Expanding Japan footprint
- PREIT to acquire three nursing homes in Hokkaido for S$26.1m
- We estimate the purchase will boost its FY22-24F DPU by 0.27-0.48%
- Reiterate Hold, with a slightly higher DDM-based TP of S$5.06
Expands Hokkaido footprint
PREIT on Tuesday announced the acquisition of three nursing homes – Blue Terrace Kagura, Blue Rise Nopporo and Blue Terrace Taisetsu – in the Hokkaido region in Japan for a total purchase price of ¥2,558m (S$26.1m), or 12.2% below independent valuation. The properties are well-located with transport connectivity within the residential areas of Ebetsu and Asahikawa Cities in Hokkaido Prefecture. It expects the transaction to be completed by 3Q22.
Purchase will extend PREIT’s WALE to 17.05 years
The purchase is in line with PREIT’s strategy to acquire healthcare-related income producing assets and could boost its asset under management (AUM) by 1.2% to S$2.2bn. Post purchase, PREIT’s Japan portfolio will expand to S$725.3m, making up c.32% of its total AUM. Under the terms of the agreement, PREIT will take over the properties’ existing lease agreements which have a balance lease term of 19 years. This will likely extend its portfolio weighted average lease expiry (WALE) from 17.01 years to 17.05 years, thus improving its income resiliency.
Acquisition is DPU accretive
PREIT expects to fund the acquisition with ¥ debt, to provide a natural hedge for foreign exchange risks arising from ¥ denominated assets. That said, at distribution income level, PREIT income remains well hedged, with its ¥ net income hedged till 1Q27 (as at end 2Q22), providing income stability to unitholders. According to management, the purchase will likely raise PREIT’s proforma leverage ratio from 32.5% (as at end-Jun 2022) to 33.4%. We expect the deal to be DPU accretive. Based on the stated net income yield of 6.5%, we estimate the additional contributions could raise our FY22-24F DPU estimates by 0.27- 0.48%.
Maintain Hold rating
We raise our FY22-24F DPU estimates by 0.27-0.48% to factor in the new income streams. Accordingly, our DDM-based TP rises slightly to S$5.06. With its robust balance sheet, PREIT is well placed to continue tapping more inorganic growth opportunities, in our view. We like PREIT for its stability, backed by its defensive income structure with in-built escalation features. However, with an estimated total return of less than 10% in the near term, we retain our Hold rating. Re-rating catalysts include accretive acquisitions, while downside risks include deflationary periods, whereby Singapore rent revisions would revert to 1%, when PREIT’s annual rent formula kicks in again.