Emirates REIT (CEIC) PLC (REIT) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for joining us today. On behalf of Al Ramz Capital, I would like to welcome you to Emirates REIT's First Half 2020 Earnings Call. I am Maria Elena Ponceca from Al Ramz' research and advisory department. The earnings presentation will be followed by a Q&A session. [Operator Instructions] I will now hand over the floor to Mr. Sylvain Vieujot, CEO of Equitativa, the Fund Manager of Emirates REIT, to commence the call. Please go ahead, and thank you.

Hello. Thank you very much. Thank you all for being here, and thank you for Al Ramz to host this investor call. So I will do the presentation, along with Alain Debare, who is the Group Head of Real Estate; and Moeen Sheikh, who is also our Director of Finance. So first, we'll do market overview. As you have all known, the first half of the year was a challenging market, mostly with the impact of COVID, which has had a very large impact. You can see here the impact it had on offices, on schools and on retail. And just now the situation starts to clarify. The schools are now opening with clear guidelines from the government. Retail is still challenging, especially in the F&B and in the office market, we start to have a bit more activity with a blend of both relocation and renegotiation and also the start of new inquiries recently. You see here on the JLL clock, however, that the outlook is still pessimistic. And the clock seems to go counter clockwise in the last months and quarters with rents still bottoming out. If you look at the year-on-year change. So again, those are markets year-on-year change. You see that on the prime real estate, the rent fell by 7% for the first half of the year. You will see that our decline is of 6% for a full year. So we have roughly half of the decline of the market, but still a very substantial decline. Again, between 5.9% for Grade A offices to close to 8% citywide. And there was no new delivery -- or no new significant delivery in -- of offices in the first half of the year. The key outlook is that occupiers' requirements are starting to increase again, a bit more activity, mostly initially around cost saving, relocation, tenants wanted to shrink their offices. Landlords are also more accommodating. Hence, the rent decreased that you've seen on the previous slide. And globally, not only in the U.A.E., large corporates are really looking more at reducing their office space and making it more efficient. If you look at the financial highlights, our property income has decreased by 6.1% year-on-year to $34 million. We have a significantly -- significant increase of provisions to close to $4 million versus $0.5 million in the same time last year. This is primarily due to one large tenant, which is Jebel Ali School, which is really the vast bulk of this provision. The EBITDA has decreased by 24.8% (sic) [ 23.8% ] to $15 million, and the FFO is at $1 million. There is a significant net loss of $70 million. This is mostly due to market-to-market valuation losses. Valuers have been very -- are very cautious in this market, and assets have lost some value for us. This is a total amount of $70 million -- this is contributing to $70 million loss. And the net asset value stands just below $400 million or $1.31 per share. Now I will give the floor to Alain to talk more about the bit on the portfolio.

