First REIT

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First Reit to buy hospital property in West Java for $31m

Published on Mar 13, 2014

By Fiona Chan

First Real Estate Investment Trust (Reit), a Singapore-listed healthcare Reit, has agreed to buy a hospital property in West Java, Indonesia, for $31 million.

It will buy Siloam Hospitals Purwakarta from PT Purimas Elok Asri, bringing its portfolio to 15 properties worth $1.09 billion.

The price represents a discount of 17.3 per cent from the higher of two independent valuations obtained for the property, said First Reit's manager Bowsprit Capital Corporation on Thursday.

First Reit will pay for the acquisition partly through debt and partly by issuing new units. It will pay $26.5 million in cash and the remaining $4.5 million in new units.



Any thoughts on this acquisition?

When it says, issuing new units, does that mean placement or will there be a rights issue?

it is more like a placement. even after taking consideration of the issuing of new units, the yield is accretive but not alot.

based on 1) it is yield accretive 2) purchased at a discount to valuation (but based on my observations, most of times such big purchases are usually at a discount) i think this purchase looks good.

however, need to manage the currency risk carefully as it would affect gearing indirectly as any depreciation in the rupiah would mean a lower NAV. If NAV drops gearing will shoot up. With its gearing at over 30% currently (based on my memory), it is likely that they may ask for cash in the near future.

(13-03-2014, 04:27 PM)lvpierre Wrote: it is more like a placement. even after taking consideration of the issuing of new units, the yield is accretive but not alot.

based on 1) it is yield accretive 2) purchased at a discount to valuation (but based on my observations, most of times such big purchases are usually at a discount) i think this purchase looks good.

however, need to manage the currency risk carefully as it would affect gearing indirectly as any depreciation in the rupiah would mean a lower NAV. If NAV drops gearing will shoot up. With its gearing at over 30% currently (based on my memory), it is likely that they may ask for cash in the near future.

Since the properties rental revenue is based on SGD, won't its valuation be based on SGD as well and hence unaffected by forex movements ?

(13-03-2014, 05:09 PM)Nick Wrote:

(13-03-2014, 04:27 PM)lvpierre Wrote: it is more like a placement. even after taking consideration of the issuing of new units, the yield is accretive but not alot.

based on 1) it is yield accretive 2) purchased at a discount to valuation (but based on my observations, most of times such big purchases are usually at a discount) i think this purchase looks good.

however, need to manage the currency risk carefully as it would affect gearing indirectly as any depreciation in the rupiah would mean a lower NAV. If NAV drops gearing will shoot up. With its gearing at over 30% currently (based on my memory), it is likely that they may ask for cash in the near future.

Since the properties rental revenue is based on SGD, won't its valuation be based on SGD as well and hence unaffected by forex movements ?

you make a good point. if the rental is in SGD and the valuation is done by DCF, then it is possible that the valuation be based on SGD. But is this the case for the indonesian ppties? Lippomall reit NAV drops due to revaluation loss due to forex movements. why didnt Lippomall consider doing it?

(13-03-2014, 07:02 PM)lvpierre Wrote:

(13-03-2014, 05:09 PM)Nick Wrote:

(13-03-2014, 04:27 PM)lvpierre Wrote: it is more like a placement. even after taking consideration of the issuing of new units, the yield is accretive but not alot.

based on 1) it is yield accretive 2) purchased at a discount to valuation (but based on my observations, most of times such big purchases are usually at a discount) i think this purchase looks good.

however, need to manage the currency risk carefully as it would affect gearing indirectly as any depreciation in the rupiah would mean a lower NAV. If NAV drops gearing will shoot up. With its gearing at over 30% currently (based on my memory), it is likely that they may ask for cash in the near future.

Since the properties rental revenue is based on SGD, won't its valuation be based on SGD as well and hence unaffected by forex movements ?

you make a good time. if the rental is in SGD and the valuation is done by DCF, then it is possible that the valuation be based on SGD. But is this the case for the indonesian ppties? Lippomall reit NAV drops due to revaluation loss due to forex movements. why didnt Lippomall consider doing it?

Lippomalls REIT rental revenue is in Rupiah so the property valuation is done in Rupiah hence the volatility in both operating income and asset valuation. You won't expect the stores in Indonesia to pay rent to the mall owners in SGD. On the other hand, First REIT Hospitals are on 15 + 15 years lease to Lippo Karawaci with SGD based rent.

