RISK RISK DESCRIPTION MITIGATION PLAN Section 4 - RISK MANAGEMENT (CONT’D) MANAGEMENT DISCUSSION AND ANALYSIS Failure to Adapt to Future Healthcare Trends The high OPR rate may stay at the elevated level for an extended period if inflation remains persistently high. Given that all of Al-`Aqar’s Islamic financing is under the floating rates, a high OPR could exert pressure on its earnings. The Manager has taken into consideration the possibility of a persistently high OPR in managing both the existing asset portfolio and the future acquisitions. Thus, it is expected that there will be no significant disruption to the earnings of Al-`Aqar. Asset acquisitions have the potential to raise Al-`Aqar’s gearing level, posing a hindrance to future asset acquisitions. As at 31 December 2023, the Group’s gearing ratio was at 40.8%, comfortably below the threshold of 50% set by Securities Commission. Additionally, the cash proceeds from the proposed disposal of Damai Wellness Centre and Jeta Gardens will lower the Group’s gearing level and provide the financial means for future asset acquisitions. Should Al-`Aqar’s gearing level approach the threshold, the Manager does not foresee any risk related to the inability to raise fresh funding. This is attributed to the resilience of Al-`Aqar’s portfolio, characterised by stable rental income, a positive growth outlook in both earnings and DPU. With an increasing emphasis on health and wellbeing, the general public is expected to shift significantly towards preventive maintenance in the long term, whereby the general public will spend more to prevent health issues from occurring in the first place, rather than relying on reactive measures such as seeking medical attention for an illness. This could lead to a higher demand for primary, long-term care, regenerative treatment, wearable healthcare devices, etc. Additionally, digital technology will likely empower consumers to monitor their health through technologies that can detect early signals of disease in asymptomatic patients, and address drivers of health at an early stage. This could result in a need for smaller-scale hospital requirements, as patients have the option to seek consultation or treatment through virtual platforms rather than an in-person hospital visit and there will be a higher demand for specialised hospitals than multi-disciplinary hospitals. As at 31 December 2023, hospitals’ rental accounted for 77% of Al-`Aqar’s total 24 assets. Failure to adapt to future healthcare trends could result in the Group losing its relevance in the healthcare industry. The Manager has established clear plans to diversify Al-`Aqar’s asset portfolio, which include actively exploring assets related to the future healthcare trend, such as ambulatory care centre, confinement centre, senior living care, warehouse and manufacturing plant for drug or health products. Furthermore, the selection of high-quality tenants that are leaders in innovation and growth industries are expected to provide a more sustainable and more profitable portfolio for a longer time. Therefore, a thorough due diligence process on the business models of the tenants is essential to the Manager before executing the acquisition. Elevated OPR Rate Inability to Raise Funding 36 BUSINESS OVERVIEW 1 3 4 5 6 AL-`AQAR HEALTHCARE REIT ANNUAL REPORT 2023
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