Section 2 - OPERATIONS REVIEW (CONT’D) MANAGEMENT DISCUSSION AND ANALYSIS In 2023, the fund entered agreement/contract for two asset disposals: On 15 November 2023, Al-`Aqar entered into a Sale and Purchase Agreement (“SPA”) with Sihat Damai Sdn Bhd for the disposal of Damai Wellness Centre for a disposal consideration of RM13.0 million cash. This proposed disposal is expected to be completed in the first half of 2024. On 12 December 2023, Al-`Aqar entered into a Land Sale Contract (“LSC”) with Principal Healthcare Finance Pty Ltd to dispose of the lands and buildings of Jeta Gardens Aged Care Facility with the disposal consideration amounting to AUD24.4 million cash (equivalent to approximately RM74.9 million). This proposed disposal is anticipated to be completed in the second half of 2024. The proposed disposals above will enable Al-`Aqar to realise its investment and strengthen its asset profile via capital recycling. The value of Al-`Aqar’s investment properties has more than tripled, reaching RM1.64 billion as at 31 December 2023, since the initial public offering (IPO) in 2006. Looking ahead to 2024, the Manager holds an optimistic outlook for Al-`Aqar, bolstered by a scheduled rental increase, potential earnings from new acquisitions and renewal of master leases. Additionally, the OPR may have already peaked, making it unlikely for Al-`Aqar’s financing rates to increase, a factor that could otherwise dampen Al-`Aqar’s earnings growth. The Manager also anticipates that the expiring leases will be renewed, given the longstanding business partnership with KPJ Group and the competitiveness of the rental rates offered to them. Beyond 2024, the Manager remains optimistic about Al-`Aqar’s prospects, supported by its proactive capital recycling strategy which involves acquiring strategic healthcare assets and divesting/repositioning underutilised or underperformed assets. PROPOSED DISPOSALS PROSPECTS In 2023, the Manager faced the challenge of balancing between a higher financing rate and competitive rental rates. Additionally, the ongoing uncertainty in the aged care industry in Australia persisted. Hence, to minimise risk exposure to the changes in the aged care industry in Australia, together with KPJ , Al-`Aqar has entered into agreements to dispose Jeta Gardens Aged Care Facility in December 2023 and the final exit via disposal of Jeta Gardens Retirement Village is expected to be completed in the next two years. 2023 KEY CHALLENGES 1. Balancing higher financing rate and attractive rental. As expected by the Manager, the OPR increased in 2022-2023 and has led to higher financing rates for Al-`Aqar, impacting the Group’s earnings negatively. Despite this challenge, Al-`Aqar managed to renew the leases for the “Second Properties Injection” at competitive rental rates for KPJ Group without compromising future returns to unitholders. 2. Continuous uncertainty in the aged care industry in Australia. The outcome of the Royal Commission into Aged Care Quality and Safety Report in 2019 had led to a shift from residential aged care to home care. The home care market has experienced significant growth mainly from an increase in government expenditure, with AUD4.2 billion in the year 2021, an increase of 12% from the previous year. This growth is aligned with government policy and consumer preferences to remain at home for as long as possible. As such, the demand for residential aged care and retirement villages has continued to decline, resulting in a continuing drop in occupancy levels. 30 BUSINESS OVERVIEW 1 3 4 5 6 AL-`AQAR HEALTHCARE REIT ANNUAL REPORT 2023
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