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First REIT buys hospital at 17% discount to valuation.

Thursday, March 13, 2014

I like buying properties at a discount to valuation but, in reality, such offers are hard to come by. In the world of S-REITs, however, it has happened before and it has happened again as First REIT is going to buy Siloam Hospital Purwakarta at a 17.3% discount to valuation. The price tag? S$31 m.

The hospital has two parts, a 3 storey building which was completed in 2005 and a 5 storey building which was completed in 2008. Major refurbishment is now underway and is expected to be completed by late 2014. The good news is that all refurbishment work will be paid by the seller. So, First REIT will get a newish property. No additional cost.

First REIT will pay S$26.5 million using debt and issue new units to the seller equal to a value of S$4.5 million. This is rather innovative. It makes the purchase financially less demanding. Gearing level will then rise by a more modest percentage from 32.3% to 33.9%, post acquisition.

This purchase will increase future income for First REIT and the 15 years Master Lease agreement will provide stability. A 6 months rental deposit will also be collected.

Now, as investors for income, we are probably more interested in how DPU will be affected. First REIT will have more units in issue after this and also a higher debt burden. So, both NAV per unit and DPU will only see very marginal increases, post acquisition. So, don't go spending any money on a lion dance troupe.

Everything else remaining equal, I would say that First REIT is a fairly good investment for income but, like the management of the REIT, I would like to buy stuff at a discount to NAV and the REIT's NAV is currently about 97c per unit.

See announcement: here.

Related posts:
1. A simple way to a double digit yield.
2. Distribution reinvestment plan: First REIT.


Anonymous said...

Hi AK,

Any idea why First REIT was able to secure such a good deal? As you know the saying "if the deal is too good to be true, it very likely is" ;P

Leonard Ng said...

Thks for sharing! in my opinion, considering the rupiah forex risks plus almost insignificant npi and nav increase....coupled with dpu dilution with new units...I wonder if its really worth the investment. Wish there is more information about the hospital's historical earnings.

AK71 said...

Hi aceirus,

Well, if it were not at a discount to valuation, it would not have been a worthwhile buy, considering the marginal benefits. So, it is probably the result of some negotiation.

Taking into consideration all the numbers and not just the 17% discount to valuation, the deal is not too good to be true. It is only fairly good. ;p

AK71 said...

Hi Leonard,

First REIT collects rental in S$. So, there is no FOREX risk for unit holders.

NPI will have quite a significant increase. NAV's increase is less significant since the purchase is largely funded by debt. DPU will bump up a little even with more units in issue. So, the matter of dilution has been diluted. ;p

I feel that this shows how it is getting harder for the REIT to find great value acquisitions now.

SnOOpy168 said...

Thankfully, my hunch is right. My 1st DRP at $1.0163 and prices has gone north... ^-^

AK71 said...

First REIT says it has agreed to buy Siloam Hospitals Purwakarta in West Java, Indonesia for $31 million.

Including professional and other expenses, the acquisition cost is expected to be $31.88 million.

Independent valuations of the property were at $31 million, $37.47 million and $37.50 million.


Tan said...

Trying to calculate the upcoming DPU for Q1 2014 and Q2 2014

Q1 2014
Total units will be 711,623,400 after including Management Fees and DRP, let us taking Q4 distributable income $13,955,000,
DPU will be 1.96 cents (not too bad compare to 1.97)

Q2 2014
Newly acquired Siloam Hospitals Purwakarta, $26.5mil cash + 4.5mil units, base on the announcement, it will contribute about $1.66mil annually (quarterly $416k)
Total Unit: 716,123,400 (711,623,400+4,500,000)
Assume Performance Fees in units: 1,500,000
Total Enlarged Units: 717,623,400
Distributable income: $14,371,500
Then, the DPU will be $0.02 (amount is much bigger than previous Quarter)

The only risk is cash on hand will be decreased significantly to $2.8mil (not even deducting the Q4 cash dividend which amounted approximate $10mil).

Another private placement or right seem to be quite near.

p/s: Do let me know if I got make any incorrect calculation.

AK71 said...

Hi Gregg,

Thanks for this. A back of the envelope calculation gave me similar numbers. :)

First REIT is still trading above NAV at the moment. So, if it wants to do some form of equity fund raising, it should do it soon.

Tan said...

I wish to get the right ....Please come asap ....

Tan said...

One thing I am not understand why they want to deplete their cash ......seller need the cash?

Plus, DRP only issued 3mil units and probably only retail investor opt for it,looks like Lippo wanted get the cash rather than more units .. ...

Sounds fishy ...

AK71 said...

Hi Gregg,

For me, the choice between DRP or cash is clear. Unless there is a chance to benefit from arbitrage, it is always cash for me. ;p

Tan said...


Spotted one red flag for Sarang Hospital while reading its Annual Report. The valuation price for Sarang hospital is actually keep dropping from 2011: $17mil, 2012:$14mil, then, 2013: $7.9mil

I have posted some questions to its IR, hope to get reply soon.

