First Reit proposes S$471.5 million divestment of Indonesia assets

[SINGAPORE] The manager of First Real Estate Investment Trust (Reit) announced on Wednesday (Apr 1) a strategic move to divest its Indonesian portfolio for an aggregate consideration of S$471.5 million. 

This two-tranche divestment of all assets in Indonesia is designed to prioritise distribution per unit (DPU) stability while recycling capital from non-core assets and properties with rental arrears, the manager said. 

Transaction details

The Reit has entered into conditional sale and purchase agreements to sell eight hospitals to Siloam International Hospitals for 5.1 trillion rupiah (S$389.2 million).

The price represents a 2.8 per cent premium over the average of two independent valuations.

Additionally, the trust will execute non-core divestments, which include selling Lippo Plaza Baubau and Hotel Aryaduta Manado to Lippo Karawaci for S$53.3 million, and granting a conditional prepaid lease for Lippo Plaza Kupang to a subsidiary of Metropolis Propertindo Utama for S$29.1 million.

First Reit has also entered into put option agreements with Siloam International Hospitals for the remaining six hospital assets in its Indonesia portfolio, which would unlock about S$294.8 million when exercised. 

These potential divestments, which include the Mochtar Riady Comprehensive Cancer Centre and Siloam Hospitals Yogyakarta, remain subject to the manager’s discretion and further unitholder approval.

Strategic rationale

Victor Tan, executive director and chief executive officer of the manager, said: “The proposed divestments, along with the potential put option divestments, eliminate First Reit’s IDR/SGD foreign currency volatility and income drag which had impacted unitholder returns.”

The aggregate net proceeds from the proposed divestments will be used for the repayment of loan facilities and debt securities in respect of the hospital properties, the manager said. 

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It will also be used to finance any capital expenditure on asset enhancement works and general corporate and working requirements.

“The manager maintains certainty for the divestment of remaining Indonesia assets and timing flexibility for redeployment for the put option properties. More importantly, the proposed divestments are expected to optimise First Reit’s capital structure to position First Reit for growth, with a focus on developed markets,” Tan added. 

Following the completion of the divestments, the manager intends to “focus on progressing the strategic review, which is to identify, evaluate and execute potential acquisition opportunities in the Asia-Pacific region, including Singapore, Japan and Australia”. 

The manager noted that First Reit’s DPU has experienced a gradual decline of 16.9 per cent over the five-year period from the financial year ended Dec 31, 2021. 

By exiting the Indonesian market, the trust expects its aggregate leverage to “significantly reduce to approximately 16.7 per cent,” providing pro forma annual interest cost savings of S$18.8 million.

Special distribution

The manager noted that it has undertaken to completely waive its divestment fee of around S$2.4 million.

Furthermore, the board intends to recommend a special distribution of about S$9.7 million to share the upside from the divestment proceeds, expected to be declared across the two financial quarters succeeding the completion of the deal.

“As at the date of the announcement, the proposed divestments represent the best available offer for the Indonesia divestment properties,” the manager said.

“Should the proposed divestments not receive the requisite approvals from the independent unitholders, there is no certainty that the manager will receive a superior offer in the future or any offer at all.”

Units of First Reit ended flat at S$0.255 on Tuesday.