Would You Like to Earn Rental Income from Hospitals?

For investors who are looking to earn rental income from hospitals in Malaysia, there is a REIT which could pique your interest, namely Al-Aqar Healthcare REIT (a member of Johor Corporation Group).

The REIT was listed in Bursa Malaysia in 2006 and became the first listed Islamic REIT in the world. Al-Aqar Healthcare REIT is supported by KPJ Healthcare Berhad.

Al-Aqar REIT earns rental income from its portfolio of hospital assets, comprise of 19 hospitals and 4 healthcare related properties in Malaysia and Australia as at end-December 2015. At least 90% of the REIT’s distributable profit would be paid to unitholders in the forms of distribution or dividends.

For its hospital assets in Malaysia, it has KPJ Ampang Puteri, KPJ Damansara, KPJ Ipoh, KPJ Damai, KPJ Tawakkal and many more. Most of us would have come cross or pass by KPJ hospitals.

Prior to any REIT investment, investors are encouraged to first analyse how does the REIT generate its rental income? Can the REIT increase the rental payment by a high single digit reversion rate? Is there a formula to calculate rental payment of the tenants?

Al-Aqar REIT	2012	2013	2014	2015
Revenue (RM’ Mil)	103.3	107.4	108.6	110.9
Revenue Growth %	22%	4%	1.1%	2.1%

Based on the table above, revenue growth for Al-Aqar Healthcare REIT might not be strong in the past few years except 2012 where revenue was boosted by rental income from newly acquired hospitals.

Al-Aqar cannot simply increase the rental rate of the hospitals as the rental reversion is subject to a formula of which the rental reversion would take place every 3 years.

The revised rental is subject to the higher of the minimum rental or 10-year Malaysian Government Securities (MGS) yield plus 2.38% multiplied by the property’s market value. Subsequently, the rental rate for the next 2 years will be at a 2% rate increase per year before it gets reviewed again.

Hence, rental reversion for Al-Aqar REIT might not be straightforward and investors might want to understand the rental reversion formula before venturing into this healthcare REIT.

Strong and positive rental reversion means higher rental income, higher rental income means potentially higher distribution or passive income to investors. Hence, the flexibility of a REIT to impose higher lease payment is a critical area which we must take note.