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

Siloam Sriwijaya.JPG
Siloam Sriwijaya, a seven-storey hospital in Palembang, is part of First Reit's Indonesia portfolio. Lippo Karawaci on Monday said its rent subsidies for the healthcare trust had become "unsustainable".

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.

Under the current lease structure, the healthcare real estate investment trust (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.

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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 Singapore cents to trade at 78.5 cents, before it called for a trading halt at 11.46am. The "unusual price movement" prompted a query from the Singapore Exchange in the morning, to which the Reit manager later replied that LPKR's announcement might be a possible reason for the trading activity.

After the manager's announcement and the lifting of its trading halt, First Reit units were down 17 cents or 19.2 per cent to trade at 71.5 cents as at 3.24pm.

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.

Amendment note: Due to a source error, an earlier version of this article stated that Lippo Karawaci owned a stake in First Reit, which had been the case as at Dec 31, 2019. Lippo Kawaraci no longer holds units in the trust, after divesting its stake in the first quarter this year.

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