So, what happened?
First REIT (SGX: SW9U) saw its share price tumble by 21% yesterday to S$0.70 from S$0.89.
To recap, First REIT is a healthcare REIT that owns a portfolio of 20 properties located in Indonesia, South Korea and Singapore.
The bulk of the portfolio consists of 16 hospitals in Indonesia operated by PT Siloam International Hospitals Tbk, a subsidiary of PT Lippo Karawaci Tbk (IDX: LPKR), or LPKR.
Two nursing homes in Singapore are operated by Pacific Healthcare Nursing Home Pte Ltd, while the remaining two assets are the Lentor Residence in Singapore and Sarang Hospital in South Korea.
What does this decline mean for investors
Yesterday, LPKR issued a statement stating that the COVID-19 pandemic has significantly impacted Siloam’s revenues due to a drastic decline in patient volume across Indonesia.
Siloam’s revenues went down by as much as 40% to 50% year on year in some hospitals, forcing LPKR to cough up additional rental support to guarantee a certain rental level for First REIT.
As LPKR expects these declines to be both significant and structural over the medium-term, it plans to initiate restructuring discussions on the structure of these leases.
To make matters worse, the original rental support agreements have a currency peg component that further worsens the financial situation for LPKR due to the Rupiah’s depreciation.
The CEO of First REIT, Victor Tan, has remarked that the manager has not been approached by LPKR on the matters mentioned above as yet.
If approached, the manager will work out an arrangement that is beneficial for the long-term interest of First REIT’s unitholders.
As it stands, the implication is that First REIT may lose a substantial portion of its rental support from LPKR after negotiations are concluded.
The uncertainty caused by this news may explain the sharp selldown in First REIT’s shares.
While there is no conclusion yet, the implication from any renegotiation could range from negligible impact to a major blow to the REIT.
The devil will be in the details of how the deal works out.
We will continue to monitor for updates from the manager of First REIT regarding these upcoming discussions.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.