+ Acquisition of three Japan nursing homes at S$53.3mn and Malaysia medical centre at S$6.45mn
+ DPU accretive resulting from debt and cash financing
+ Maintain ACCUMULATE with a higher target price of $1.950
What is the news?
PLife REIT started the year with a bang. The trust strengthened its foothold in Japan with three nursing homes and in tandem penetrated into Malaysia private healthcare sector by acquiring a medical centre. The three nursing homes will be on 20-year master lease, lengthening the weighted average lease term to expiry for PLife REIT’s Portfolio to approximately 12.35 years. Akin to other acquisitions made in Japan, the properties are secured with backup operators and protected with rental income guarantees. The acquisition is expected to be wholly funded by a fresh term loan facility of S$53.3mn at an estimated allin cost of 1.8% and to be concluded by March 2012.
Making inroads into Malaysia, the trust acquired strata titled units within Gleneagles Medical Centre Kuala Lumpur at S$6.45mn and the transaction is expected to complete by August 2012.
How do we view this?
We like the management approach when in comes to venturing into uncharted waters and would attempt to label this as “start small and finish big” approach which they have demonstrated by expanding their presence in Japan in the past four years. From unitholders’ standpoint, the purchases are DPU accretive as no equity is raised. The Japan properties offer income stability with downside protection while Malaysia property provides organic growth potential with shorter lease term. Based on our model, the leverage ratio is likely to be c.36.8% and this leaves the trust with debt headroom of S$80mn and S$220mn with respect to 40% and 45% gearing respectively.
Investment Actions?
With latest acquisition, DPU is anticipated to elevate by 3.6% on average over the next five years and resulting to higher price target of $1.950. We are confident that the management will continue to deliver sustainable DPU with its growth model and therefore maintain our call to Accumulate.
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Future plans
The management guided that, ” As part of the PLife REIT’s strategy to optimize its portfolio constitution to ensure diversified revenue sources, it intends to hold down its acquisition in Japan in the interim and focus on exploring yield accretive acquisition opportunities in the region.”
We see the shift in country focus is an opportune time for PLife REIT to seize the opportunities in Malaysia healthcare sector. With Mitsui & Co Ltd taking a 30% stake in Healthcare Holdings Sdn Bhd (IHHSB) and joint venture between Khazanah National and Temasek Holdings to build wellness centre in Iskandar Malaysia, these evident of flourishing demand for private healthcare service in Malaysia. Given PLife REIT connection with Parkway Health, we believe the trust will make their inroads into Malaysia with breeze as there is a readily string of properties in the pipeline for acquisition.
Major Shareholders
1. Parkw ay Holdings Ltd 35.8%
2. Bank of New York Mellon Corp 10.3%
3. Symphony Intl Holdings Ltd 6.4%
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