Downside risk to revenue growth protected. PREIT is the only REIT that pegs its rental revenue growth to CPI, with a minimum growth of 1%. In an economic downturn where CPI is negative, PREIT’s rental revenue from its Singapore properties would still grow by the minimum 1%. Of its 10 Japanese properties, the lease structures for three nursing homes are linked to Japan’s inflation, while rental from the other Japanese assets would be reviewed every few years, to reflect market rates. The agreement with lessees is that rent revision would be only take place, if the market rates are higher. Otherwise, rentals will remain unchanged. Hence, its unique lease structure offers revenue downside protection, and provides a stable dividend payout.

No refinancing risks for the next 24 months. There is no refinancing risk in the next 24 months, as the next refinancing requirement will be in 2011. Its low gearing of 23% at end FY08 allows PREIT with headroom to take on debt to expand its portfolio through acquisitions. It would be able to take on another S$300m debt before it reaches a gearing of 40%, and S$990m before it hits 60% gearing. PREIT’s current portfolio consists of 80% of Singapore assets and 20% Japan assets. Management highlighted that Singapore will remain its core focus, but it does not rule out seeking acquisitions in countries like China, India or Australia, for mature assets that are yield accretive.

We have a target price of S$1.01 for PREIT. Our DDM value assumes no new acquisitions and cost of equity of 8.7%. At current levels, PREIT is trading at 0.6x P/B and FY09F dividend yield of 10.5%. We feel that PREIT deserves a premium over peers, for its defensive nature and the revenue downside protection that its lease structure offers. We initiate coverage with a BUY recommendation.