Al-Aqar REIT is Malaysia’s only wholly healthcare REIT which is traded in the Bursa Malaysia stock exchange since 2007. They are a shariah-compliant REIT with 23 properties located across Malaysia and Australia. As at 31 December 2020, they owned 22 properties across Malaysia and 1 property in Australia.
In this post, we will look into Al-Aqar REIT FY20 performance to see how it has performed.
1) Occupancy rate remain strong at 100% in FY20
We will kick start the performance of Al-Aqar REIT with a favourable point which is their occupancy rate. If we were to look at its occupancy rate, they have maintained a strong 100% occupancy rate in FY20. This comes to no surprise given the defensive nature of the industry they operate in. Regardless of the economic condition, healthcare remain an essential service.
Despite the overall positive occupancy rate, there are a number of uncertainties that might be adverse to Al-Aqar REIT which we will discuss further in the next two points.
2) Uncertainty in the Australian Aged Care Industry
Though the majority of Al-Aqar REIT are located in Malaysia, they do own one nursing home asset in Australia which happens to be Al-Aqar REIT biggest contributor. As shared in our previous Al-Aqar REIT FY19 analysis, the establishment of Australia Royal Commission into the residential aged care sector has created an increased level
of uncertainty in the aged care industry. The interim report in September 2020 have showcased a preference for home care over residential care. This had led to the possibility of shifting from aged care institutional to community and home care services.
Furthermore, the negative publicity during Royal Commission into aged care quality and safety has adversely
impacted the financial performance of Jeta Gardens. Going forward, this would remain an area that remains uncertain.
3) 15 leases due for renewal in FY21 with 6 leases expiring in June 2021
Lease expiry profile of Al-Aqar REIT is another area to which we would pay close attention going forward. Looking at its lease expiry profile, 15 of their property leases out of the 23 properties are due for renewal in FY21. This creates uncertainty on whether better terms are discussed and whether the leases due for expiry are successfully renewed.
Despite the uncertainty on the renewal, we are in the opinion that the lease will be likely be further renewed. KPJ Healthcare Berhad which is the master tenant of the leases due for expiry would likely renew given the increased demand in the healthcare industry. Furthermore, management had also represented in the annual report that on September 2020, KPJ Healthcare has stated their intention to renew the 6 affected leases and talks have been ongoing. The target properties are KPJ Damansara Specialist Hospital, KPJ Ampang Puteri Specialist Hospital, KPJ Selangor Specialist Hospital, KPJ Ipoh Specialist Hospital, KPJ Johor Specialist Hospital and KPJ Puteri Specialist Hospital.
4) Overall net property income increased in FY20
|MYR in 000s||FY18||FY19||FY20|
|Net Property Income||96,609||100,326||109,614|
Financial performance has been fairly great in FY20 despite the uncertainty of COVID-19. The net property income of Al-Aqar REIT increased year on year from MYR 96.7 million in FY18 to MYR 109.6 million in FY20. Given that their properties portfolio consists of both Malaysia and Australia properties, let’s dive into the segment respectively.
|Net Property Income (MYR in 000s)||FY19||FY20|
The Australian property segment remains stable with a slight increase in net property income from MYR 11.4 million in FY19 to MYR 11.6 million in FY20. Looking back at the earlier point discussed, Al-Aqar REIT’s Australian asset would likely be affected given the uncertainty of the aged care industry. Malaysian properties segment on the other hand has increased from MYR 88.9 million in FY19 to MYR 98.0 million in FY20. This increase is mainly attributable to the full-year income contribution in lease rental from KPJ Batu Pahat Specialist Hospital which was acquired in December 2019.
5) Decline in distribution per unit in FY20 to 6.81 cents
|Distribution Per Unit||7.70||7.75||6.81|
Despite the positive financial performance, that does not always translate to a favorable distribution. The distribution per unit of Al-Aqar REIT has declined from 7.75 cents in FY19 to 6.81 cents in FY20. The dropped despite the strong financial performance is mainly from the COVID-19 rental support given to assist tenants during the year.
6) Slight increase in gearing level but still within the permissible range
As at 31 December 2020, Al-Aqar REIT has a total borrowings of MYR 683.6 million. This would translate to a gearing level of 41.48% which is still below the permissible limit giving them slight debt headroom for further asset acquisition and enhancement initiatives in the future. Of the total debts, approximately 84% of its debt are fixed rate in nature. The remaining 16% of debts are floating rate in nature which would subject them to interest rate risk. Having said that, that would also mean that they would benefit from a low-interest rate environment.
Based on our overall analysis, Al-Aqar REIT being a healthcare REIT remain fairly defensive in nature as compared to REIT in other sector. Nevertheless, Jeta Garden future outlook remains a question mark given the uncertainty in the aged care sector. This would potentially be detrimental to Al-Aqar REIT overall performance given that they are biggest revenue contributor.
What are your thoughts on Al-Aqar REIT FY20 Performance? If you are just getting started, feel free to read more of our REIT Guide and REIT Analysis. You can also read more about what REITs are if you are new to REITs.