First Reit agrees to Surabaya asset swap with Lippo

HOSPITAL owner First Reit has inked an asset-swap deal to sell two of its oldest properties in Indonesia back to its sponsor Lippo Karawaci and then acquire a new hospital that the sponsor plans to build over the next few years.

First Reit will sell an empty plot of land in Surabaya for S$8.2 million and an existing hospital building next to the plot for at least S$27.5 million to Lippo Karawaci, a property developer that is part of Indonesian conglomerate Lippo Group.

Lippo Karawaci intends to use the empty plot for part of an upcoming mixed development in Surabaya that will include a new hospital, mall, hotel, apartments and private school, First Reit said in a press release on Wednesday. It added that it has agreed to buy this new hospital for S$90 million.

In total, First Reit will get at least S$35.7 million from the sales. This sum was more than double the combined S$16.8 million it had paid to acquire the two properties in December 2006 as part of its initial portfolio, it noted. It also said the sum was 7.5 per cent above the two properties' combined appraised value of S$33.2 million as at Oct 31, 2014.

It plans to use the sales proceeds to pay for part of its acquisition of the new hospital, it said, adding that the acquisition will be funded with a mix of debt and cash.

The Reit also said the S$90 million purchase price for the new hospital was at a 12.3 per cent discount off the average of two independent valuations.

Timing-wise, the deal will be done in two parts. First Reit will initially sell off the plot of land so that Lippo Karawaci can redevelop it. After the new hospital has been completed and the necessary hospital permits have been obtained, the Reit will sell the existing old hospital building to Lippo Karawaci and buy up the new hospital in the mixed development.

The Reit said in its statement that the old hospital "serves a large catchment of patients since it was established in 1977". It added: "In recent years, capacity and site constraints as well as demand for better services have led to a need for a more modern and larger facility in Surabaya."

The new hospital is expected to be completed in 2019. The Reit will continue to get rental income from the old hospital until it takes possession of the new one.

A spokesman for First Reit said that the plot of land originally had some ancillary structures on it but was now empty. He added that after First Reit sells off the old hospital, the old hospital building will be demolished to make way for new structures as part of Lippo Karawaci's planned mixed project. The new hospital is expected to have a capacity of around 488 beds.

The Reit said it expects the asset swap deal to expand First Reit's portfolio and make it younger on average. The portfolio asset size will grow 6 per cent from S$1.17 billion to S$1.24 billion when the asset swap is completed. The weighted average age of the properties will also drop from 10.1 years to 8.2 years.

The trust manager is Bowsprit Capital Corporation. Bowsprit's chief executive officer Ronnie Tan said in a statement that the asset swap deal was the trust's first asset enhancement initiative and the new hospital facility would bring "increased income stability" with its 15-year master lease agreement.

First Reit units closed half a cent up at S$1.335 on Wednesday after the announcement was released.

This article was first published on October 22, 2015.
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