More Japan acquisitions
- Acquires two nursing homes in Greater Tokyo for S$29.4m.
- Transaction initiates new collaboration with Daiwa House, while establishing new relationship with Zen Wellness for tenant diversification in Japan.
- Maintain Hold rating with an unchanged TP of S$5.06.
Buys another two nursing homes in the Greater Tokyo area
PREIT has announced the acquisition of two nursing homes – Assisted Living Edogawa and Assisted Living Toke – in the Greater Tokyo region, from Daiwa House Industry Co Ltd (Daiwa House) for a total consideration of ¥2,880m (S$29.4m), or 11.1% below independent valuation. The properties, completed in 2021, are well-located in residential areas of Edogawa Ward and Chiba City and has close connectivity to Tokyo Centre. This is PREIT’s first acquisition from Daiwa House and initiates a new collaboration with the latter for potential future pipelines of assets, in our view. It expects the transaction to be completed by 3Q22.
Establishing new collaborative relationships
We estimate the purchase could boost PREIT’s Japan portfolio to c.S$755m, making up c.34% of its total assets under management (AUM). Under the terms of the agreement, PREIT will take over the properties’ existing lease agreements with Zen Wellness Co Ltd (Zen Wellness) which have a balance lease term of 29 years. This will likely extend its portfolio weighted average lease expiry (WALE) from 17.05 years to 17.21 years, thus improving its income resiliency. This is PREIT’s first working relationship with Zen Wellness and would enable the REIT to establish a long-term strategic alliance for further tenant diversification in Japan. According to management, Zen Wellness was established in Nov 2013 and currently operates 11 nursing homes in the Kanto/Greater Tokyo region.
We estimate DPU boost of 0.02-0.25%
PREIT expects to fund the acquisition with ¥ debt, to provide a natural hedge for foreign exchange risks arising from ¥ denominated assets. According to management, the purchase will likely raise PREIT’s proforma leverage ratio from 32.5% (as at end-Jun 2022) to 34.3%. We expect the deal to be DPU accretive. Based on the stated net income yield of 5.2%, we estimate the additional contributions could raise our FY22-24F DPU estimates by 0.02-0.25%. Furthermore, 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.
Reiterate Hold rating
We raise our FY22-24F DPU estimates by 0.019-0.254% to factor in the new income streams. Our DDM-based TP remains unchanged at S$5.06. With its robust balance sheet, PREIT is well-placed to continue tapping into more inorganic growth opportunities, in our view. With limited near-term upside, 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.