MANAGEMENT DISCUSSION AND ANALYSIS RISK MANAGEMENT The Group is cognisant of the fact that it is exposed to various risks that may have a material impact on its business operations and financial performance. As such, the Manager has identified the following key risks and established mitigation plans: Risk Risk Description Mitigation Plan The Group may face a decline in revenue due to unfavourable market condition, increased competition, changes in tenant’s business strategies, changes in government regulations and outbreak of pandemics. However, the competitive pressure is relatively low because KPJ Group holds a dominant market position and has strong presence across all states in Malaysia. Furthermore, hospital business has been resilient throughout the history, with the exception of the COVID-19 pandemic period in 2020-2021. The Manager monitors the operating environment closely, so that it can implement the mitigation plans swiftly, such as repositioning or divesting the assets to ensure that the Group’s rental income is not affected. The remaining tenures of the current contractual leases are shorter than before, with 5 contractual leases (or 21% of total contractual leases) expiring in 2023 and 8 contractual leases (or 29% of total contractual leases) expiring in 2024. Given that Al-`Aqar’s healthcare assets are highly-specialised, finding a replacement lessee or healthcare operator may take significant amount of time. This could negatively impact the Group’s immediate earnings until a new lessee is secured. The current lease agreements require the tenants to provide a minimum of one year notice prior to renew the tenancy contracts. Furthermore, our mitigation plan for business and market risk can also serve as an early warning for any potential underperformed or underutilised properties. Should the lessee decide not to renew the lease, the Group needs to identify new JV partners, continuously source for a replacement lessee or healthcare operator, repurpose the building or divest the property to a third party. The factors to decide will mainly depend on the risk assessments of each respective asset before a certain course of action is undertaken to mitigate this risk. As the world is in a rate hike cycle, it is expected that BNM could follow suit and raise the OPR in 2023. Given that all of Al-`Aqar’s Islamic financing is under the floating rates, an increase in OPR would have a negative impact on earnings in 2023, although it is expected to be minimal. The Manager has taken into consideration the possibility of a higher 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. 1. Business and Market Risk 2. Non-Renewal of Leases Risk 3. Higher OPR rate 53 1. Corporate Overview 3. Strategic Performance 5. Governance Structure 2. The Driving Forces 4. Sustainability Statement 6. Financial Reports
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