We initiate coverage on PREIT with a BUY recommendation. PREIT is Asia’s largest healthcare REIT in Asia, mainly deriving its revenue from three hospital properties in Singapore, with some exposure to the mature healthcare market in Japan through the ownership of nine nursing homes and a pharmaceutical product distributing and manufacturing facility.

The sponsor, Parkway Holdings Limited (PHL) has a master lessee for the three Singapore hospitals for 15 years, with a minimum rental growth of CPI+1%. Two nursing homes in Japan also have inflation-linked lease structures, while 7 have back-up operator agreements. The average tenure of the Japan assets is 15-19 years.

The gearing of 23.3% is below the sector average of 30%. The weighted average tenor of its S$252m in debt is 2.8 years; the bulk of which is due only in 2011. Its cost of debt is fixed for the next three years at a relatively low rate of 2.85%. PREIT will emerge at the end of the downturn with ample debt capacity to buy assets in its target markets.

PHL is the largest private hospital operator in Asia in terms of revenue and has full or partial interests in hospitals and clinics in the region. PREIT has the first refusal rights to these assets, giving them a balanced choice of its sponsor’s assets as well as third-party assets in the mature markets like Japan and Australia.

Our target price of $0.94 is derived based on the dividend discount model (DDM) at a cost of equity of 9.7% and a terminal growth rate of 2.4%. The key risk is the reduced ability for PHL to pay rental commitments to PREIT in a sustained downturn. PREIT is trading at a P/NAV of 0.6x, showing a well-deserved premium over its smaller peer. We initiate coverage on PREIT with a BUY.