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First REIT’s Latest Addition to Its Healthcare Portfolio

First Real Estate Investment Trust (SGX: AW9U), or First REIT for short, announced on 13 March 2014 that it has entered into a conditional sale and purchase agreement with PT Purimas Elok Asri (“PT PEA”) for the proposed acquisition of Siloam Hospitals Purwakarta at a price of S$31.0 million.

First REIT happens to be Singapore’s first healthcare REIT and owns a portfolio of 14 healthcare-related properties with 10 located in Indonesia, three in Singapore and one in South Korea.

Introduction of Siloam Hospitals Purwakarta (SHPW)

Comprised of interconnected three-storey and five-storey hospital buildings, SHPW is strategically located in a growing niche market in Purwakarta, West Java, an area within Indonesia with a population of almost 1 million.

While SHPW is currently undergoing major refurbishment works, the bulk of it has been completed in the first quarter of 2014, with the remaining expected to be done in September this year.

Similar to the existing hospital assets of First REIT, SHPW is also equipped with advanced medical equipment and has 250 vehicle parking spaces. The hospital, with a gross floor area of 8,254 square metres and maximum capacity of 203 beds, is a Centre of Excellence for emergency, trauma and caters to patients under the Health Ministry‟s Social Security Management Agency Program. Currently, SHPW has an operational capacity of 100 beds.

Highlights of the Deal

According to the REIT’s announcement, Mr Albert Cheok, Chairman of First REIT’s manager (Bowsprit Capital Corporation Limited) is rather positive on the acquisition. Let’s take a look at a quick takeaway of why Cheok feels so:

1. Attractive Location – The REIT’s manager believes that SHPW is set to benefit from the urbanization trend in Purwakarta; that’s because Jakarta is “densely populated and saturated, leading to the gradual shift towards nearby cities like Purwakarta and Bandung”. Purwakarta is also located between Jakarta and Bandung, which makes it a very attractive destination for residents from cities like Indramayu and Subang, who previously had to travel long distances to receive good quality healthcare services.

2. Good Valuation & Yield – SHPW will be acquired at an attractive discount of 17.3% from its average appraised value of S$37.5 million that’s calculated by independent valuation firms. With an initial annual base rent of S$3.4 million and a current rental yield of approximately 11%, SHPW is yield accretive for First REIT as compared to its existing portfolio.

3. Extension of Asset Base – This acquisition will expand First REIT’s portfolio to 15 properties and increase the value of its asset base by 3.8% from S$1.05 billion to S$1.09 billion. There are also a number of improvements made to First REIT’s operational metrics after the acquisition: 1) The weighted average lease to expiry would be extended slightly by 1.8% to 11.5 years and; 2) The number of hospital beds would grow by 8.8% from 2,318 beds to a potential 2,521 beds.

Method of Financing

The total purchase consideration of S$31 million will be split into 2 portions. S$26.5 million will be paid in cash while the remaining S$4.5 million will be satisfied by way of issuance of new units in First REIT.

The issue price for the new units will be determined based on the 10-Day volume weighted average price of First REIT’s units immediately preceding the date of completion of the SHPW acquisition while the cash portion of the acquisition price is expected to be financed via a drawdown from First REIT‟s committed debt facility.

Valuation

First REIT last changed hands at a price of $1.07 and its NAV stands at S$0.966, implying a premium of 10.76% above its NAV. It offers a distribution yield of 7.028%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.