(13-03-2014, 07:05 PM)Nick Wrote:

(13-03-2014, 07:02 PM)lvpierre Wrote:

(13-03-2014, 05:09 PM)Nick Wrote:

(13-03-2014, 04:27 PM)lvpierre Wrote: it is more like a placement. even after taking consideration of the issuing of new units, the yield is accretive but not alot.

based on 1) it is yield accretive 2) purchased at a discount to valuation (but based on my observations, most of times such big purchases are usually at a discount) i think this purchase looks good.

however, need to manage the currency risk carefully as it would affect gearing indirectly as any depreciation in the rupiah would mean a lower NAV. If NAV drops gearing will shoot up. With its gearing at over 30% currently (based on my memory), it is likely that they may ask for cash in the near future.

Since the properties rental revenue is based on SGD, won't its valuation be based on SGD as well and hence unaffected by forex movements ?

you make a good point. if the rental is in SGD and the valuation is done by DCF, then it is possible that the valuation be based on SGD. But is this the case for the indonesian ppties? Lippomall reit NAV drops due to revaluation loss due to forex movements. why didnt Lippomall consider doing it?

Lippomalls REIT rental revenue is in Rupiah so the property valuation is done in Rupiah hence the volatility in both operating income and asset valuation. You won't expect the stores in Indonesia to pay rent to the mall owners in SGD. On the other hand, First REIT Hospitals are on 15 + 15 years lease to Lippo Karawaci with SGD based rent.

thanks for the inputs. will the forex movement in one way or another leads to the SGD based rent be negotiated downwards? i mean if i am Lippo Karawaci, why would i want to continue to pay increasing higher rental rate than others (assumming rupiah continue to depreciate).

(13-03-2014, 05:09 PM)Nick Wrote: Since the properties rental revenue is based on SGD, won't its valuation be based on SGD as well and hence unaffected by forex movements ?

I'm not sure how these indonesian hospitals are valued officially but here's my simplistic thinking:

Let's suppose nothing happens in indonesia and the SGDIDR for some irrational reason goes up i.e. sgd appreciate and idr depreciate.

the valuation in IDR for the building should be somewhat constant since nothing is happening in indonesia so patients are still paying in IDR in expected volume (so DCF valuation is constant) and cap rates are still consistent since the property market is not under stress (so cap rate method is constant)

The hospital operator receives medical payments in IDR and pays rental to REIT in SGD, as well it borrows in SGD.

If the SGDIDR goes up, the bloke has less sgd equivalent to receive and the same amt in SGD to pay - bloke is in trouble.

If he intends to hedge, either thru a x-ccy swap or thru a simple NDF hedge, the carry on these instruments (basically IDR rate-SGD rate+basis so >6%) is enough to kill the deal looking at the yields offered, so i think the bloke has to be unhedged.

So somewhere in the background is an implicit guarantee from the operator to take the FX risk. The bloke should have also calculated a range of FX for which the paying of SGD rent is sustainable, but its tough to imagine he can guarantee that for an extended period of upward movement in FX.

So i think the valuation of these in SGD should be something like valuation in IDR + credit risk of operator + ability to obtain sgd funding forever etc.

(13-03-2014, 07:14 PM)lvpierre Wrote:

(13-03-2014, 07:05 PM)Nick Wrote:

(13-03-2014, 07:02 PM)lvpierre Wrote:

(13-03-2014, 05:09 PM)Nick Wrote:

(13-03-2014, 04:27 PM)lvpierre Wrote: it is more like a placement. even after taking consideration of the issuing of new units, the yield is accretive but not alot.

based on 1) it is yield accretive 2) purchased at a discount to valuation (but based on my observations, most of times such big purchases are usually at a discount) i think this purchase looks good.

however, need to manage the currency risk carefully as it would affect gearing indirectly as any depreciation in the rupiah would mean a lower NAV. If NAV drops gearing will shoot up. With its gearing at over 30% currently (based on my memory), it is likely that they may ask for cash in the near future.

Since the properties rental revenue is based on SGD, won't its valuation be based on SGD as well and hence unaffected by forex movements ?

you make a good time. if the rental is in SGD and the valuation is done by DCF, then it is possible that the valuation be based on SGD. But is this the case for the indonesian ppties? Lippomall reit NAV drops due to revaluation loss due to forex movements. why didnt Lippomall consider doing it?

Lippomalls REIT rental revenue is in Rupiah so the property valuation is done in Rupiah hence the volatility in both operating income and asset valuation. You won't expect the stores in Indonesia to pay rent to the mall owners in SGD. On the other hand, First REIT Hospitals are on 15 + 15 years lease to Lippo Karawaci with SGD based rent.

thanks for the inputs. will the forex movement in one way or another leads to the SGD based rent be negotiated downwards? i mean if i am Lippo Karawaci, why would i want to continue to pay increasing higher rental rate than others (assumming rupiah continue to depreciate).

The rent is fixed in SGD so there is no room for negotiations throughout the lease term.

End of the day, the lessor is also the developer. Could be a case of selling low, renting low.

(Not Vested)