First Reit says Lippo Karawaci has not approached it about lease restructuring

SINGAPORE (THE BUSINESS TIMES) - Indonesian real estate giant Lippo Karawaci (LPKR) plans to start discussions with First Real Estate Investment Trust (First Reit) to restructure its leases, as the Covid-19 pandemic has rendered its rental subsidies "unsustainable".

The pandemic has had a "material negative impact" on the business of LPKR's hospital subsidiary Siloam, LPKR announced in a press statement early Monday morning (June 1).

First Reit, one of two listed healthcare Reits in Singapore, has a portfolio of 20 properties across Indonesia, South Korea, and Singapore, most of which are operated by Siloam Hospitals.

Under the current lease structure, First Reit is guaranteed a certain rent level, which means any decline in Siloam's revenue increases the "significant" rental support that First Reit will receive, LPKR said.

On Monday afternoon, the Reit manager clarified that it has not been approached by LPKR regarding these matters.

The Reit manager said in a bourse filing that it "will consider any reasonable and commercially viable proposal from LPKR carefully", given that the Indonesian government has declared the pandemic a national disaster.

Any agreement will be mutually agreeable and beneficial in the long-term interest of First Reit, and having regard to applicable legal and regulatory requirements, the manager said, adding that it will monitor the situation "closely".

Units of First Reit fell 11.3 per cent or 10 cents to trade at 78.5 cents, before it called for a trading halt at 11.46am. The Singapore Exchange (SGX) had asked First Reit for possible reasons that might explain the counter's "unusual price movement" in the morning. The Reit manager replied SGX at 1.50pm, citing its latest bourse filing relating to the LPKR matter.

In its press statement, LPKR said the level of subsidies it provides First Reit is "prohibiting spending to expand medical care and improve medical facilities across Indonesia".

Not accounting for Covid-19 revenue drop, rents for LPKR's hospitals came in at a weighted average of close to 40 per cent of each hospital's gross operating revenue, a figure the real estate developer said was "unrealistic to sustain and support".

It added: "These (rebate) restructuring discussions reflect the government of Indonesia's declaration of the current situation as a national disaster and extraordinary event."

The pandemic has dealt a blow to Siloam's business as patient volumes declined drastically across Indonesia, with revenues in some hospitals down 40 to 50 per cent year on year.

"We anticipate the impact to be significant and structural over the medium term," Lippo Karawaci said.

LPKR added that its rental support agreements, which were entered into over the past 10 years and contain a currency peg component, are now under additional pressure due to the rupiah's depreciation.

LPKR is the Reit's former parent company, having completed the divestment of its 10.5 per cent stake in First Reit in Q1 2020. LPKR began selling the stake in the second quarter of 2019 as part of its management's strategy to dispose of "non-strategic" assets.