SINGAPORE (June 1): PT Lippo Karawaci Tbk (LPKR) said that as a result of the Covid-19 pandemic in Indonesia and its material negative impact on hospital subsidiary Siloam's business, it wants to restructure its rental support agreements with First REIT, which owns the Siloam chain of healthcare properties.

First REIT, separately listed on SGX, drew an unusual trading query from SGX at 10.30 am. It dropped 11.3% to 78.5 cents before trading halt was called at 11.46am.

“These restructuring discussions reflect the Government of Indonesia's declaration of the current situation as a national disaster and extraordinary event. The level of subsidies is prohibiting spending to expand medical care and improve medical facilities across Indonesia,” said LPKR.

According to the company, Covid-19 has significantly impacted Siloam's revenues and led to a drastic decline in patient volumes across Indonesia. 

Under the current rental structure, LPKR provides a rental support which guarantees First REIT a certain rental level, such that a decline in Siloam's revenues would increase the support provided by LPKR. 

According to the company, revenues in some hospitals are down as much as 40-50% y-o-y. “We anticipate the impact to be significant and structural over the medium term,” said LPKR.

Furthermore, the rental support agreements, which were entered into over the past 10 years, also have a currency peg component, has put additional pressure on the arrangement due to the recent depreciation of the Rupiah.

“Even before accounting for the decline in revenues as a result of Covid-19, the rental amounts for almost all the hospitals range of 30-100% of the hospital’s gross operating revenue — and with a weighted average of close to 40% — a level that is unrealistic to sustain and support,” added LPKR.

In FY2019, Indonesia contributed $110 million in revenue to First REIT's total revenue of $115.3 million, and $109 million in net property income to total NPI of $113 million.  FY2019's operating expenses were around $31 million of which $11.4 million were management fees and $20 million in finance cost. Assuming management fees are reduced significantly in the current financial year, and revenues from Indonesia are 40% lower, that would leave First REIT's income available for distribution lower by more than 20% y-o-y.  

However, some market observers point out that there are two issues to reckon with. The impact from Covid-19 which is likely to cause a decline in distribution per unit (DPU) this year, is a one-time impact. The Rupiah on the other hand has been depreciating against the Singapore dollar since First REIT's IPO, and LPKR has been supporting First REIT and its unitholders with its master leases for the hospitals. 

In its response filed at 1.46pm, First REIT said that it has not been approached by LPKR in respect of the rent support renegotiation.

"Given the declaration of the current Covid-19 situation as a national disaster by the Indonesia government, the Manager will consider any reasonable and commercially viable proposal from LPKR carefully, with any agreement to be mutually agreeable and beneficial in the long term interest of First REIT and having regard to applicable legal and regulatory requirements," said First REIT.

On May 6, Bowsprit Capital Corporation, the manager of First REIT, reported a DPU of 1.86 cents for the 1Q2020 ended March, down 13.5% y-o-y, as the REIT’s unit base has grown bigger. First REIT held back $1 million out of income available for distribution of $15.92 million in 1QFY2020, down 6.5% y-o-y.