Mainboard-listed OUE acquired IHC in 2017, a company with a dubious past, before renaming it OUE Lippo Healthcare. However, following its acquisition of 40% of First REIT’s manager, and subsequently owning 33% of First REIT’s units, OUEH’s fortunes have turned around.

Says Yet: “Although the usual threshold for effective control is 50% from an accounting perspective, we own the largest stake of 33% and we have a stake in the manager, so the auditors assess that we have effective control.”

The 2018 fundraising opened the way for OUEH to take a 40% stake in First REIT’s manager and 10% in the REIT for $143 million. Subsequently, First REIT acquired 12 nursing homes in Japan from OUEH for the equivalent of $163.2 million. Of this, $131.5 million was paid to OUEH in the form of First REIT units.

“We increased our stake because of the placement in 2018 and when we transferred our 12 Japanese nursing homes to First REIT. The bulk of the consideration is in units. There was no cash call by First REIT, and we are almost neutral in our P&L and cash flow in terms of holding First REIT units,” Yet explains.

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Yet is quick to point out that OUEH’s largest shareholder, OUE, which owns 70% of the healthcare company has three pillars: property and asset management; consumer; and healthcare.

Excluding First REIT, contributions from its other businesses are small. OUEH is still building up its other businesses such as hospitals in China and Myanmar, and last year it acquired some specialists in Singapore.

On May 16, its share price surged by 19% to 3.1 cents with 41 million shares changing hands, before receding. The only announcement that the company made was the opening of an obstetrics and gynaecology hospital in Changshu, near Suzhou.

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In FY2022 ended December 2022, OUEH reported a net profit of just $4 million. However, its revenue, which includes First REIT’s rental income, surged to $119 million because it consolidated First REIT’s financials.

However, the company was affected by non-cash items such as net fair value losses relating to investment properties and impairment of investment in associate and joint ventures. The company is also affected by foreign exchange losses, some of which were from First REIT.

“In terms of revenue and earnings. IHC in 2017 had almost no operating businesses. The only income-generating assets were the 12 nursing homes in Japan. We took some trouble unravelling these legacy issues,” Yet recounts.

Restructuring OUE Healthcare

The previous shareholders and management of IHC had credit facilities from Crest Capital. The facilities comprised a standby facility of up to $20 million and the Geelong facility of $11.5 million. The facilities were secured by IHC Medical Re, which in turn owned three properties in Australia, and personal guarantees.

“The previous management had a dispute with Crest. The money drawn down from the standby facilities was lent to IHC to buy its own shares and that was prohibited. We managed to void the standby facility and we managed to get some funds back from the disposal of the Australian properties,” Yet recalls.

OUEH had a separate dispute regarding a piece of land and a building in New District, Wuxi, China. In 2013, IHC acquired a 74.97% stake in a company that owned a China-based entity which held the Wuxi New District Phoenix Hospital.

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According to OUEH’s FY2022 financial statement, in 2017, Weixin Hospital Investment Management (Shanghai), a company controlled by David Lin, sought a court order for the shares in the Wuxi hospital to be transferred to Weixin. The Shanghai courts ruled in favour of Lin. In 2018, OUE Healthcare commenced arbitration proceedings in Singapore against Lin. On Jan 7, 2019, a final arbitration was awarded against Lin.

Subsequently, OUEH obtained a judgement in terms of the arbitration award on November 28, 2019. Getting the judgement enforced in China took another two years. In 2019, the company started recognition and enforcement proceedings in Hong Kong, Taiwan and Shanghai against Lin to enforce the award. Finally, on Dec 31, 2022, OUEH obtained permission from the respective authorities concerned to enforce the award in Hong Kong, Taiwan and Shanghai.

During the litigation period against Lin, Yet had other problems to solve. For one, IHC was deeply indebted. It had multi-currency term notes (MTN) which carried double-digit interest rates. The covenants were triggered and the MTN holders had to be repaid.

“OUE put in a $165 million shareholders loan to pay the MTNs that were defaulted, and other high interest rate loans. In 2021, we converted the OUE loans together with accrued interest which totalled $190 million into perpetual convertible securities, which is a show of support from our controlling shareholder,” Yet describes.

