OREANDA-NEWS. Fitch Ratings has affirmed Parkway Life Real Estate Investment Trust's (PREIT) 'BBB' Long-Term Foreign-Currency Issuer Default Rating (IDR) and the 'BBB' rating on PREIT's SGD500m medium-term note (MTN) programme. The Outlook on the IDR is Stable.

KEY RATING DRIVERS

Strong Demand, Asset-Quality: PREIT's rating is driven by the strong demand for the services of its hospitals and elderly care homes, and supported by its robust asset quality. Demand is supported by the non-discretionary nature of healthcare and elderly care services, as well as an ageing population in PREIT's core markets of Singapore and Japan. PREIT's Singaporean operations generated 63% of its 2015 revenue. Two of its three Singapore hospitals are leading private healthcare institutions in the country, which are also popular with international patients from Asia.

Robust Leases, Financial Profile: PREIT benefits from stable and long term revenue visibility, with weighted average lease maturity of over nine years and downside protection (including contractual "up-only" annual rental reversions) on 93% of its revenues at end-2015. Its Singapore hospitals are leased out on a "triple-net" basis, where the tenant is responsible for property tax, property insurance, and property operating expenses, resulting in strong EBITDA margins to PREIT. PREIT's financial profile is strong, with net debt/investment properties at 35% and solid interest coverage of 9.1x at end-2015. The rating also reflects PREIT's moderate operating scale compared with higher-rated REITs globally, and the revenue concentration to Singapore.

Strong Performance to Continue: We expect PREIT to continue to perform well in terms of earnings growth and stable EBITDA margins, supported by its latest acquisitions. Revenue increased by 8.6% in 1Q16 and 2.3% in 2015, supported by its portfolio expansion in Japan. EBITDA margin remains solid at more than 80%, supported by triple-net leases on the bulk of its portfolio. The ratio of net debt/investment properties increased to 35% in 2015 from 29% in 2014; but this is below the 40%-45% threshold for the current rating. PREIT's FFO-adjusted net leverage was 7.5x in 2015, which is high compared with that of most of its rating peers. This is because of the lower capitalisation rates of Japanese assets that PREIT has been investing in; but this is counterbalanced by the lower cost of Japanese yen-denominated debt used to fund these purchases. Consequently FFO fixed-charge coverage remained robust at 9.1x at end-2015.

Ongoing Portfolio Expansion: PREIT's paid SGD13.6m for a Japanese elderly-care facility in 1Q16, and we expect PREIT to continue to expand its portfolio over the medium term via debt. The trust has room to add more debt as its gearing (debt/total assets) of 36.4% at end-1Q16 was below the regulatory limit of 45%. At end-1Q16 PREIT's portfolio comprised 48 properties leased to 26 tenants. Most properties are in Japan, with three hospitals in Singapore and strata-titled units of Gleneagles Intan Medical Centre in Malaysia. In comparison, PREIT had only its three Singapore assets during its IPO in 2007.

Strong Sponsor / Lease Counterparty: Malaysia's IHH Healthcare Berhad (IHH) owns 36% of PREIT; its subsidiary Parkway Hospitals Singapore Pte Ltd operates PREIT's Singapore hospitals. IHH is a large regional healthcare services provider with a strong credit profile. At end-2015 it owned or operated 49 healthcare facilities with nearly 10,000 licensed hospital beds across nine countries. It has a further 3,000 new licensed beds in the pipeline. IHH generated EBITDA of around USD775m in 2015.

Manageable Market Risk: PREIT has a net income hedge on its Japanese yen-denominated income through to 1Q20, which mitigates the foreign-currency risk on its earnings. PREIT also currently hedges most of its floating interest-rate borrowings into fixed-rates. At end-1Q16 about 98% of its interest payments were on a fixed-rate basis, up from the 95% at end-2015.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for issuer include:

- Revenue to grow by 3% in 2016 assuming no further acquisitions after 1Q16

- EBITDA margin to remain above 80%

RATING SENSITIVITIES

Positive: No upgrade is expected over the medium term, due to PREIT's smaller scale and limited asset diversity than its higher-rated peers.

However, over the longer term, developments that may, individually or collectively, lead to positive rating action include:

- Greater property portfolio size and asset diversity in line with higher-rated peers, while maintaining a strong lease structure with high downside protection and EBITDA margin sustained over 75%

- Sustained low interest-rate risk, with FFO fixed-charge coverage sustained above 4x while maintaining an appropriate level of fixed-rate debt

- FFO-adjusted net leverage sustained below 6x, and loan-to-value ratio sustained below 35%-40%

Negative: Developments that may, individually or collectively, lead to negative rating action include:

- Heightened interest-rate risk, as evident by FFO fixed-charge coverage sustained below 4x

- FFO-adjusted net leverage sustained above 6.5x, and loan-to-value ratio sustained above 40%-45%

- A significant weakening in PREIT's lease structure, such as shorter tenors and less downside protection, and EBITDA margins sustained below 75%

- Unencumbered assets/unsecured debt sustained below 2x could lead to a downgrade of the senior unsecured rating on PREIT's MTN programme