The management stated its intention to reduce tenant concentration risk from PHL from the current 80% to about 40-50% in the long term and is open to investing in more nursing homes, medical units or funds in Japan, Australia, Singapore and Malaysia, possibly adopting the similar inflation-linked leasing structures. AEIs are also advancing, with indicative yield of more than 10%.
Fitch ratings downgraded PREIT’s long-term issuer default rating and $500m MTN program to ‘BBB’ to ‘BBB+’ on weak credit profile of sponsor, Parkway Holdings (PHL), despite PREIT’s good interest coverage, low debt cost and refinancing risk, and stable rental mechanism. PHL owns Parkway Hospital Singapore Pte Ltd, the operator of PREIT’s hospitals in Singapore. However, we believe the negative has been priced in.
The credit-rating downgrade centres on whether PHSPL is able to service rental payments to PREIT, should credit quality of PHL deteriorate. We believe that such concerns are overplayed as the master lease agreement confers PREIT the right as a creditor to claim the rental guaranteed for the remaining lease period in the event PHL goes into financial distress.
Our target price has been raised to $1.17 as we roll forward our DDM valuation to FY10F. The stock price has increased 24% over the last three months since our initiation despite the premium over S-REITs but has lagged the FSTREI by 14%. Entry of new shareholders from Europe, US and Asia observed by the management during this period affirms our belief in the long term growth potential of PREIT. Reiterate Buy.
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