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First Real Estate Investment Trust announces restructure of master least agreements

First Real Estate Investment Trust announces restructure of master least agreements

The Manager of First Real Estate Investment Trust (SGX:AW9U) (First REIT) announced on 29 November that it will restructure the master lease agreements of 14 Indonesia hospital assets. 11 of the assets are leased to Lippo Karawaci Tbk (LPKR), with the remaining three hospitals leased to PT Metropolis Propertindo Utama (MPU).

A memorandum of understanding was signed with both LPKR and MPU on 28 November 2020 regarding the restructuring of the master lease agreements.

Under the new lease terms, lease for the 11 assets under LPKR will be extended to 31 December 2035, with an option for a further 15-year term by mutual agreement. The rental will be the higher of either the base rent or the variable rent.

The aggregate commencement base rent, starting 1 January 2021, will be approximately S$50.9 million (or approximately IDR550.7 billion) per annum. The commencement base rent will enjoy a fixed escalation rate of 4.5% per annum, compared to the existing terms where base rent escalation is capped at 2.0% per annum. This higher escalation rate to compensate for the potential increased volatility associated with the proposed switch in rental payment currency from Singapore Dollars to Indonesian Rupiah.

Under the new agreement, the actual rent paid will be the higher of either the base rent or the performance-based rent which will be 8.0% of the relevant hospital’s gross operating revenue for the preceding year. This performance-based rent mechanism replaces the existing variable rent structure, which has contributed not more than 4.2% to the total rent received for each year over the past three years, and provides an enhanced upside sharing mechanism for First REIT.

Further, the security deposit under the restructured LPKR MLAs will also be increased from 6 months to 8 months.

Victor Tan, executive director and chief executive of First REIT, said:

“The financial stress facing LPKR and MPU, the impact of the Covid-19 pandemic, the changed macro economy in Indonesia, and First REIT’s short-term refinancing pressures have created a significant overhang for First REIT. As such, the repositioning of the REIT to achieve long term sustainability has been a key strategic initiative that the Manager has been working to resolve over the last few months. The proposed restructuring with LPKR and MPU is expected to set a clean path ahead for First REIT to establish sustainable long-term returns with improved upside sharing for Unitholders.”

The restructuring of MPU’s master lease agreement will also be implemented on similar terms as the proposed LPKR restructuring, including the extension of the term to 31 December 2035, with an option for a further 15-year term by mutual agreement. MPU has also committed to make payment of 50% of its outstanding rent arrears of S$5.134 million by 31 December 2020, with the remaining 50% by 31 March 2021.

First REIT opened down at S$0.465 on 30 November and is currently trading at S$0.44, down 7.37% or S$0.035 as at noon 30 November.

This content was originally published here.

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