Horizon.my

Horizon.my speaks with AL-’AQAR KPJ REIT, the world’s first Islamic REIT. With us are Yusaini bin Sidek (CEO) and Shareen Zurina (Strategic Planning & Investor Relations Executive).

The Board of Directors of Alaqar KPJ REIT

1. Can you share with us a bit about Johor Corporation, Al-Aqar KPJ Reit (“Alaqar”) and KPJ Healthcare Berhad? – how each member of the group fits together? Does KPJ Healthcare hold any stake in Damasara REIT Managers Sdn Bhd?
Alaqar was set up in June 2006 with KPJ as sponsor. In that year, KPJ sold six assets worth RM 481m to Alaqar, and Alaqar was listed on Bursa Malaysia. These assets were sold partly in cash and partly in units, therefore KPJ received units in Alaqar, amounting to around 49% of Alaqar’s capital.

Alaqar, Damansara REIT Managers and KPJ are different entities under the umbrella of Johor Corporation. Damansara REIT Managers is responsible for managing Alaqar REIT.

2. Do you think KPJ will sell down to below 20%?
This would be up to KPJ. It is not for us to say.

3. For example, KPJ Healthcare announced recently that it was buying Bandar Baru Klang Medical Centre for RM38 million. How does the group decide which vehicle is entitled to buy which hospital?
I can’t comment as this deal is with KPJ and not Alaqar.

4. What will be Al-Alaqar KPJ’s gearing position following completion of the recent acquisitions (ie Seremban Specialist Hospital, Taiping Medical Centre, Damai Specialist Hospital in KK etc)?
Upon completion, the third acquisition amounting to RM394m will result in a gearing position of 44% of total assets.

5. What is your target or optimal gearing level?
This really depends on the expansion strategies that we are undertaking. Gearing may be undertaken where the right acquisition opportunity presents itself. Furthermore, current interest rate cost of around 4%+ is attractive so we also want to take advantage of this opportunity. When we decide to make an acquisition, we will make plans and ensure an adequate buffer for the purchase. But we will try to cap our gearing level at 45%.

6. Is the income for Al-Aqar KPJ sourced purely from property rental? or the operations of the hospital itself?
90%+ is from property rental and the remaining is from profit sharing of income from fixed deposits. Alaqar only owns the property and is not involved in the operations of the hospitals.

7. Currently KPJ is tenant for all the hospitals under Alaqar. Will all future assets acquired by Alaqar be run by KPJ or can another company be brought in to do so?
We are not restricted to only have KPJ as our tenant. But since they have a history and good track record with us, why don’t we just stick with them? After all, we enjoy a very good partnership with KPJ. However, this will not stop us from exploring opportunities with other hospital operators.

So far, KPJ have been very good tenants and prompt paymasters.

8. How are the property rentals determined – is it by arms-length negotiation with your tenants?
It is based on market price and formula. In the initial stage, the rental is determined at a certain yield, say 7%. Then there is a yearly increment which gives us an increase every year and rental rate will be reviewed every three years.

Our leases go for 15 years with the option to renew another 15 years and every 3 years we have a rental revision based on a formula. It is calculated by Market Value of the Property x (MGS + 2.88 basis points).

Even in the event of an economic crisis, we will still be able to meet our Minimum distribution promise of 6.5 sen per unit to unitholders. Therefore investors are protected during the good and bad times.

We are not so affected because of our tenant nature of business. Regardless of the economy, people will still need healthcare. Also, our assets are rented out on a Gross Floor Area basis, so in this aspect we maximize our rental income. Contrast this to other commercial property where the landlord gets rental on the space they let out, which gives rise to vacancies when times are bad.

9. Does KPJ Healthcare tenant all of your hospitals?
Yes, the KPJ group tenants all our hospitals.

10. Would you look into any other assets other than hospitals?
Actually, our focus is not only on hospitals but on healthcare-related assets. Meaning we could acquire nursing colleges, factories that produce medicine, hotels with syariah compliance operations to cater for health tourism – anything related to healthcare. But we find that among all these assets, hospitals provide the best returns. So we classify hospitals as Class A assets in our REITs.

Currently, we hold 20 assets comprising of 18 hospitals, one college and one hotel.

11. According to your Group Structure, Al-Aqar KPJ REIT pays Maintenance and Management Fees to Healthcare Technical Services Sdn Bhd (HTS) as the “Maintenance Manager”. Who owns this company and what exactly does this company do?
HTS was the property and maintenance manager for KPJ hospitals before the setting up of Alaqar REIT. According to guidelines, if a property falls under the Board of Valuer Act, then we need to appoint a registered valuer to manage it.  However, hospitals do not fall under property governed by the Board of Valuer Act therefore we are required to instead appoint a specific party as property manager. So we appointed HTS because of their vast experience in hospital maintenance.

Not all our assets are maintained by HTS. For example, our hotel and college falls under the Board of Valuer Act, therefore a registered valuer is appointed to manage it.

12. Is HTS a subsidiary of KPJ group?
No, HTS is no longer a subsidiary under KPJ, but they are all within the Johor Corporation group.

13. What are the elements you look for in a property/hospital building before investing in it?
The population catchment is an important factor to consider. The Ministry of Health (MOH) will conduct a market study of an area before approving the construction of a hospital to ensure there is a market need. So we look at this quite carefully.

14. How about looking into factors such as the projected selling price of the asset?
Yes, we do. But in this business, we will hardly sell an asset. The healthcare industry is a long-lasting business and we are more likely to hold our assets. However, we would look into whether the asset has any land which can be further developed such our Ampang Puteri asset, which is a prime area with a large piece of vacant land adjoining it.

15. Are there similar REITs in the Asia region focused on hospitals & medical centres?
I have heard that there are only two in Asia. One is in Singapore and the other is our company. But I believe every REIT has its own special features.

16. Is the market for Hospital properties a large/liquid one? For example, how saleable are your hospitals should you decide to exit an investment?
According to our agreement, the First Right of Refusal goes to KPJ. If we want to buy or sell any asset, we must first offer it to KPJ. If KPJ declines, then we may approach other parties.

17. What is the current Management Fee charged by Damansara REIT Managers following the proposed change late last year?
Previously our Management Fee was based on 0.15% of NAV but this was revised recently. Now we have a new scale which is 0.10% to 0.125% of GAV. I believe we are among the lowest of all REITs managers in the market.

18. Would you consider developing your own properties? Would you consider acquiring properties under construction or overseas assets?
According to guidelines, REITs cannot be developers or financiers. But since we have land (eg. Ampang Puteri), perhaps we may consider development through another vehicle.

We will also consider properties under construction; however, we are only allowed to invest up to 10% of our assets, according to guidelines.

19. Does Alaqar have any other expansion plans lined up locally or overseas?
We do have expansion plans in place but are waiting for the economy to pick up before we proceed.

20. How are your hospitals valued generally – is it by Discounted Cash Flow, Yield etc?
Both. We are required by the SC to have our assets valued by an independent registered valuer. And we use both methods as check and balance.

21. Which are some of your assets that require more capex?
Daily maintenance expenses are borne by KPJ. But Total Asset Replacements such as lifts, air-conditioning, would be borne by Alaqar REIT. These are items which affect the overall building system.