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

Hello, and thank you for attending our online H1 investor call. We will start with a market update and with the key trends we see in the market today. Alain, our Group Head of Real Estate, will then give you an operational update. I will follow with a presentation of the most recent development. And Moeen, our CFO, will finish the presentation with a financial update. We'll then have a Q&A session. So first, let's talk about the market overview. In the first half of 2021, most leading banks reported strong growth in both revenue and net profit, which is a very positive sign. Dubai also launched a number of unprecedented initiatives, including full foreign ownership for some companies and the number of licenses issued grew significantly. If we look at the Dubai office market, Dubai remains a preferred regional hub for multinational companies and the government initiatives to boost innovation and the tech sector are leading to a visible increase in demand from tech startups. The flexibility on these terms remains important, and we see a real flight to quality as the tenants try to take advantage of the weaker market conditions to secure nice offices at a historically very reasonable price. The 2 key trends are on the negative side, the reduction of space for large tenants due to remote working and on the positive side, the demand from the tech clients. I want to note that some of the tenants that reduced their space last year are now canceling their reduction and reverting back to their former office. The expected deliveries for the second half of the year are very modest with only 70,000 square meters. This represents only 0.1% of the current supply. The average Central Business District rates have reduced by 1% year-on-year. In our case, you will see that our rates have remained fairly stable or in some cases, increased. I will now let Alain present you the operational highlights.

Thank you, Sylvain, and good afternoon. I will be taking you through the operational highlights. Overall, we have weathered the pandemic well. Occupancy remained stable and rental rate increased by 5% across the portfolio, which is a good achievement in the current market conditions. During the first half, we have seen a good pickup in DIFC, whilst our properties in Dubai Media City and Knowledge Village remain under significant pressure. The market is dynamic, and we have been busy. During the period, we have completed a good number of new leases and retained most of our tenants. We have completed 51 new leases for 85,000 square feet, 30 leases have expired for 40,000 square feet, and we have completed 81 renewals for 130,000 square feet. Also, the average lease term has increased by 9% approximately year-on-year to 9 years. Of course, we remain vigilant, and we continue to ensure a safe environment due to COVID. Although, we are seeing some sense of normality back in the market. Commencing with Index Tower, the REIT's largest property, occupancy at Index has increased by 9.2% year-on-year and now stands at 56%. Our leasing team is focused on converting inquiries, and we have also seen a good momentum enjoying DIFC during the first half. We have signed up Index 24 new leases, most of which are for a larger bespoke, fully-fitted and furnished units. And we have also been able to hold our rental rates whilst increasing the lease term to 2.2 years, which is an increase of 16%, resulting from the longer-term nature of some of those larger leases. The dynamics in DIFC are good and the full connectivity of Index to the rest of the DIFC through Index Mall and through the DIFC Gate Avenue are real game changers for Index. So, we remain confident, and we remain focused on providing one of the best, if not the best, office supply in DIFC. Finally, on Index, we have an exciting program of events and activities coming, and we hope the community can enjoy Index more on Index Park as the weather permits. Moving on to Office Park. Office Park, which is our largest property in Knowledge Village, has an occupancy of 71%, which is a drop of 15% year-on-year with the expiry of one of our largest tenants in August last year and several corporate headquarters downsizing. Retail at Office Park has also been impacted by the low footfall whilst many companies still work from home, but we have also used this time to complete the soft refurbishment of the common areas and upgrades of the security systems. Moving on to the lofts in Media City, occupancy at the Lofts 1 and 2 is 58%, which is the property that was probably most impacted by the COVID disruption as we have a concentration of SMEs and creative companies in the lofts. The Loft 3 is now vacant, and we are working on the permits to repurpose the property to larger offices that can be leased to medium-sized corporates or be leased as one full building to a larger company headquarters. Moving on to DIP, occupancy at European Business Centre is now at 71%, which is a good recovery from the dip to 56% in October last year. We have had some good momentum, and we have secured 17,000 square feet of new leases and 34,000 square feet of renewals during the first half. The area is now improved significantly with the opening of the metro station since 1st of June, and that gives EBC a great visibility and access. We are currently reviewing our property management strategy at the property and assessing a soft refurbishment of common areas and exteriors. Building 24, also in Dubai Media City, is 47% occupied, which is a drop of 6% year-on-year. We are currently assessing proposals for the refurbishment of the common areas to improve the property standards. We are also exploring possible interest at Building 24 for leasing the full building, which is a nice size, about 60,000 square feet, in a beautiful location between the Facebook headquarters and the Mastercard headquarters. Moving on to Trident Grand in JBR, the occupancy at Trident stands stable at 72%, and there are a good number of inquiries. And here again, we are assessing the opportunity of a soft refurbishment of common areas to remain competitive. Finally, Indigo, which is our smallest property on Sheikh Zayed Road, is at 93% occupancy as of 30 of June, but is 100% as of today, with the successful replacement of its largest retail tenants on the ground floor units. The following slide shows us the annualized rent, as you can see, which is stable and the increase in the unexpired lease term to 9.2 years. This concludes our operational review. Thank you.

