First Reit units tumble 21.5% after Lippo says it cannot sustain rental support
Singapore
UNITS of First Real Estate Investment Trust (Reit) were sold down on Monday, after its former parent company Lippo Karawaci (LPKR) announced plans to start discussions to restructure its leases as the Covid-19 pandemic renders its rental subsidies to the healthcare Reit "unsustainable".
The units dropped 11.3 per cent during the morning session before a trading halt was called.
The price continued its decline after the halt lifted in the afternoon, ending the day at 69.5 Singapore cents, down 19 cents or 21.5 per cent, with 23 million units changing hands.
The Singapore Exchange (SGX) had asked First Reit in the morning for possible reasons that might explain the counter's "unusual price movements". The Reit's manager replied at 1.50pm, citing its latest bourse filing relating to LPKR's announcement.
In its filing, the manager clarified that LPKR had not approached it in respect to the proposed restructuring and rental matters, but said it would "consider any reasonable and commercially viable proposal from LPKR carefully", given that the Indonesian government had declared the pandemic a national disaster.
Any agreement would have to be mutually agreeable and beneficial in the long-term interest of the Reit, having regard to applicable legal and regulatory requirements, the Reit manager added.
LPKR and its subsidiaries contributed 81.59 per cent of First Reit's rental income as at Dec 31, 2019.
In its statement, LPKR said the Covid-19 pandemic had a "material negative impact" on the business of its hospital subsidiary Siloam. First Reit's portfolio includes 16 hospitals in Indonesia, all of which are leased and operated by Siloam.
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.
It added that the Covid-19 pandemic had dealt a blow to Siloam's business, as patient volumes declined "drastically" across Indonesia, with revenues at some hospitals down 40 per cent to 50 per cent year on year.
"We anticipate the impact (of the revenue drop) to be significant and structural over the medium term," LPKR said.
Not accounting for the 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 Indonesian property giant called "unrealistic to sustain and support".
It said the level of subsidies it provides the Reit is "prohibiting spending to expand medical care and improve medical facilities across Indonesia".
LPKR also noted 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 completed the divestment of its 10.5 per cent stake in First Reit in Q1 2020. It began selling the stake in the second quarter of 2019 as part of its management's strategy to dispose of "non-strategic" assets.
On May 6, First Reit posted a Q1 distribution per unit of 1.86 Singapore cents for the three months ended March 31, down from 2.15 cents a year ago.
Rental and other income edged up 0.8 per cent to S$28.89 million for the quarter under review.
Net property and other income was marginally higher by 0.6 per cent at S$28.21 million, while income available for distribution fell 6.7 per cent to S$15.92 million.
