Master leases are sometimes a doubleedged sword, only good during lease term

The top five REITs with the highest yields and top five REITs with the lowest yields feature one healthcare REIT each. ParkwayLife REIT (PLife REIT) is trading at just 3.3% and at more than twice its book value. On the other hand, First REIT has a yield of more than 10% and is trading at a 50% discount to its book value. PLife REIT’s unit price is up 26% this year while First REIT’s is down 56%.

PLife REIT was admitted into the FTSE EPRA NAREIT Developed Index on Sept 18. On Aug 11, First REIT, in response to queries from the SGX, confirmed its valuations were based on the master leases.

“The value of First REIT’s properties are supported by master leases,” says its manager. However, the master leases of four of First REIT’s initial assets comprising three hospitals and a hotel and country club, are up for renewal in December 2021. Lippo Karawaci has announced that it intends to restructure the master leases of these properties.

The master lease rent for the four properties is being paid in Singapore dollars at a fixed rate of $ 1.00 to IDR5,623.50. According to the prospectus, this formula was fixed for the duration of the lease term which started in 2006, the year of First REIT’s IPO. But the current exchange rate is around $1 to IDR10,600. On June 1, Lippo Karawaci announced that the currency peg agreed at IPO is unsustainable given the Singapore dollar has strengthened considerably against the rupiah.

“Potential adjustments to the valuation of First REIT’s properties may arise from restructuring of the master leases,” the manager says in its Aug 11 reply to the SGX.

On Sept 20, First REIT’s manager announced it has set up an independent board committee comprising independent directors to evaluate Lippo Karawaci’s proposal. The board is likely to appoint an independent financial advisor to make a recommendation, following which unitholders can vote on the new master lease proposal in an EGM.

Equity markets usually move ahead of fundamentals. The extent of First REIT’s decline this year suggests that its NAV, which stood at 96.98 cents as at June 30, could be negatively impacted by the master lease proposal. In 1HFY2020 ended June, First REIT’s DPU of 2.3 cents was 46% lower than the 4.3 cents announced in 1HFY2019.

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