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

Good afternoon, and thank you for attending our online Q3 investor call. We will start with a key highlight of the quarter, followed by a market overview. Alain, our Group Head of Real Estate, will then present the portfolio update, and Moeen, our CFO, will finish the presentation with a financial update. We will then have a Q&A session. So first, let's talk about the key highlights. In Q3, we've seen a positive momentum, both in the market and in our portfolio. The key indicator have seen a real improvement. Year-to-date, the occupancy has increased by 2.3%. The rental rates have increased by 3.4%. The valuation have increased by 4.8% and the net asset value has increased by 22%. As you will see later in the presentation, this is a combination of both general market improvement and also positive trends in our key assets. I would like to mention specifically Index Tower and Jebel Ali School. In Index Tower, you will remember that we sold half a floor in Q2. In the third quarter, the occupancy has continued to increase and grew 4.8%. The occupancy in the tower is now higher than 60%. The mall also start to have a good footfall and a vibrant community, thanks to the active events program. For Jebel Ali, we won the arbitration case against the school. And we are also in discussion with potential operators who gave us offers to buy the school. Equitativa is continuing to expand its team, and Thierry Leleu has joined us as Deputy CEO. Thierry brings a lot of experience to the team. His biography is probably too long to read verbatim, and I will let you read it from the presentation that you can download on our website. I just want to mention that Thierry has a legal background is graduated from Harvard Law School, Sciences Po in France and the University of Pantheon Assas in Paris. He has built European operations for GE Capital Real Estate Investment Management and was the Head of Fund Management from -- for Cromwell Property group. More recently, before coming to Dubai, he was the Chief Investment Officer of Cromwell European REIT, which is a Singapore-listed REIT. So as you see, Thierry joining us will bring further REIT and real estate experience to our team. Now let's discuss about the market. You see that 2021 looks in stark contrast with 2020. And the forecast for 2021 and 2022 looks very similar to what we experienced in 2018 and 2019. In 2021, the UAE GDP is expected to grow by 2.1% and by 4.2% the next year. The key factor mentioned to catalyze the recovery are strong and successful vaccination campaign and the recovery in tourism. If we look at Dubai office market, which is more important for Emirates REIT, the total office stock stands at 9 million square meters, which represents only a 1% increase from 2020. 90,000 square meters have been delivered so far, and there is no major handover scheduled for Q4 in 2021. In 2022, the forecast is for an additional supply of 120,000 square meters. In terms of market trend, we see a stabilization of the office market in Dubai. And Dubai remains the preferred regional hub for multinationals. So government initiatives to boost innovation and the tech sector are leading to a visible increase in the demand from tech start-up. The sharpest strides in occupancy was witnessed in the DIFC and the new tenants are mostly focusing on Grade A assets. Alain will now present you the operational highlights.

