KUALA LUMPUR (April 2): Al-Aqar Healthcare Real Estate Investment Trust (KL:ALAQAR) faces risks of an earnings decline with the proposed renewal of leases for five key properties, CIMB Securities flagged on Wednesday.

Renewal of leases, including the KPJ Penang Specialist Hospital, Taiping Medical Centre and TMC Health Centre, and KPJ Seremban Specialist Hospital, could come with yields of 6.0%-6.1% versus 6.0%-7.3% in 2023, according to estimates from CIMB Securities, one of only two research houses covering Al-Aqar.

“Overall, we are slightly negative on the proposed acquisition and lease renewal,” CIMB Securities said. “While we acknowledge Al-Aqar’s continued efforts to expand its portfolio, the yield from the proposed asset acquisition and lease renewal may be lower than its current portfolio’s average.”

Last week, KPJ Healthcare Bhd (KL:KPJ) announced that it plans to inject two hospital properties into Al-Aqar for a combined consideration of RM241 million via a sale-and-leaseback arrangement.

KPJ has also proposed to renew existing lease agreements for six hospital properties and two academic institutions within Al-Aqar’s portfolio. The transactions are expected to be completed in the second half of 2025.

The projected 2026 earnings forecast could decline by about 3.7%, while the inclusion of a new rental income stream in Al-Aqar’s portfolio would only partially cushion the impact of the renewals, said CIMB Securities.

Overall, Al-Aqar’s distribution yield could fall to 5.9% in 2026, lower than the current yield of about 6.1%, CIMB Securities said as it kept the stock on “hold”.

Further, Al-Aqar’s gearing level could rise up to 48% at the end of 2026, which is only two percentage-points below the regulatory limit of 50%, if the proposed acquisition is fully funded through borrowings, the research house added.

For MIDF Amanah Investment Bank, the acquisition would only lift earnings by less than 0.5% while the potential increment is limited after deducting financing cost of about 5% and expenses.

The research house maintained a “neutral” call on Al-Aqar for its "flattish earnings outlook" in a March 28 note after the acquisition and renewals were announced.

Al-Aqar’s shares edged up one sen or 0.8% to RM1.26 at the time of writing on Wednesday, valuing the trust at RM1.06 billion.