Al-`Aqar Healthcare REIT Annual Report 2019

Al-`Aqar’s profit rate risk is relatively low as of its 84% borrowings are on fixed rate. The exposure of floating rate borrowings only represent 16% of the total borrowing. Due to the nature of the borrowings, there is an exposure to interest rate risk. Al-`Aqar has benefitted from the recent Overnight Policy Rate (OPR) cut by 0.25% in May 2019 through immediate interest rate adjustment for its floating rate borrowings. ISLAMIC FINANCING: SUKUK IJARAH In 2013, the Group via its special purpose vehicle, Al-`Aqar Capital Sdn Bhd (‘‘Al-`Aqar Capital’’) has established a 15-year Islamic Medium Term Notes Sukuk Ijarah of up to RM1.0 billion in nominal value in FY2013. The RM655 million 5-year Sukuk under Issue 1 was issued via the First Tranche of RM374 million and the Second Tranche of RM281 million. In July 2017, Al-`Aqar Capital made a partial early one-off redemption of RM80 million in nominal value of unrated Class C IMTNs of Issue 1. The redemption was made by using the proceeds from the disposal of an investment property. In May 2018, Al-`Aqar Capital redeemed the outstanding IMTNs of Issue 1 of RM575 million together with the outstanding profit due on maturity and refinanced the IMTNs via an issuance of RM575 million in nominal value of IMTNs (“Issue 2”). The maturity period for Sukuk Issue 2 has shortened to 3 year compared to 5 year under Issue 1. In December 2018, Al-`Aqar re-rated RM112 million in nominal value of unrated Class C IMTNs of Issue 2. The re-rating exercise had led to an early redemption of the Class C IMTNs of Issue 2 and an additional issuance of RM75 million in nominal value of Class A IMTNs of Issue 2 and RM37 million in nominal value of Class B IMTNs of Issue 2. The profit rates for the sukuk are all on fixed rate basis thus insulting Al-`Aqar Capital from any adverse movement in the interest rate and volatility in the economy. The average profit rate of the Sukuk Issue 2 is about 5.05% per annum. The respective AAA/Stable and AA2/Stable ratings of RM295 million Class A and RM60 million Class B Sukuk Ijarah had been reaffirmed by RAM Rating Services Berhad (‘‘RAM’’) in their annual review dated May 2019. The stable rating outlook reflect that the 19 secured properties will perform within expectations, supported by the long-term lease agreements with the KPJ Group. Additionally, RAM expects the expiring long-term lease to be renewed and any ongoing or new developments to be prudently managed. RAM also highlighted that the above is exposed to significant single-counterparty risk as all the hospital operators under Issue 2 are subsidiaries of KPJ Group. In this regard, the KPJ Group’s vested interest in the REIT via its indirect stake further ensures continued performance and servicing of the lease term. ISLAMIC FINANCING: MURABAHAH TAWARRUQ TERM FINANCING-I In November 2018, Al-`Aqar obtained floating rate borrowing facility (“Murabahah Tawarruq”) amounting to RM29.9 million to part finance the outstanding balance in relation to an investment property purchased in prior years amounting to RM38.9 million. The Murabahah Tawarruq is payable over a period of 24 months from the date of first disbursement with bullet repayment of the principal sum on the 24 th month. The Murabahah Tawarruq bears an effective profit rate of 1.50% per annum above the bank’s Cost of Funds (“COF”). The average effective profit rate for the Murabahah Tawarruq during the year is 5.54%. The Murabahah Tawarruq will come due in May 2020 and the Management team is already in talks to strategies the repayment of the borrowing. ISLAMIC FINANCING: COMMODITY MURABAHAH TERM FINANCING-I On 27 December 2019, Al-`Aqar obtained floating rate borrowing facility (“Commodity Murabahah”) amounting to RM80.0 million to finance the acquisition of KPJ Batu Pahat with purchase consideration of RM78.0 million and to pay related cost and expenses during the acquisition. The Commodity Murabahah is payable over a period of 60 months from the date of first disbursement with bullet repayment of the principal sum on the 60 th month. The Commodity Murabahah bears an effective profit rate of 1.25% per annum above the bank’s. The average effective profit rate for the Commodity Murabahah during the year is 4.70%. 03 STRATEGIC PERFORMANCE 46