1) Why First Reit using cap rate 9% for year 2013 but 13% for year 2012
2) FY 2013 Annual Report Page 78: Note 12: *The higher the capitalization rate, the lower the fair value", suppose your carry value should be higher since you have reduced the cap rate to 9% but it wasn't.
3) FY 2013 Annual Report Page 26, stated Annual Rental $1.6mil for Sarang Hospital, is this figure including or excluding the operating expenses. It would be good if you can provide the actual rental number.
4) My personal calculation on the Sarang rental,
Rental=Fair Value (SGD) * 9%
=7.966mil/ 1.25 (Exchange Rate) * 9%
=573k USD (---> Is this number closer to your number?)
5) Can I conclude that the rental for Sarang hospital is actually deteriorated over the years since the carry value keep dropping


AK71 said...

Hi Gregg,

Very good questions. Thanks for sharing with us here. Hope they get back to you soon. :)

Tan said...


The tenant of Sarang Hospital really got problem...

Below is the reply:
· As the Vendor and Guarantor for the Master Lease Agreement encountered unforeseen financial difficulties, he was unable to fulfill his contracted rental obligation.

· Hence, through the Valuer’s (CBRE) independent assessment and judgement, it was more appropriate to value Sarang Hospital on a “market rental basis”, ignoring the contracted rental in the Master Lease Agreement which was guaranteed by the Vendor.

· Due to the lack of similar comparables in the market, the Valuer has adopted a “proxy approach” to determine the market rent. Apart from the Valuer’s investigations into rentals achieved with comparable properties and within the broader market, the Valuer has relied on anecdotal evidence which include their discussions with active brokers, investment and fund managers as well as fund investors.

· They have also considered the relativity of asset class pricing. This includes the relativity of the healthcare real estate sector against other comparable markets, and the relativity of the healthcare real estate sector against other asset classes within the relevant market.

AK71 said...

Hi Gregg,

Your diligence paid off. :)

Actually, when First REIT went and bought Sarang Hospital, I wondered why did they do that because with only one property, how could they achieve economy of scale? Better that they concentrate on properties in Indonesia and Singapore.

"When the REIT acquired its first property in South Korea, freehold Sarang Hospital, many were optimistic. However, the acquistion increased the REIT's gross revenue by 6.3% while increasing its operating expenses by 51.1%. Expectations for a higher DPU due to the acquisition has yet to be met." Source: First REIT: 1Q 2012.

Seems like they got thrown a lemon. -.-"

I guess the only thing they can do now is to do damage control as best as they could. :(

Capricon said...

AK, Gregg,
Is this something that we should worry about before investing in FIRST REIT ?
Apparently it is a default by the Koreans, puzzle that this can happen in Korrea which I thought they have better policies and controls.


Tan said...

Trying to Google search any related news on Sarang hospital but no result returned.

I checked 2012 AR, rental payment had no issues.

AK71 said...

Hi Gregg and Capricon,

We should be getting the 2013 AR soon. :)

Tan said...


AR2013 already available, you can refer to page 90 (note 23): "Impairment allowance on trade receivables"

I will be attending AGM next week to see any update.

AK71 said...

Hi Gregg,

You got yours already? I guess mine will be in the mail tomorrow then. Thanks for the heads up. :D

Tan said...

Ya,i got it last Thursday ...wonder why urs take so long... :)

AK71 said...

Hi Gregg,

And Singpost is on my watchlist too. -.-"

Tan said...

Signpost below $1 has better margin of

AK71 said...

Hi Gregg,

Wah! You expecting Singapore's economy to sink really badly, I guess. haha... ;p

Tan said...

Hi AK,

Please see below update: (was captured during the conference call, I don know should I get the permission from First Reit before posting this,hope wont get any lawsuit.. :) )

If you read up the First Reit 2013 AR, you will notice the below:

First Reit 2013AR: Page 53, it showed the property value dropped by half to 7mil
First Reit 2013AR: Page 90, Impairment allowance on trade receivables (about 2mil for Sarang Hospital)

I have the call with their CFO Victor. He explained to me the background.

First Reit bought Sarang hospital from Dr. A and leased it out to Dr. B, the initial deal very attractive due to rental commitment from Dr. A (~50%). Unfortunately, Dr. A went bankruptcy last year and could not make the payment that is why First Reit written off the income. Then, First Reit renegotiate lease contract with Dr. B and probably only 50% of original contract value. This explained why the property value dropped by half.

Dr.A and Dr.B are for explaination as i could not remember the exact name during the call

AK71 said...

Hi Gregg,

Thank you very much for sharing this and throwing light on the matter. Much appreciated.

This is a risk in the business of landlording. If tenants are unable to pay, we will have to look for new tenants.

However, in this case, I believe that not enough due diligence was done by First REIT in the purchase of Sarang Hospital. Till today, I still wonder why they made the purchase since it would be their one and only property in Korea.

Was the guaranteed rental offered by the seller (Dr. A) too optimistic? Did First REIT compare the going rates in Korea to see if it was realistic and sustainable? If Dr. B could only pay 50% of what Dr. A was paying to First REIT, how could Dr. A pay so much in the first instance? -.-"

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