First Reit defends Siloam Hospitals Surabaya divestment as investors question rationale, benefits

UNITHOLDERS of First Reit : AW9U 0% have raised a number of questions regarding the company’s divestment of Siloam Hospitals Surabaya.

In a bourse filing on Monday (Jul 18), the real estate investment trust (Reit) posted a lengthy list of questions that it had received from its unitholders, including queries on the rationale of the divestment, the resultant distribution per unit (DPU) changes, as well as the plans of the Reit manager to turn around the group’s business and profitability. 

First Reit in May announced that it would divest Siloam Hospitals Surabaya — which comprises 5 integrated purpose-built hospital buildings — at an agreed property value of 430 billion rupiah (S$40.1 million) subject to post-completion adjustments. 

One of the questions from unitholders noted that the sale price is at a mere 0.1 per cent premium to the asset’s valuation, and questioned if First Reit’s manager had sourced for better offers. 

The manager argued that although the premium figure is correct, the price represents a 143.2 per cent gross premium over First Reit’s original purchase consideration of S$16.8 million. First Reit acquired Siloam Hospitals Surabaya back in 2006 as part of its initial portfolio. 

The manager said that Siloam Hospitals Surabaya is a “mature asset” that was constructed in 1977, and faced increasing competition from both new facilities and existing healthcare competitors with upgraded facilities.

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First Reit had sold a portion of the land next to Siloam Hospitals Surabaya to PT Saputra Karya (PT SK) in connection with development works to build a new hospital, pursuant to an agreement. It was then intended that First Reit would have received a new healthcare facility by the first long stop date of Jun 28, 2020, said the manager. 

However, the road subsidence that took place in Dec 18, 2018 along Jalan Gubeng in Surabaya — which is in close proximity to Siloam Hospitals Surabaya —  had a serious impact on the development works, which were “no longer progressing”, said the manager. 

PT Tata Prima Indah (PT TPI) had on Jun 29, 2020 served a termination notice to PT SK to terminate the development works agreement. As a result, the desired outcome to swap the ageing Siloam Hospitals Surabaya with a new healthcare facility did not materialise. 

Since the road subsidence, First Reit’s manager had commissioned multiple parties across different fields — including tax consultants, legal counsels and valuers — to determine the possibility of conducting future construction works on the site should the project be revived.

It was then determined that restarting the development works is a complex matter, said the manager. Although it could result in First Reit receiving a new healthcare facility at a much later time, it also meant that the Reit would incur additional development cost and thereby take on excessive development risk. 

“It was determined that such risk should not be borne by First Reit,” said the manager. 

First Reit holds the stake in Siloam Hospitals Surabaya through Primerich Investments and Surabaya Hospitals Investment — both wholly-owned subsidiaries of Perpetual (Asia) Limited, a trustee of First Reit. Primerich Investments and Surabaya Hospitals Investment entered into a conditional sale-and-purchase agreement with Siloam International Hospitals and Megapratama Karya Bersama.

Unitholders also asked about the divestment of the property to Siloam — which is considered a related party. They questioned how much effort was put into the sale process, and if the Reit had considered selling the property to other parties besides Siloam. 

First Reit’s manager said Knight Frank was commissioned to conduct direct marketing of Siloam Hospitals Surabaya to 37 healthcare players with substantive regional and local presence, as well as presentations or site inspections for prospective buyers. However, none of these healthcare players submitted an offer, said the manager. 

In response to a question on why divestment fees are still payable given that the buyer is an interested party, the Reit manager said the divestment fee of some S$200,000 is payable to the manager pursuant to the trust deed. The fee is also in the form of units, and cannot be sold within 1 year of the date of issuance. 

Unitholders also noted that the Reit’s distribution per unit (DPU) would drop to S$0.0228 from S$0.0261, and asked if quarterly distributions are expected to fall by the same percentage. The manager stressed that these pro forma financial effects are strictly for illustrative purposes only. 

While the Reit manager said it is not able to provide DPU forecasts, it remains committed to providing a stable distribution payout to unitholders.

Next, it was noted that the divestment will increase First Reit’s exposure to the Japanese market. The Japanese yen has depreciated in relation to the Singapore dollar, and unitholders wanted to know how the Reit hedges its exposure to the yen, and manages its exposure to the Japanese market. 

The manager said a weak Japanese yen against the Singapore dollar is a positive factor from any acquiror’s perspective, and said it continues to actively review prospects within Japan and other mature markets.

Although there will be some foreign exchange impact, the impact will be capped because the Reit’s portfolio in Japan comprises 22 per cent of First Reit and its subsidiaries’ assets under management. 

“As we look to grow our presence in Japan, we are actively looking at the possibility of hedging currency risk with financial derivatives,” said the manager. 

The manager added that over the next 3-5 years, First Reit aims to increase its exposure to developed markets to more than 50 per cent of its portfolio. 

The Reit will continue to seek out yield-accretive acquisitions that can maximise returns to unitholders in the long run either through the sponsor’s healthcare network or third-party assets, and will reshape its portfolio for capital efficient growth, where it will recycle assets and capital from non-core assets.

Units of First Reit closed on Monday at S$0.275, up 1.9 per cent or S$0.005.