Thank you, Alain. Now, for the most recent developments. First, in Index Tower, as you've seen with a significant increase in occupancy. You will remember that last summer, the Gate Avenue that connects the tower to the rest of the DIFC has been open. And in the first half of the year, we increased the occupancy in the tower by 9% going from 50% in December to 59% in June. On the 10th of June, we sold half a floor shell and core at a price of AED3,350 per square foot, which represents a significant premium of 82% compared to the book value and allowed us to book a profit of AED18 million. We also signed an MOU with Jebel Ali School where Jebel Ali School paid AED21 million of its arrears rent and agreed to work together along with an external adviser to find a permanent solution for the payment of the outstanding and future rent, which is a very positive development. Moeen will now present you the financial highlights.

Good afternoon, ladies and gentlemen. I'm pleased to present the financial highlights for the first half year performance for Emirates REIT. During the first half year, the REIT continued to operate in a challenging real estate market environment, given the presence of a global pandemic. However, apart from the normal business activities, there has been a few notable developments that took place during the first 6 months of 2021. This includes portfolio revaluation, which after registering a continuous decline since 2019 levels, have recorded a gain in the year 2021. This indicates the beginning of positive sentiment in UAE real estate market. Secondly, in June this year, the REIT completed the divestment of a shell and core half floor in Index Tower at a substantial gain. Also during the same period, the REIT started to see recovery from one of its tenants that has not been making payments since 2019. Moving on to the financial highlights, you would see that total property income recorded an 8.1% increase and closed at approximately $37 million as compared to $34 million posted last year June. This included the one-off gain recorded from the sale of investment properties, as mentioned earlier. Property expenses registered a decline of around 2.7% in the same period, which is a result of continued cost management initiatives taken by the REIT. Consequently, the net property income moved up by almost 11% to close at $30.3 million, which is an uptick of around 11%. As a result of recovery of past dues, the REIT witnessed ECL reversal in June. This, along with the lower fund costs, resulted in an improved EBITDA of around $29.7 million for the first 6 months of the year, up from $15.4 million recorded in last year June. Finance costs for the half year also recorded a decline of 3.1% on a Y-on-Y basis, pushing the FFO were $15 million from [ $885,000 ] recorded in the same period last year. The overall impact of portfolio revaluation in the first half year resulted in our portfolio appreciation of around 5% as compared to December 2020 levels. This for the P&L meant an unrealized revaluation gain of $35 million as compared to a revaluation loss position seen in 2020. The next slide shows the quarter-on-quarter movement in net property income since last 2 years. The impact of the gain on sale of the half floor is visible in the Q2 numbers here. If we move to the next slide, we will see the quarterly trend in EBITDA margins, which was supported by a reversal of ECL provision in Q2. Similarly, the FFO movement, as shown in the next slide, reflects the same trend, which has also posted substantial improvements since the last 8 quarters. Moving on to the balance sheet overview, we would see that the value of investment properties as of the end of first half year amounted to $725 million, approximately, up by 5% from December 2020 levels. Supported by a revaluation gain, the total asset of the REITs also recorded similar growth and jumped by 6.4% from the December levels. Islamic financing continued to show a gradual decline, which is in line with the scheduled gradual repayments. Driven by portfolio evaluation and positive development seen in first half year, the net asset value of the REIT amounted to $277 million approximately, which is up by almost 23% as compared to the December levels of $225 million NAV. This translates to a NAV per share of $0.91, up from $0.74 reported in December. The commercial real estate market outlook continues to remain tough and challenging going forward. However, the REIT continues to focus on its core business with emphasis on enhancing its sustainable revenue flows and improved profitability.

Thank you, Moeen. We'll now proceed with the Q&A session. And I would ask you to please enter your questions in the chat. If you have any questions, you can please write them in the chat. So somebody asked what is the total revenue of H1 compared to last year. Moeen, please?

Yes, last year, if you compare the H1 versus H1, the total revenue in the current half year is [ $51.47 million ] versus there was a loss in last year comparative because of the revaluation losses and the position was $71.78 million negative.

Somebody asked what is the profile of the buyer of the half floor. It is an owner-occupier who had already some property in the building.

There's a question about the valuation gain, asking what is the breakup of this $35 million revaluation. It's spread out over the assets and includes the Index Tower and other assets across the board because the market has gone up considerably in a positive direction in the first 6 months of the year. So, it's well diversified. So, it's not 1 single asset, but this revaluation takes into account the sale of the asset as well.

And we have a question on what is expectation on occupancy in the portfolio in the second half and also the [indiscernible] properties. So, we've seen in the first half that generally, the occupancy was going up. We have good traction specifically on 2 properties, which is one Index Tower. It is our largest property. And there's a good number of especially fintech companies in the DIFC at the moment. So that's going quite reasonably well. And also, we have good traction on EBC. You've seen that the metro station opened just 2 months ago or 3 months ago in DIP, and that has led to a significant increase in the occupancy in European Business Centre. So then we had some other questions on Jebel Ali on the profile of the repayment [indiscernible] of recovery. So with Jebel Ali, as we announced recently, we -- so, we have an arbitration going on that we think is probably going on favorably. And we agreed with them to first receive a part payment of the past rent and to work on a more sustainable and long-time solution. So, we are really in the middle of it. We are significantly hopeful that the situation will be normalized with Jebel Ali. And as I said, we are working on it, but the payment of the AED21 million in arrears was a very good first step. So one of the question was, will you sell assets to repay the debt. So, we have always considered selling assets if we were selling them at a profit. So we are -- that's exactly what we did with the half floor in Index that we sold at almost twice the book value. And we are always considering those. So yes, that's a possibility.

