to S$1.45b.
• Acquisition strategy switching to a two-pronged approach leveraging on the established pipeline in Japan with PLife’s established strategic partnership with the nursing home operators while exploring potential sponsor and third-party acquisitions in Malaysia and Australia.
• Further potential upside in asset valuations from yield compression in the nursing home sector due to increased competition for assets. Acquisition yields of 7.0-7.1% in 2013 are below the acquisition yields of 7.5-7.8% in 2012, although they still remain attractive. For example, Shinsei Bank will be establishing the first healthcare REIT in Japan in 2014, while Singapore’s Healthway Medical has established a ¥15b fund to invest in nursing homes in Japan.
• AEI (asset enhancement initiatives) still on the cards for Mount Elizabeth hospital which has been facing high utilisation for its hospital beds. With the opening of Mount Elizabeth Novena, capacity constraints at Mount Elizabeth will be curtailed and could accelerate the timeframe for the upgrading.
• We have adjusted 2014-15F DPU by +3.5-3.8% to factor in the acquisitions. Key risks include higher interest costs arising from Fed tapering and exchange fluctuations on Japanese yen impacting gearing.
• We upgrade to HOLD with a higher target price of S$2.39 (from S$2.30). We use the dividend discount model (required rate of return: 6.4%, terminal growth: 1.8%) to value PLife. Entry price is at S$2.08. PLife offers a better value for exposure to the healthcare sector than parent IHH which is trading at over 45x PE.
Share Price Catalyst
• Yield-accretive acquisitions and AEIs.
• Interest savings arising from loan refinancing.
Publish date: 19/09/13