First REIT: Reply from the management.

A reader, Gregg, first shared his concerns regarding Sarang Hospital in First REIT's portfolio here in the comments section: Gregg's comment.

Sarang Hospital

Another reader wrote in with a list of questions for the REIT's management and shared these with me in an email. Here is the email with the replies from the management in red.

1. Noted that there is impairment provided in subsidiary of S$8,136,000 in the statement of total return. Could you advise me the reason of this impairment being provided and which subsidiary? Understand usually DCF was prepared to determine whether impairment is necessary. Since the impairment is being provided, does that means that the present value of the future cash flow is lower than the carrying amount of the investment?

 

We have made some provisions for impairment to our investment in South Korea, Sarang Hospital.

This S$8.1m is the impairment provided at Trust level for Kalmore Investments Pte Ltd, the holding company of Kalmore (Korea) Limited which owned Sarang Hospital. 

 

2. Under note 9 of the financial statements, there is deferred tax income recognised relating to changes in fair value of investment properties of S$11,667,000 despite the fact that there is increase in fair value of investment properties of S$61,334,000 (net) under note 12. Could you advise which property does the S$11m relating to? 

 

The write back of the deferred tax relates to the Indonesia properties mainly due to lower building reinstatement values as provided by the independent valuers, as compared to the net book value of the properties.

 

3. In note 14 of the financial statements, an impairment allowance is provided of S$2.165 million. Please advise which property it is related to and what are the Trust's action to recover this debt. Noted that there was also provision made in prior year of S$547k, is it relating to the same debtor? 

 

The impairment allowance of S$2.165 million was made for Sarang Hospital.  We have taken legal actions in the past two years to recover the debt from the vendor.

 

There is no provision of S$547K make in the prior year however the provision of S$567K was made for amount due (intercompany balance) from Kalmore Investment Pte Ltd (Subsidiary of First REIT) at Trust Level in FY2013.

 

4. Noted that the fair value of Sarang Hospital decreased to S$6.3m compared to purchase price of S$13m. Please advise the reason of 50% decrease in fair value. 

 

·         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.

I suppose that the curious decision of buying a lone property in South Korea has turned out to be a bad one. Fortunately, it should not have a big negative impact on the REIT as a whole.

Related post:
First REIT: Purchase in South Korea.
(Dated 9 July 2011.)