February 05, 2025

A Fresh Chapter

Market Commentary

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First REIT is one of the leading players in the healthcare property industry in Southeast Asia, especially in Indonesia.

As the first real estate investment trust (REIT) in the region focused on the healthcare sector, First REIT owns a portfolio of hospitals and healthcare facilities strategically located across various areas.

Its business model, which combines property investment with long-term leasing, has provided a stable foundation to support healthcare services while consistently delivering returns to its investors.

Now, a new chapter in First REIT’s journey is unfolding. SILO, one of the largest hospital operators in Indonesia, submitted a preliminary, non-binding Letter of Intent (LOI) to First REIT Management Limited in January.

This LOI signals SILO’s strong intent to acquire First REIT’s hospital assets in Indonesia.

Currently, SILO operates 14 hospitals from assets owned by First REIT and is at a significant crossroads.

For years, they have been renting these assets, with annual rent set at 8% of each hospital’s gross operating revenue.

While this system has allowed SILO to grow, it comes with a significant challenge: the bigger the hospital’s revenue, the higher the rent.

This led SILO to a strategic question: why not just buy the assets?

This idea is no longer just a thought, it has become a serious plan.

Based on First REIT’s 2023 annual report, the value of these 14 hospitals is estimated at around IDR 8.5 tn. SILO sees this as a golden opportunity to secure its future.

If this plan is executed by 2025, the projected IRR is 9.7%, higher than the cost of debt at 8%, making this a smart investment decision.

By owning these assets, SILO could not only save on long-term rental costs but also gain full control over hospital operations, strengthen its position in the healthcare sector, and lay the foundation for even greater growth.

However, no big step comes without challenges.

In the short term, interest expenses and depreciation costs from this acquisition will outweigh rental savings.

Net income is expected to temporarily decline to around IDR 994 bn in 2025 and IDR 1.26 tn in 2026.

But for SILO, this is not about instant results. They are playing the long game.

Our analysis indicates that net income will turn positive by 2031, with operational cash flow becoming positive earlier, in 2028.

While awaiting further clarity on the acquisition structure, our projections for SILO remain stable.

Over the next five years, earnings are expected to grow at CAGR of 12.2%, driven by expansions in both greenfield and brownfield, as well as the execution of SILO’s five-year strategic plan.

With this strategic move, SILO aims not just to survive but to establish itself as a stronger and more resilient player in the future.

So, even though the journey won’t be easy, SILO has shown that it is ready to face this big challenge to achieve greater rewards in the years to come.

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