First REIT's property in Singapore, Pacific Healthcare nursing home in Bukit Merah (Photo: REITsWeek)

First REIT has signed separate memorandums of understanding (MOUs) to restructure its leases with PT Lippo Karawaci (LPKR) and PT Metropolis Propertindo Utama (MPU).

First REIT rents out 11 hospitals to LPKR on a master lease agreement (MLA) basis, while 3 hospitals are on a similar arrangement with MPU.

On 1 June 2020, LPKR unilaterally announced its intention to restructure all of the MLAs it currently has with First REIT, a significant number of which will expire in December 2021.

Related: First REIT poised to lose rental support from sponsor and master lessees

First REIT’s manager has set up an independent board committee to consider and evaluate the proposals that were received from LPKR, and appointed Merrill Lynch (Singapore) as its financial adviser in the discussions.

New rent structures

Under the proposed rent restructuring, all of the LPKR’s MLAs will be extended to 31 December 2035, with an option for a further 15-year term by mutual agreement.

The rental under all of the restructured LPKR MLAs will be the higher of either the base rent or the variable rent.

The aggregate commencement base rent shall be payable IDR instead of SGD as it was in the previous arrangement.

The base rent from LPKR MLAs from 1 January 2021 will be approximately SGD50.9 million ( IDR550.7 billion) per annum.

The commencement base rent will feature a fixed escalation rate of 4.5% per annum, compared to a base rent escalation capped at 2% per annum under the existing LPKR MLAs.

The higher escalation rate is intended to compensate for the potential increased volatility associated with the proposed switch in rental payment currency from SGD to IDR, said First REIT.

The restructured LPKR MLAs will also feature a new performance-based rent mechanism where the actual rent paid will be the higher of either the base rent or the performance-based rent at 8.0% of the relevant hospital’s gross operating revenue for the preceding year.

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

Meanwhile, the restructuring with MPU seeks to address outstanding rent arrears of SGD5,134,298.45, with MPU committing to make payment of 50% of the outstanding rent arrears by 31 December 2020 and the remaining 50% by 31 March 2021.

The restructurings require approval from First REIT lenders and unitholders, the latter of which will be sought at an extraordinary general meeting.

First REIT was last done on the SGX at SGD0.475, which implies a distribution yield of 8.5% according to data listed on the Singapore REITs table.

By Shariffa Al-Habshee

Shariffa joined REITsWeek in 2017, and monitors Asia-Pacific REITs for the publication.