There's another question regarding the repayment of Islamic financing till the end of the year. And there is no pressure as such for us to repay the 2 bilateral facilities that we have right now. So, the position is quite liquid and quite strong at the moment.

Another question is on Expo 2020. What will be the effect on Emirates REIT? That's very difficult to assess at the moment as the Expo is 28 days away. So, I think we have the month or quite quickly or we'll start from a month, so quite quickly. What is important is more generally, we see a quite good market sentiment towards Dubai. We see new companies coming here and looking very actively at the market, which is something we didn't have since a long time. I don't know if it is linked to Expo. I think it's not linked to Expo. Probably Expo will have a very positive help to the market. I think it might especially help EBC which is in DIP, very close to the Expo and on the last metro station stop before the Expo. Apart from that, today -- it's very difficult to assess at the moment. We have another question on why the share price is not rising. We think that the share price is mostly linked to the market. There's a very big issue with the liquidity on Nasdaq Dubai. And I think that's more -- the current share price and the dynamic of the share, unfortunately, today, I think is more linked to the liquidity of the market than the performance and non-performance of the stock. And actually, you can see this with the other REIT as well. Then, there is another question on what is the plan to refinance the [ sukuk ] and the restructure of the sukuk soon. As you know, on the topic, we are actively working with Houlihan Lokey. We did a consent solicitation offer in the first half of the year that had good support, but not enough to pass. So, we are always exploring all the options to deal with the maturity of the sukuk. And we have no definitive answer at the moment. As I said, we are exploring many different offers. So there is a question on how the REIT envisages Dubai real estate market to perform against global competitors such as London, Hong Kong, Mumbai, et cetera. I think Dubai is a much more dynamic and volatile place compared to those markets. And yet, if you look at London, I think it's going through a turmoil at the moment with Brexit. I think the key thing in favor of Dubai is that, first, the government handled very well with the pandemic. And next, we have a very significant part of the population vaccinated. And that shows -- I mean the region, it's very -- it looks like a very stable and well-managed place. So, I think Dubai will continue to take advantage of this in the years to come. I want also to mention that we had some requests from school operators trying to come to this market. This was a bit unexpected from our side. We expected school operators to come back to the market, but not that quickly. And especially, some foreign school operators from some Asian countries are looking at Dubai because some of those countries, you still send a big part of the student population abroad. And at the moment, it is difficult for them to send them in Europe and America as for Visa issues or sanitary reasons, and they look at establishing compass in Dubai. So, that is not directly an asset to the financial competitiveness of Dubai's financial part. But globally, I think Dubai is becoming more and more attractive and people see that as a very friendly and welcoming established place. So we have another answer. Do you expect the office supply in the real estate market to continue pressuring rental in property prices? First on property prices, I think the pressure is mostly off. I think the valuations are rather going up. If you look at the luxury market that has gone up very dramatically. I think, in commercial, less, but I think the pressure on the price of real estate is quite starting to go the other way. On the rental levels, what we see is in commercial real estate, it's still under pressure, especially for the non-prime buildings. We see building where the price has dropped very, very significantly. When you go into the upper end of the market, I think the -- we see rents that are more stable and in some cases increasing. But overall, it's still under pressure. There is very few new supply. As I said, there's only 70,000 square meters of office supply for this year. But yes, there is still a good stock of unleased property in the commercial market. So, we see continued pressure probably for this year. And then I think the dynamic will be whether the population and the economy continues to grow in Dubai a lot. If the economy and the population continues to grow significantly, I think it might go the other way very quickly because there's very little new commercial project under development at the moment. So, there's a new question on new acquisition or divestment. At the moment, we are more looking at divestment because we don't want to increase significantly our loan-to-value. So as we said, we are looking at potential option if the price we can secure is significantly above our valuation prices.

There's a question on why finance income is 0. It's because the cash which is coming in is -- within the banks where we use it for collection purposes. And the entire cash is being used for effective cash flow management and also the IBR rates are so down so that we hardly get any good effective rates. So we don't put in the cash for term deposits for us to be -- and to use it in the general working capital requirements.

There's another question on the -- has the DFSA investigation concluded? Unfortunately, no. We are not aware as of today of any finding, but the DFSA investigation is still ongoing. Okay. Well, thank you for all your questions. If you have more questions or if you want a direct answer, please contact our investment relation team or you can send an e-mail at [email protected]. We'll be happy to answer you and to meet you if you like. This will conclude our session. And hopefully, we'll have some good news to report for our next call. Thank you very much and have a good evening.