OREANDA-NEWS. Fitch Ratings has affirmed Parkway Life Real Estate Investment Trust's (PLIFE) 'BBB' Long-Term Foreign-Currency Issuer Default Rating (IDR) with a Stable Outlook. The agency has also affirmed PLIFE's long-term senior unsecured rating at 'BBB'.

KEY RATING DRIVERS
Resilient Demand, Asset Quality: PLIFE's ratings are driven by the defensive nature of its earnings across economic cycles; the quality of its assets and robust lease structures; as well as its strong balance sheet. PLIFE continues to post healthy organic earnings growth despite macroeconomic pressure in most of its markets. Its performance is supported by robust demand for private healthcare in Asia, driven by rising affluence and an ageing population.

Defensive Lease Structure: PLIFE's has a weighted average lease expiry of over nine years, with over 90% of the portfolio subject to "up-only" annual rental revisions, providing a strong hedge against income volatility. Furthermore, PLIFE's Singapore assets are master-leased on a "triple-net" basis, whereby the lessee is responsible for paying property tax, property insurance, and operating expenses for these assets.

Healthy Financing Flexibility: We expect financing flexibility to be supported by steady organic earnings growth over the medium term, so long as any new investments are yield-accretive to the portfolio. PLIFE's financing flexibility - as measured by its net debt/investment property ratio (LTV), FFO fixed-charge coverage, and unencumbered assets/unsecured debt ratios - stood at 29%, 9.3x, and 2.6x, respectively, at end-2014. Fitch estimates that PLIFE's financial metrics could withstand an interest-rate/cap-rate shock of up to 100bp and still remain appropriate for its 'BBB' rating.

Concentration Risk Mitigated: Around 60% of PLIFE's revenue stems from two of its three Singapore hospitals, run by Parkway Hospitals Singapore - a subsidiary of IHH Healthcare Berhad (IHH, 36% ownership of PLIFE). IHH is in turn 44%-owned by Khazanah Nasional Berhad, which is an investment fund sponsored by the state of Malaysia (A-/Stable). The high concentration of assets and lease counterparty risk is mitigated by the high quality of the facilities and the difficulty in replicating them, as well as the strength and expertise of IHH as a leading healthcare services provider.

Strong Sponsor/Lease Counterparty: PLIFE's sponsor and key lease counterparty IHH owns and/or operates 39 hospitals in 10 countries. It has over 7,000 licensed beds, and over 3,000 more in the pipeline. IHH's revenue grew by 9% to MYR7.3bn (around USD1.9bn) in 2014, and EBITDA by 17% to MYR1.9bn. Its balance sheet was strong, with net debt/EBITDA of less than 1x. Fitch views PLIFE's association with IHH as a credit strength, given that this provides the REIT with the opportunity to expand its portfolio via access to a pipeline of quality, well-managed properties.

Currency and Interest-Rate Risk: Most of PLIFE's debt and around 40% of its earnings are denominated in Japanese yen. Foreign-currency risk is mitigated by the use of forward contracts to hedge yen-denominated post-tax profit, and the contracts are effective up to 1Q20. . PLIFE's weighted-average lease maturity of nearly 10 years is considerably longer than its weighted-average debt maturity of nearly four years. The basis risk that could arise as a result is mitigated by the "up-only" annual rent revisions on more than 90% of its income. Furthermore, at end-March 2015, PLIFE paid fixed interest costs on 82% of its debt, and targets to keep this mix at a 50% minimum.

Adequate Liquidity: PLIFE had unrestricted cash reserves of SGD20m at end-March 2015, after spending SGD96m on acquiring several properties in Japan in 1Q15. By comparison, debt due in 2015 was just SGD4.4m, and Fitch estimates that PLIFE will generate negative FCF (defined as operating cash after capex and dividends but before debt repayment) of around SGD3m for the remainder of 2015.

RATING SENSITIVITIES
Positive: No upgrade is expected over the medium term, due to PLIFE's smaller scale and limited asset diversity than its higher-rated peers:
- 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 margins 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 LTV sustained below 35%-40%
- Unencumbered assets/unsecured debt sustained above 2x.

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Heightened interest-rate risk, as evident from FFO fixed-charge coverage sustained below 4x
- FFO-adjusted net leverage sustained above 6.5x, and LTV sustained above 40%-45%
- Unencumbered assets/unsecured debt sustained below 2x
- A significant weakening in PLIFE's lease structure, such as shorter tenors and less downside protection, and EBITDA margins sustained below 75%.