While the restructuring was underway, Yet had to look for operating businesses. In January 2018, the company formed a joint venture with China Merchants Group. The joint venture CM Lippo acquired a plot of land that is being developed into Prince Bay Hospital, Shenzhen, China. The hospital will be ready in 2024.

“This is an asset-heavy model where we jointly develop and operate a Grade-2 general hospital,” Yet says.

The second model is the asset-light model. On May 15, OUE Healthcare opened the O&G hospital in Changshu, near Suzhou, China. Here, the company leases the hospital from China Merchants Group and operates the hospital. Separately, OUEH owns 70% stake of the operating company that operates Wuxi Lippo Xi Nan Hospital.

“Hospitals are not usually profitable from their first day of operations. We look at the total investment of the land, the building, medical equipment, working capital losses that we have before and after operations. We have some financial models where when the hospital matures, the revenue should be the sum of the investments,” Yet reasons.

“In Changshu, we don’t own the asset. It’s not the best place for real asset investment. But I still put in money, I do the fit-outs, and bear the upfront working capital losses, and we also use the same numbers to size up the future performance,” Yet says.

In 2018, OUEH also formed a joint venture with First Myanmar Investments to own and operate three hospitals, one medical centre and three clinics in Myanmar.

In June 2022, OUEH’s joint venture company with OUE established a medical partnership with three medical specialist groups of 11 doctors in Singapore, including two leading Respiratory Specialist Practices as well as a Cardiothoracic Surgery Practice.

All these businesses are adding revenue to OUEH, but the largest contributor remains First REIT. In FY2022, China contributed $4.76 million to revenues, compared with $79.2 million from Indonesia, $20.5 million from Singapore and $15.4 million from Japan.

Outside of China, the contributions are mainly from First REIT, which owns three nursing homes in Singapore, 14 in Japan, 11 hospitals in Indonesia, 2 integrated hospitals & malls, 1 integrated hospital & hotel, and 1 hotel & country club, also in Indonesia.

In the S-REIT model, sponsors, who own the manager and a stake in the REIT, are meant to support the REIT in providing it with a pipeline and the financial help for the REIT to acquire assets. Here is where OUEH and First REIT appear to diverge.

In a continuation of its 2.0 growth strategy, announced in early 2022, First REIT plans to continue its pivot to developed markets, reshaping its portfolio for capital efficient growth, coupled with divesting non-core assets. These would include the mall, hotels and country club in Indonesia. In 2022, First REIT divested Siloam Hospitals Surabaya for $40.9 million, at a 143% premium to its acquisition price.

In a recent interview, Victor Tan, CEO of First REIT’s manager, had said his goal is to continue expanding into developed markets to more than 50% of its AUM. As at March 31, Japanese nursing homes comprised 25.1% of AUM, and Singapore 2.8% of AUM. OUEH does not have any assets in Singapore and Japan to form a pipeline. Its focus is on operations in China and Myanmar.

OUEH took a look at the government land sale for assisted living in Parry Avenue, launched for sale by URA and the Ministry of Health. The land lease was for 60 years. The tenders were from Evia Real Estate, Allium Healthcare Holdings, Yuan Ching Development, YK Realty, Pre 20 and United Medicare Development.

The Singapore nursing homes are providing First REIT with an NPI yield of 8%, Tan said. With borrowing costs upwards of 4%, First REIT would need a yield on cost of 10% to 11%.

How does First REIT’s strategy align with OUEH’s which is expanding into developing and frontier markets? Yet indicates that OUEH took a look at Parry Avenue. “We need to balance between the real estate part and the service part of things,” he says. Margins for operating nursing homes in Singapore can be challenging.

“We do the business and operations, and First REIT holds the real estate. First REIT has certain requirements and I must generate a sustainable P&L to sign a master lease. It’s a strategic partnership. We can come in to help them to size the business of the tenant. The biggest worry is the tenant. The tenant’s credibility and business viability has an impact on the sustainability of the rental,” Yet says. “China assets are not in the best tax regime to put into a REIT,” he adds.

The advantage of holding First REIT for OUEH is its liquidity. “We hold the units, which is definitely more liquid than the bulkiness in real assets. We have been using these units to some extent with the banks. I think it has been a very useful exercise,” Yet says.

OUE Healthcare expands footprint in China but what’s next for First REIT?

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