Thank you, Sylvain, and good afternoon, everyone. As Sylvain mentioned, we've had a busy first half. So quarter 1 was a good start of the year, really. We had good momentum on leasing and a good level of renewals, especially that we renewed some of our larger tenants. And obviously, quarter 2 has been really focused on COVID, and I'll go back in detail on the COVID situation in a moment. Currently, there is significant pressure on the market, and we are operating in a very competitive environment. And really, in this context, the portfolio is resilient and, as a result, occupancy stands at 71%, which is a year-on-year decrease of 3%. We're pretty much holding on the rates, which have only decreased by 4% in this competitive environment, whilst the average rental term has increased by a year to 8.4 years with the recent renewals. So as a result, the rental income has decreased by 6.7%, and it's reflecting through the net operating income, which decreases 7.5%. As an update on the COVID situation, our immediate response clearly has been on making sure everyone is safe and managing the impact on the business. So at the property level, we reinforced on cleaning, sanitization, et cetera, which is all still in place. And during the period, we managed almost half of our tenants. We have over 130 tenants reaching out to provide and asking for rent relief. So we didn't have an across-the-board rent waiver policy. We addressed each situation one by one and provided relief through flexibility and deferrals. So out of the 130 requests we received, actually, we only lost 14 tenants from the period February to July. And during the same period, we signed 30 new contracts with new tenants. So we really work on converting the challenge to an opportunity. And I think we've created a great relationship with the tenants that we've helped. So as a result, we've got to increase in the lease term to 8.4 years with clearly renegotiations outweighing the terminations. And we continue to monitor the situation. We're not having any more requests. So the situation is stabilized. But we're staying very close to the SMEs, to the retail and to the gyms now that they have been shut down during the period. Now on a positive note, the leasing over the last 10 days, 2 weeks, we've seen some leasing activity resuming. And our team is reengaging with the inquiries, the brokers and all the business we talked to during the first quarter. Now in more detail and as a detailed update on the portfolio, and starting with the inquiries, we've had 68 renewals over the period for 150,000 square feet. And we've had 115,000 square feet of expiring leases while 90,000 of new leases. So in more detail that reflects -- and Index stands at 47% with the renewal of a largest tenant, Boehringer, that's increased the lease term to 2.4 years, but we've also lost 2 other tenants during the period in Index. The -- we have Office Park, which stands at an occupancy of 86%. So over there, we recently commenced the renovation program, which is the renovation of the lobbies and the common areas so that we should see good improvement that, that property tenant facing was the new properties coming in the market. We also have Building 24, so -- which is more commonly known as the Dubai Islamic Bank building, the DIB building, which stands at 51%. We're in discussions, as we mentioned last time, with TECOM, in relation to directly managing the property, which is now under PMLA. And then at the Lofts, we have 66% occupancy at the Lofts 1 and 2. And as you know, we've entered Loft 3 as we started to repurpose the property for larger offices. And we've now completed the exterior works and the facade painting works at the Lofts. So for those that are quite close, the property really looks very, very attractive, I would say, one of the best ones in the area now. The European Business Center occupancy stands at 69% as we released 10,000 square feet from business center operator. Now the metro works are complete. They -- we're hearing that they will open the metro on 9 of September, so we're keeping fingers crossed. And that's going to give us a good opportunity to reposition the space and the property, obviously. And at -- finally, at Trident, we had an increase of occupancy to 76%, and we recently renewed [ research on ] supermarket and F45 gym. So that's giving us also a longer lease term. On the property highlights, you can see a small dip in the annualized rent, which basically reflects the impact on the rental income and the reset of the leases during COVID. And you can see the lease term increasing to 8.4 years. Thank you, and I will pass on to Moeen for the financial highlights.

Hello, everyone. Good afternoon. So I will start with the financial highlights. First half year was indeed a tough period with the pressure coming from COVID, and there were certain rent negotiations, as Alain and Sylvain mentioned. The total revenues were -- as a result of this pressure environment, which stood at a decline of 6.1% as compared to the same period last year. Our main focus was to retain the tenants and make sure that the rent declines are limited and contained, which were -- we were quite successful in ensuring that. Second focus was on the -- maintaining the expense side and to controlling the expenses, which, in this period that we are talking about, rose just almost 0.5%. So the overall decline in terms of the net operating income was 7.5% decline. We closed at $27.3 million versus $29.6 million last year. And this -- if you see in the slide, the quarter 2 2020 numbers showing $14.0 million revenues -- net income versus $13.3 million, which is showing an uptick from the first quarter. And with this -- with efforts that we are doing going forward in the upcoming quarters, this should be showing same similar trend going forward. So if we go to the next slide, the EBITDA was mainly impacted by the provision that Sylvain mentioned. We had to be prudent in terms of our provisioning requirements. So we did the provisioning, which was required, in fact, a bit more than what was needed. So the EBITDA has been directly impacted because of that impact, and it's 23.8% down from $20.2 million to $15.4 million in the first half year. Again, the first -- on quarter-on-quarter levels, it's showing an uptick versus the first quarter. Second quarter looks promising. And the third quarter even is looking -- this is the same trend. So if we go on the next slide, the FFO, the financing costs remained in the same range-bound levels. We had, obviously, no further borrowings. Borrowings were serviced on time. And the impact on the rate revision, the overall IBOR decline, which is expected to come in the third quarter, which, going forward, we will be seeing some savings in the financing costs as well. We have negotiated -- we have spoken to our lenders, the banks, for softer terms. And they are willing to provide whatever necessary support that they can in this environment. And as a result of this, we can see the costs coming down going forward. So FFO for the 6 months period amounts to $0.9 million, almost $1 million, versus $6.2 million same period last year. So if we go on to the next slide, we would see the impact of the valuation losses on investment property, which is down by 8.7% on a year-on-year basis. It was $940 million, now it's $858 million and -- because of the valuation losses of around $70 million. Consequently, the total assets have also fallen at the same pace. There has been no changes in Islamic financing. In fact, we have repaid loan, which were due, pending to be paid. And the impact on the LTV is also mainly because of the valuation of investment properties. So we stand at a liquidity of around $31.3 million versus $68.2 million last year. And we continue to operate in a stable liquid environment. And our cash collections have been impacted by the COVID. But going forward, we will see no imminent threat in the property scenario. Going on to the last slide, I will pass on to Sylvain, just to wrap up.

