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First REIT proposed to buy MD Property and SHMK

After a long time First REIT finally proposed to make an acquisition.

Full details can be [found here]

Purchase price: SGD $142 mil

Valuation: SGD $160 mil

Pretty good purchase at 10% below valuation.

This will be finance by a mixture of debts and private placement. For the folks that are not sure how these placements and debt work out [check out this article]. It explains when placements are good and when is bad. This will be the one called partially funded by debts.

Incidentally, Bow Spirit stated that one of their reasons of purchase is to buy two hospitals at below market valuation.

Lease Term with Sponsor: 15 Years + 15 Years

Bow Spirit also indicated this will increase their weighted lease expiry (WALE)

Asset Size Increase: SGD $618 mil to $782mil

Weighted Average Age Decrease: 13.2 years to 9.9 years

Current Asset Value: SGD $650 mil

This purchase bump up the assets by 20%

Current Net Property Income: SGD $53.4 mil

Forecast Net Property Income: SGD $14.1 mil

NPI will be bumped up 26%

NPI yield: 14.1/142 = 9.9%

DPU increase: $0.0677 vs $0.0633

Very disappointing. That is just a 7% DPU boost.

Debt increase: 97 mil to 214 mil

The gearing would probably be increase to 30% from 15%

To conclude it boosted DPU but doubles the debt. However, as an end investor I feel its more risk than return.

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Reader

Saturday 22nd of September 2012

Hi Drizzit,

Don't you think that after a couple years, the DPU will increase while their Debt reduces?

Do you think maybe due to the increase in the assets, the manager fees goes higher but for investor the rewards are not as great as for the manager?

Drizzt

Saturday 22nd of September 2012

hi Reader,

you are not wrong to draw that conclusion. Myself have question whether the risk is more. yet REITs have not known to pay down their debts the way some well run business trust or toll roads do. CM Pacific, which i did say alot on this blog, pays out like 55% and the rest pays down debt.

ahyu

Saturday 22nd of September 2012

Hi Drizzt,

May I know how come the asset size increase is different from purchase price and valuation? And what is current asset value?

Thank you!

Drizzt

Saturday 22nd of September 2012

hi Ahyu,

the increase in asset size takes into consideration the asset value change of 160 mil not 142mil. hope that explains.

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