First REIT has also been granted a put option by its sponsor Siloam to divest its remaining 6 hospitals for at least $294.8 million by Oct this year.
"This allows it to structure its exit from Indonesia in two tranches, cushioning DPU impact for FY2026," says OCBC Group Research's Ada Lim. The REIT's manager has also waived divestment fee of some $2.4 million so as to be more closely aligned with other unitholders.
After accounting for divestment costs, the aggregate net proceeds would be around $464.2 million, of which $362.7 million, or 78.1% of the net proceeds, will be used to pare down debt, and $9.7 million paid as a special distribution to unitholders over two quarters.
On a pro forma basis, had the divestments been completed on Jan 1, its FY2025 DPU would have been 35.9% lower at 1.39 cents, or 14.7% lower at 1.8 cents, which incudes the special distribution.
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If the divestment was completed on Dec 31 2025, pro forma aggregate leverage would be reduced significantly from the 42.1% reported to 16.7%. First REIT unitholders will vote for this deal at an EGM to be called.
Pending the outcome of the EGM, Lim prefers to maintain her fair value estimate of 24.5 cents and "hold" call. Also, Lim says the REIT's manager is not able to say what might be the potential acquisitions.
"In our view, the overall portfolio pivot will likely be dilutive to existing unit holders, as First REIT would be hard pressed to find an asset in developed markets that provides similar yields as its Indonesia portfolio," says Lim.
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"Moreover, stagflation concerns due to the Middle East conflict have also pushed back rate cut expectations, which may throw a spanner into the works.
"That being said, the reset may be a positive in the longer run as the REIT shrugs off its emerging market risk premium and currency-related headwinds," she adds.
In his separate note on April 6, Darren Chan of PhillipCapital, citing uncertainty over the future direction of First REIT, has lowered his target price.
From his initial target price of 29 cents, Chan now figures the stock is worth 25 cents, even as he keeps his "accumulate" rating.
Chan explains that he has changed his valuation methodology to 1x FY25 P/NAV from a dividend discount model, to reflect uncertainty over the future portfolio composition, as no assets have been earmarked for acquisition and the REIT is expected to be cash-rich post-divestments.
For now, he is keeping his FY2026 DPU estimates at 2.27 cents, but expects this number to decline to around 1.7 cents, excluding special dividends - assuming the first tranche of divestments completes in August.
"No updates were provided on potential acquisitions, as the strategic review remains ongoing to identify, evaluate, and execute opportunities in the APAC region, with the aim of increasing exposure to developed markets," says Chan.