Thank you, Moeen. Thank you, Alain. So again, a very challenging environment. Quarter 2 is usually a strong quarter for the REIT. So COVID came just at that time and prevented us to continue to grow the income. We are -- as Alain said, we have terminated renegotiation with most of the tenants. Some have real challenges and some even are shutting down. For the ones that are still -- have good -- and this is again mostly in the retail front. For the other one, we have renegotiated many rates. That's why you see a softening in the income also in Q2 because of those deferred rents, but that allowed us to strengthen our long-term cash flow and the increase in weighted average lease term, which is the positive point here. We announced also recently that we appointed an adviser, Houlihan Lokey, to look at the strategic advice on the REIT that encompasses all part of the REIT, the equities, the listing on NASDAQ and overall, all setup. This has started. We are still early in the process, and we will keep you updated as soon as we have something to announce. So thank you, everybody, and we can now go to the Q&A session. Hello, Elena.

Hello, Sylvain. Thank you very much for this presentation. [Operator Instructions] If you make now Marwan Shurrab, our Head of Prime Brokerage, your host, he will handle the Q&A from this point on. Thank you, Sylvain.

Thank you.

Thank you, Sylvain. Thank you, Elena. And thank you, everyone, for being with us today. We appreciate your time, and we're going to start with the Q&A session. So as Elena has reminded everyone, only questions that are identified, and I've already written this in the chat for everyone, identified who is the -- who's making the question, I will be able to address. Other than that, the other questions will not be addressed in this form. Emirates REIT will have the right to address you guys after the call. So let's start with Ali Zahed. He has a question for you, Sylvain. What do the additional $2 million provision for rent payable relate to?

Yes. So this is mostly due to the dispute we still have with Jebel Ali School.

Is there any update on that situation?

Well, unfortunately, this is a confidential process, so we cannot talk too much about it. Otherwise, we could put ourselves at risk in this process. But there is nothing to announce yet. We hope for resolution by the end of the year. But again, unfortunately, that's all I can talk about at the moment. The important thing is also that the school seems to be trading well, and this is the beginning of the school again. So this school is open, is receiving students. And as I said, we will give you an update on the situation as soon as we have a clarity on the legal process.

Thank you. Shaza Shaker has a couple of questions. So we'll start with -- when will the Index Tower retail start leasing?

The Index Tower retail has started leasing just before COVID, actually. There's 2 floors in the retail, the first floor and open floor at the top with a garden. So the first floor is leased again since a long time with a key tenant being aswaaq as a supermarket and the Platform team and a few F&B as well. The garden is supposed to be finished very soon, and we'll start leasing -- we are starting to have inquiries for this second floor now.

What about -- is there any negotiations to date with other school operators in the place of the schools that were not -- that are not leased anymore?

Yes. So the schools that is not leased is one school. It is our school in DIP. We are in discussion with a few operators. We had discussion even at the beginning of the year, and we're very close to signing with one operator. Unfortunately, this operator was abroad and couldn't come to Dubai because of COVID. But we have 2 operators with which we have advanced discussion at the moment. But we are very -- I just want to say that we are very cautious in this process. This is a 30-year lease, so we need to be absolutely sure that we are signing with an operator that is not going to default. And hence, our caution. We were -- about 1.5 years ago, we had an operator that wanted to sign with us. We were very close to signing with them. They even announced that they signed with us. And I think if they -- we would have signed with them, they would have defaulted. So I cannot talk too much more about it, but I think we're right to be cautious. And those 2 operators, I think, we are quite confident in them. But now we need to see if we conclude the deal with one of them.

[Operator Instructions] [ Ahmed Shaheen ] has a question. Please advise on the amount of overdue rent for Jebel Ali School as of June 30, 2020. And what steps, in details, you have taken to ensure payment is done?

