Singapore Market

First REIT (SGX:AW9U) Restructuring of Master Lease Agreements

Calvin Lo

First REIT (SGX:AW9U) has officially announced details of the restructuring of Master Lease Agreements (MLA) for its Indonesian hospitals with PT Lippo Karawaci Tbk (LPKR) and PT Metropolis Propertindo Utama (MPU).

This restructuring had been expected for some time now, and had been a huge overhang on First REIT stock price. Although there’s finally certainty around the MLA, the shift of base currency from Singapore Dollar (SGD) to Indonesian Rupiah (IDR) has introduced currency risk to First REIT. Previously, rental payments in SGD had provided investors certainty against a depreciating IDR.

First REIT also seems to have no choice but to accept a more disadvantageous arrangement due to financial stress faced by LPKR. After all, if LPKR falls, First REIT will lose its biggest tenant by far and will probably fail as well. In addition, LPKR’s financial woes are far from over, and will likely worsen because of the pandemic.

Key details of the restructuring agreement (classification into pros and cons are my personal opinion)

  • Pros:
    • Variable to performance based rent of 8% of hospital gross operating revenue – more upside
    • Lease extension for another 15 years + 15 years (option), WALE increases to 12.6 years from 7.4 years
    • Higher security deposit – 8 months from 5 months
    • Higher fixed escalation rate 4.5% p.a. from 2.0% capped
  • Cons:
    • Base currency changed to IDR from SGD (IDR/SGD depreciated around 53% in the last 10Y or 4.3% per year, and 2.6% in the last 1Y)
    • Base rent reduction to S$50.9M from S$80.9M (LPKR) and to S$5.8M from S$11.3M (MPU)
    • Property valuations decrease to $0.94B from $1.34B

As I mentioned earlier, IMO currency risk due to rental payments in IDR is the biggest risk investors should consider now when evaluating First REIT.

My thoughts and position

When trying to decide what I should do with my position in First REIT, I had to go back to my original investment thesis. I decided to invest into First REIT mainly to access the growing Indonesian healthcare sector.

Although tailwinds for Indonesia healthcare sector remains, First REIT as the investment vehicle seems more and more risky. Another big question is what the lasting economic impact of COVID-19 will be on Indonesia, which is one of the hardest hit countries in the world.

I’m increasingly uncomfortable holding assets in Indonesia due to increased uncertainty. With the added risk of IDR depreciation, I’m seriously considering selling my position.

First REIT makes up 1.5% of my portfolio and I’m deeply in the red on the position, down by ~60%. This is indeed a painful lesson. I’ve probably already held on for way too long. My gut tells me to sell and put the capital into another REIT with better diversification and prospects.

If you’re also an investor in First REIT, do let me know your thoughts. Will you be holding, buying more, or selling out?

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Disclosure: I am long First REIT AW9U