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.