As I said, I can't mention this because this is covered by the confidentiality of the arbitration. What I can say is they stopped paying rent early last year. So you can probably derive the amount, but I don't want to break any confidentiality clause in this matter. And just to reiterate, this is a very significant part of our provisions.

Chetan Joshi has a question. Sorry, one second. Have you started planning on a debt repayment plan for your sukuk.

We are talking about it, and this is part also of the Houlihan Lokey advice. So again, we are look at overall strategy of the REIT, both for the equity and for the debt. So we are handling that with them at the moment.

Ahmed Shaheen would like to ask a question. What is the consequences of breaching the LTV limits by the regulator? And Houlihan Lokey is usually involved in restructuring. Should we expect the restructuring of the current outstanding indentures?

So there's no breach of the current LTV with the regulators. The LTV limit is 65%. We are at 51%. So there's no breach there. We had a concession to go to 65% before. The regulator since that has changed its -- the regulation and that's about, I believe, a year ago. So the regulation is 65%, and we didn't breach.

Also from Ahmed Shaheen. You touched on controlling costs. What has been done to reduce the management fees in line with the industry norms, given the current situation? And what is the Emirates REIT's strategic view for the company over the next 3 to 5 years or any other long-term strategy for the REIT?

Sorry, I didn't understand the second part. What is it?

The second part was about the strategic view of the company over the 3 -- over the next 3 to 5 years and any long-term strategy for the REIT.

Yes. So for the management fee -- again, this is part also of the Houlihan Lokey discussion, and we're interacting with them. This is also going to be very dependent on what is the strategy going forward. Clearly, if we decide -- and if the shareholder decides that we should not be listed on Nasdaq Dubai, there's significantly less cost, and this will probably be reflected in the outcome. So all of this is, again, part of the discussion and review by Houlihan Lokey. The long-term view is, I think Dubai is really at -- really tough time at the moment with COVID, and the economy was challenging in the past 2 years. I believe we are roughly at the bottom of it. We start to see a good activity including from Chinese tenants that we didn't see before. And now we start to see a number of Chinese tenants and a few other people from the regions that have some interest. I personally believe that like we've seen many, many times, Dubai is going to rebound quite strong out of this phase, and that we should try to find ways to grow at the moment and to buy building at fairly cheap value. Again, that's quite prospective. I don't have any hard data to tell you that this is going to happen, but I think in this tough market, we are probably -- we need to try to seize opportunity to not only keep our tenants, increase our occupancy, but see also how we can go and how we can do more acquisitions because we are keen to do acquisition in the current market today rather than when the market has recovered and when the asset value will have increased significantly as well.

Okay. So we have from Walid Achour. What is the outlook on dividend payments for the next 2 to 3 years?

I don't -- we never give forward guidance on this. Again, we are really just going out of COVID. You've seen that many REITs worldwide have either suspended dividend or had scrip dividend like we did. A big part of our receivables at the moment is with one large tenant if the situation is resolved and suddenly the position of the REIT is very, very different. So that's a lot of ifs at the moment. I don't want to give any specific guidance on this, but I think when the situation improves both in the market and with our tenants, we'll probably be able to resume a healthy dividend.

Okay. So we have Alexandre Ayoub. You asked for softer terms from the banks. Does it mean that you're pushing back amortization or asking for interest waiver?

We are asking for both. And discussion seems to be promising at the moment because rates have gone down and, therefore, we're asking in for a lower profit rate, which we, again, are keen to, and we are hopeful to conclude discussions on this shortly. And we are also asking them to reduce the amortization or to push the amortization a bit later.

Okay. So we have from Akber Khan. Is the external adviser looking at options to restructure the sukuk? And he would like also to know thoughts on dividend? We already answered that. What are you looking at opportunities to buy -- are you looking at opportunities to buy high-quality distressed assets for the time being?

So the adviser is looking at both, the equity and the sukuk. So the answer is yes. We are indeed looking at buying opportunities. However, we remain very cautious because even so we have a healthy cash level at the moment, we want to be sure it remains that way. So we are looking at acquisition, but we didn't do any acquisition, and we are not looking at any imminent acquisition at the moment. However, we remain very -- we continue to monitor the market very actively.

