First Reit Rights Issue: First REIT’s 2011 distribution yield expected to rise to 9.14% following acquisition of two Jakarta hospitals

First REIT’s 2011 distribution yield expected to increase to 9.14% following acquisition of two Jakarta hospitals

Wednesday, 10 November 2010 23:17

Bowsprit Capital Corporation, the manager of First Real Estate Investment Trust (First REIT), Singapore’s first healthcare real estate investment trust, announced today that First REIT’s distribution in projection year 2011 is expected to rise from 8.57%1 to 9.14% following the acquisition of two new healthcare properties in Indonesia – The Mochtar Riady Comprehensive Cancer Centre and Siloam Hospitals Lippo Cikarang.

This is based on a forecast annualised distribution per Unit (DPU) of 6.40 cents for the full financial year ending 31 December 2011, in relation to its enlarged portfolio and financing through a combination of the underwritten renounceable rights issue of 345,664,382 new units at an issue price of $0.50 per rights unit and bank loan.

Apart from the upside in yield, the manager also expects to see an increase in annual gross rental income of 80%, from $30.3 million in forecast year 2010 to $54.5 million in projection year 2011 as a result of its enlarged portfolio. On the same basis, distributable income is also expected to increase by 89% from $21.3 million to $40.3 million.

Upon completion of the Acquisitions, First REIT’s aggregate leverage will also be lowered from 18.60% to 17.25% for the projection year 2011. Accordingly, First REIT’s statement of financial position will be strengthened, leaving sufficient capability for debt financing should the need for such financing arises in the future.

“Through these acquisitions, we will be able to deliver long-term value and returns to our unitholders by way of an improved distribution yield. This is testament to our sound acquisition strategies whereby we are constantly looking out for yield-accretive healthcare related properties, and we will continue to embark actively on such acquisitions whenever opportunities are available,” said Dr Ronnie Tan, CEO of Bowsprit.

Based on a proforma capitalisation of First REIT as at 31 December 2009, as if First REIT had purchased MRCCC and SHLC (the “Properties”) and completed the Rights Issue on 31 December 2009, First REIT’s total capitalisation would have stood at S$565.9 million as compared to its actual capitalisation of S$323.3 million.

The Acquisitions

MRCCC, which will begin operations in December 2010, is Indonesia’s first private comprehensive cancer treatment centre equipped with state of the art cancer treatment and diagnostic facilities. SHLC, which began operations in 2002, is a six-storey hospital (with a basement and a covered roof space) and will accommodate 75 beds by the end of 2010.

MRCCC will be acquired from Wincatch Limited, an unrelated third party, for S$170.5 million, and SHLC will be acquired from the sponsor of First REIT, PT Lippo Karawaci Tbk (“Lippo”), for S$35.0 million. The respective purchase prices of MRCCC and SHLC represent an attractive discount of 19.7% and 13.8% respectively to the average of the Properties’ latest independent valuations.

The Acquisitions will increase the value of First REIT’s portfolio by 74.3% to S$603.4 million. The total gross floor area of the enlarged portfolio will increase by 58.7% from 83,638.2 sqm to 132,696.2 sqm. The total number of hospital beds in relation to First REIT’s Indonesia portfolio will increase by 43.8% from 537 to 772.

On completion of the Acquisitions, the conditional master lease agreements entered into with Lippo in relation to the Properties will commence for a 15 year lease term (with an option to renew for a further term of 15 years, subject to the renewal of the Properties’ HGB4 titles).
Rental income of both Properties comprise a base rent component which is payable quarterly in advance, and subject to a stepped up increase every year thereafter at a rate equal to 2 times of the percentage increase of Singapore’s Consumer Price Index for the preceding calendar year; as well as a variable rent component5.

Key benefits of the Acquisitions

The Manager believes that the Acquisitions and the Rights Issue (collectively, the “Transactions”) will bring, among others, the following key benefits to the unitholders:

(i) opportunity to purchase attractive and high quality properties at prices below valuation;

(ii) increased income stability of First REIT through the MRCCC master lease agreement and the SHLC master lease agreement and increase in First REIT’s weighted average lease to expiry;

(iii) unique opportunity to acquire two quality hospitals in Jakarta, Indonesia;

(iv) increased absolute size of First REIT’s asset base which may raise the profile of First REIT among global investors and increased portfolio size enhances First REIT’s competitive positioning and ability to pursue future acquisitions;

(v) increased market capitalisation and potential increased liquidity through the Rights Issue;

(vi) yield accretive acquisitions with expected increase in distribution yield to unitholders for Projection Year 2011;

(vii) the Acquisitions would enable First REIT to grow through the acquisition of a portfolio of hospitals which enhances the diversification of First REIT’s portfolio across locations and medical specialisations; and

(viii) increase in attractiveness of the enlarged portfolio given the reduction in the weighted average age of the Properties in the enlarged portfolio after the completion of the Acquisitions.

The Rights Issue and Debt Financing

The acquisition of MRCCC and related transaction costs will be funded in cash through a combination of the net proceeds from the Rights Issue and partially through a new term loan facility of up to S$50.0 million from Oversea-Chinese Banking Corporation Limited. The acquisition of SHLC and related transaction costs will be fully financed in cash from the proceeds raised from the Rights Issue.

The Manager intends to raise approximately S$172.8 million in gross proceeds through the Rights Issue to eligible unitholders, on a pro rata basis of five (5) Rights Units for every four (4) existing Units, at the Issue Price of S$0.50 per Unit (fractional entitlements to be disregarded). Oversea-Chinese Banking Corporation Limited and Credit Suisse (Singapore) Limited are the joint lead managers and underwriters for the Rights Issue.

Moving Ahead

First REIT will be looking to achieve a portfolio size of S$1 billion in the next two to three years. The Manager will continue to look for other yield-accretive assets in Singapore and Indonesia, as well as the rest of the Asia Pacific region.