Al-`Aqar Healthcare REIT Annual Report 2020

Strategic Performance 41 The 2020 original plan of business transformation together with the diversification of assets portfolio throughout healthcare chain or industry and diversification of tenants has been postponed to the year 2021. This includes the diversification of assets class for primary care, tertiary care, non-medical institute and non-medical supplier with both KPJ Group and other third parties. In future, Al-`Aqar will be focusing more on digital transformation especially in the administration and operation matter related to the business growth. New business model and package will be offered to both existing and future tenants. This includes the flexibility in rental arrangement in customising to the needs and requirement of the tenants. There will also be repositioning and divestment of existing potential underperformed and underutilized assets as part of the business goal. Challenges The year 2020 is a challenging year for Al-`Aqar as numerous pitfalls are inflicting the Group business growth caused by the outbreak of COVID-19. Al-`Aqar is facing the common types of pitfalls as literally the world is experiencing during this pandemic. Those pitfalls are divided into three aspects which include political, economy and social aspects. The below paragraph highlighted those challenges for the Fund and the response by the Management to address those challenges. Declining in Private Healthcare Business Operation Private hospital may be requested by the Government to take up the shortage of beds as a result of the sudden surge of patients in Government hospital during this pandemic outbreak. Thus, there will be a potential collaboration and partnership between the public and private sectors to overcome the shortcomings. However, the private hospital may encounter potential insufficient healthcare facilities if not well equipped at all times, as substantial cost will need to incur to adopt those facilities. As a result of the lockdown implemented by the Government to contain the spread of the virus, the main sponsor of the Fund, KPJ Group has reported a decline in their business activities. This was evidenced by lower patient episodes and lower daily Bed Occupancy Rate (“BOR”) started from March until May 2020. Therefore, as part of the long-term business sustainability plan, Al-`Aqar has committed to a rental support programme to its affected tenants in the form of rental rebate. The rebate is determined based on actual performance of each properties or tenants with a certain capping and the post MCO impact has been seen starting 10 June 2020, through an implementation of RMCO. Interest Rate Movement - Overnight Policy Rate (“OPR”) Cut Under the economy pitfalls, the current low interest rate regime will persist in view of the depressed economic growth in the next two years. OPR cut provide an opportunity to the tenant to consider other options in renewing existing properties and potential future injection of properties into Al-`Aqar. Al-`Aqar have adopted effective capital management approach, to counter the risk if the interest rate rises to pre-covid levels. Technology Trends in Healthcare The amalgamation of the healthcare industry over the past several years has resulted in more complex back end technology and systems as networks had become complicated and in great volumes. The main challenges in adopting technological innovations in the healthcare sector lie in cost and the ability of such innovations to meet users’ needs. The hit of the recent pandemic has also changed the health care industry into virtual communication platform as patient preferred to obtain consultation virtually and delayed appointment to hospitals. Thus, the main sponsor of the Fund, KPJ Group may experience lower patient episodes and lower daily BOR. In the long term, this may affect the rental arrangement between the Fund and tenant. Uncertainties in Australia’s Aged Care Industry The announcement by Australian Prime Minister Scott Morrison on 16 September 2019 regarding the establishment of Australia Royal Commission into the residential aged care sector, has created an increased level of uncertainty in the aged care industry. An announcement released in September 2020 by Royal Commission has emphasized on the home care over residential care. In addition to the Federal Government has announced $70 million in extra funding for people moving out from aged care home into family homes during the pandemic. This has increased uncertainty in the aged care industry. The current situation has impacted the financial performance of Jeta Gardens as there is a drop of occupancy level with the fear of higher pandemic risk in aged care facilities. Prospect Despite adversity during the COVID-19 pandemic, Al-`Aqar is optimistic with regards to its future. The healthcare industry will continue to face high demand market as the Malaysian population becomes larger, older and educated. The availability of COVID-19 vaccines starting in the first quarter of 2021 is an extra stimulus for tenant’s business as business will continue with minimum disruption in the coming years. Over the near term, the low OPR cutting provides lower refinancing risks and the Manager is taking an advantage of current accommodative interest environment to lengthen the debt tenures, refinance loan ahead of maturities and to establish new loan facilities for future drawdown. Al-`Aqar also expects its earnings to improve in 2021 as more patients will return, especially the foreign patients Management Discussion and Analysis