First Reit to restructure Lippo Karawaci's master lease agreements

FIRST Real Estate Investment Trust (First Reit) will restructure the master lease agreements of its 11 Indonesian hospital assets leased to former parent company Lippo Karawaci (LPKR).

The trustee of First Reit on Saturday signed a memorandum of understanding (MOU) with LPKR, in which all the LPKR master lease agreements are extended to Dec 31, 2035, with an option for a further 15-year term by mutual agreement.

Separately, the trustee also signed a MOU with Metropolis Propertindo Utama (MPU) to restructure the master lease agreements relating to the three hospitals which MPU leases from First Reit. This restructuring will also extend the master lease agreements to Dec 31, 2035, with an optional 15-year term extension.

MPU has also committed to make payment for half of its S$5.1 million of outstanding rent arrears by Dec 31, 2020, and the remaining by March 31, 2021, said First Reit in a statement on Sunday.

Meanwhile, the rental under all the LPKR restructured master lease agreements will either be the higher of the base rent or the hospital's performance-based rent.

The performance-based rent - at 8 per cent of the relevant hospital's gross operating revenue for the preceding year - replaces the agreement's existing variable rent structure, and provides an enhanced upside sharing mechanism for First Reit.

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The aggregate commencement base rent starting Jan 1, 2021, will be approximately 550.7 billion rupiah (S$50.9 million) per annum.

The commencement base rent will have a fixed escalation rate of 4.5 per cent per annum, versus a base rent escalation capped at 2 per cent per annum for the existing LPKR master lease agreements.

The higher escalation rate is intended to compensate for the potential of increased volatility, since rental payment currency will be switched to Indonesian rupiah, from the Singapore dollar.

The security deposit under the restructured LPKR master lease agreements will also be increased from six months to eight months.

Restructuring creates a sustainable path for First Reit, taking into account the current Indonesian economic and operating environment, it said.

Victor Tan, executive director and chief executive of First Reit, said: "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 move will also increase long-term cash flow certainty with First Reit's weighted average lease expiry extending from 7.4 years to 12.6 years, it said.