Al-Aqar Reit may sell assets to fund acquisitions - AmInvestment

KUALA LUMPUR: Al-Aqar Real Estate Investment Trust (REIT) may sell underperforming assets to bolster cash reserves for potential acquisitions, according to AmInvestment Bank Bhd. The research firm highlighted that asset disposals would grant the REIT enhanced financial flexibility to pursue higher-return opportunities amidst elevated gearing levels.

Currently, Al-Aqar's gearing stands at 48%, which leaves little room for additional borrowing to fund acquisitions. Selling lower-yielding assets, especially wellness centers generating yields roughly 40 basis points below the portfolio average, could bolster its financial position. AmInvestment estimated that selling all wellness centers, along with Jeta, could trim gearing by three to four percentage points to around 44%.

The bank believes Al-Aqar is adopting a pragmatic approach by relying on short-term financing while waiting for a more opportune moment to secure longer-term rates. Al-Aqar's sponsor still owns 13 hospitals outside the REIT, along with a new wing at Puteri Hospital, which could be considered for future acquisitions. The new wing, connected to a sponsor-owned hospital, has an estimated book value of RM158 million.

The REIT's acquisition history, with two acquisitions in 2025 priced at 97 to 100% of cost-based valuations, provides some reassurance. Al-Aqar aims to amass RM2.5 billion in investment properties by 2028, up from its present portfolio value of RM1.9 billion. The REIT recently submitted its RM3.0 billion Islamic debt program, encompassing commercial papers and sukuk under a single ceiling, offering greater refinancing flexibility.

However, rising yields have made refinancing decisions more complex, with Al-Aqar aiming to lock in long-term sukuk financing only if costs fall within the 4.5 to 4.8% range. Otherwise, the REIT will rely on shorter-term commercial papers while awaiting more favorable rates. AmInvestment retained its Hold recommendation on Al-Aqar but reduced its target price to RM1.20 from RM1.25, following a 0.5% decrease in its distributable income forecasts for FY2026 to FY2028 due to higher financing costs.

The implied gross target yield remains unchanged at 6.2%, representing a 230-basis-point spread over the 10-year Malaysian Government Securities yield.