Okay. [ Artem Rozhok ]. In first half of 2020, the net negative change in cash was around $17 million. What's your forecasted cash burn for the second half of 2020 and 2021? Please elaborate also on the substantially increased property redevelopment and fit-out costs.

Yes. So on the forecast, as I said, we don't give forward guidance. So I won't be able to help here. On the costs, those costs were for the refurbishing of first to complete the mall. So a big part of that was for Index Mall. As I said, first floor is partly tenanted already, and we hope to open the second floor very soon. We also did a lot of CapEx on some of our buildings on Office Park, where we did some, and we are in the process of doing the common areas. We have also the Loft Offices. And so in the Loft Offices, we did all the exterior, and we are working on the common areas. And thirdly, on the school, especially on the Lycee Francais, where there was an extension that has been built and is being completed now, I think we are waiting for the delivery certificate very soon, probably tomorrow, Alain tells me. So that was the big bulk of it.

Okay. So we have also here a question on the delisting that has been proposed. Delisting has to do with cost-cutting only? Is the listing on a different exchange and option?

So it has not -- the cost-cutting is a consequence, it's not the goal of the delisting. The reason why we want to delist is that, at the moment, we don't think that the listing is working very well. We are not the only one to do this. I mean you've probably seen that DP World has delisted. Emirates NBD REIT tried to delist, and we -- overall, we see that the market is very volatile. We trade like our peers at a huge discount to the market value. And I think it's not helping anybody. It's not helping the shareholders. And we are looking at alternatives. Before COVID, we were looking at potentially transferring or dual-listing on Tadawul. This is something we want to reassess at the moment. To be honest, it seemed more promising before COVID than it does now. But we are looking at alternatives: one is becoming private for some time and then listing on another exchange; another one is potentially dual-listing. So again, all of this is part of the advice that is going through with our -- with Houlihan Lokey.

There's questions obviously on the DFSA. So [ Ravi ] has -- [ Ravi Priyani ] has. Any feedback from the DFSA investigation due to the current media coverage? And can you elaborate on the current status of the issue?

Well, the only thing I can tell you is we've not been aware of any findings.

Okay. Do you have a time line when you expect any -- for them to come back to you?

We don't have one. I don't even think that this is a process for the DFSA to give you a time line on when they conclude their investigation. So at the moment, I don't have any time line. As I said, the best I can tell you now is that we are not aware of any findings. And...

Okay. From [ Magnus Sherman ]. The sukuk, obviously, is trading at a discount of over 40%. Have you considered the buyback of the sukuk?

We are potentially looking at this. We have looked at it. And that's also -- as I said, it seems that I'm always referring back to Houlihan Lokey, but indeed, this environment gives rise to challenges and opportunities. This is potentially one of the opportunity. And this is why they are looking at both the equity and the sukuk.

We have from [ Yusri ] as well from [indiscernible]. Just to elaborate on the same sukuk question. Will you be considering to sell assets to repay the sukuk or buy it back at these levels?

We would not exclude it.

[ Abdullah ]. He has a question. I'm a shareholder. What is your plan to support the share price?

So we -- the first is to improve the performance. The second one is also why we think that the share price is a function of 2 things: the performance of the REIT and where it is listed. I think at the moment, this is a big issue. That's why we look at potentially delisting from Nasdaq Dubai and, as we said earlier, potentially relisting elsewhere, but probably not immediately. We also allowed a few parties that were willing to buy some shares previously and that were prevented to do it, like, all our Board members, employee and [indiscernible] to potentially engage in buying the shares. Those are the key things we look at. But one of the big part is also since there is an issue with the listing and in many, many days, I mean, even sometimes for the whole week, we did 100% of the volume on Nasdaq Dubai, which we think is highly -- is a very, very strange situation to be in. I don't know about today. But yesterday, again, we did a vast majority of the volume on the market. And we think that we need to change this setup to, ultimately, have a meaningful impact on the share. We talk to and our Investor Relations team talks to a lot of investors in Europe, and we've been facing some investors that want to buy their shares and cannot access their shares and don't find a way from Europe to buy their shares because the Euroclear agreement with Nasdaq has been canceled. So I think this needs to change so that, ultimately, we have a good audience and a good market of investors that can buy their shares.

[Operator Instructions] [ Walid Achour ] has a question. What is the outlook on observation rates keeping in mind the new supply in the pipeline?

Sorry, the outlook on what?