Thank you, Sylvain, and good afternoon. I will be taking you through the operational highlights today. In general, we are seeing that the market is gradually recovering. The occupancy across the portfolio grew by 2.3% year-on-year to 71%, of which 1.25% during the quarter 3 alone. The average rate has increased by 3.5%. During quarter 3, Index Tower, the REIT's largest asset, has experienced a good occupancy increase of 4.8% to 60.3%, which is a strong growth and a year-on-year increase of 13.7%. In the meantime, occupancy at our properties in Dubai Media City and Internet City is at 60%, which is a decline of 5.5%, with rates decreasing 1.7%. The weighted average unexpired lease term remained stable at 8.5 years. Our main focus remains on leasing, retaining our customers and commercial operations. We work closely with our property managers to make sure that our properties are well maintained and that our tenants are satisfied. We have a strong leasing team that also ensures that we can convert as many inquiries as possible. We have a tenant retention of 80% to the number of leases with a 6.6% increase in the number of tenants. During the period, we have renewed 28 leases for 40,000 square feet, 7 leases have expired for 12,000 square feet and we have 31 new leases for 47,000 square feet. Finally, we have completed the refurbishment of common areas at Office Park, and we continue to monitor qualities through our ongoing quality assurance review. Property-wise, Index Tower is now 60.3% occupied, which is a nice milestone and a growth of 13.7% year-on-year. The increase in occupancy is driven by occupancy from premium office floors at premium rates and corporate bespoke solutions. We are also currently working on good level of inquiries for larger shell and cost base and have commenced community activation at Index Mall and Index Park. We have had a very successful blood drive in October, and we are doing fitness, meditation and mindfulness during November, which is the fitness challenge month in Dubai. All those 3 activities are meant to increase the public awareness of Index Mall and is expected to drive larger footfall at Index. For those who are in Dubai, of course, you're very welcome to join us an evening. Office Park. Occupancy at Office Park has declined by 5.9% to 71.3% with 2 large leases and several downsizing during 2020. We are seeing less stay versus go requests, and we are receiving some inquiries yet at lower rates. The refurbishment of the common areas and the access control systems was also completed and is receiving a very positive feedback from our customers. Building 24 occupancy stands at 44%, which is a further decline of 9.9%. The property is managed under PMLA by TECOM. Still in Media City, at the Loft, occupancy for Loft 1 and 2 is 59.9%, which is a drop of 4.4%. The Loft is a cluster for small creative companies and SMEs, which were most impacted by the COVID disruption. It looks like we have now stabilized since March 2021, and we have seen a rebound of 2.8% during quarter 3. The Loft was relooked and repositioned last year and is a very attractive option for smaller creative offices in Dubai Media City. The Loft 3 is being refurbished, and business is concentrated in the Loft 1 and 2, which is also more efficient in terms of operating expenses. Moving on to DIP. Occupancy at European Business Centre increased by 5.9% to 73.4%. The area is improved with the opening of the Metro link since 1st of June 2021, and Expo is only 10 minutes away. We are seeing a reduction from business from China at the moment, and we are assessing a soft refurbishment of the common areas. In JBR, Trident Grand Mall is stable at 72%, and there too, we are reviewing and assessing the feasibility of a soft refurbishment. Finally, Indigo on Sheikh Zayed Road is fully occupied. On the next slide, you can see the year-on-year occupancy with the variance for each property. We can see the significant increase in Index Tower, some pickup in European Business Centre, whilst we can also see some pressure on the properties located in Dubai Media City. Thank you. This concludes the operational overview. And now Moeen will take you through the financial highlights.

Good afternoon, ladies and gentlemen. I am pleased to present the unaudited financial highlights for Emirates REIT for the 9-month period ended September 30, 2021. With the effects of global pandemic gradually starting to recede in the UAE, the REIT continues to operate in a challenging real estate market environment. The REIT continued to work hard under the current situation and have been successful in improving the total occupancy levels from the lows of peak COVID days, driving the total revenues gradually up. The result of these efforts are expected to be fully seen going forward in the next 9- to 12-month period. Moving on to the financial highlights. We would see that the total property income grew by 3.1%. And it closed at approximately $52.2 million as compared to $50.6 million posted in the 9-month period ended September 30, 2020. This included the one-off gain recorded from the sale of investment property in June this year. Property expenses registered a decline of around 3.8% in the same period, which is a result of continued cost management initiatives taken by the REIT. As a result of this, the net property income moved up by 4.8% on a Y-on-Y basis and closed at $42.5 million as compared to $40.6 million recorded for the 9-month period ended 2020. Fund expenses also registered an 11.2% decline on a year-on-year basis. And as a result of partial recovery of past dues, mainly from Jebel Ali School in June 2021, the REIT booked a reversal in ECL provision. Consequently, the EBITDA for 9-month period ended September 30, 2021, amounted to $38 million, up from $22.9 million as recorded in September 2020. The 9-month EBITDA includes the impact of divestment of half shell and core office in Index and reduction of ECL provision, as mentioned earlier. Finance costs for the 9-month period also recorded a decline of 2.9% on a year-on-year basis, pushing the FFO up to $16.9 million from $1.3 million recorded as of the same period last year. Despite witnessing a quarter-on-quarter decline of 0.17% between Q2 and Q3 2021 valuations, the fair value of investment properties depreciated by 4.8% from FY 2020 levels, closing at $723.4 million compared to $690.3 million in -- as of December 31, 2020. This for the P&L meant an unrealized revaluation gain of $32.4 million in Q3 2021 as compared to our revaluation loss position recorded earlier in 2020. The next slide shows the quarter-on-quarter movement in net property income since last 2 years. On a year-on-year basis, the net property income grew by 4.8%. Moving on to the next slide, we will see the quarterly trend in EBITDA, which is reflecting a gradual improvement on quarter-on-quarter basis. Impact of gain on sale of the half floor in Index and reversal of ECL provision, which was done in Q2 2021 is visible here. On a year-on-year basis, the EBITDA grew by 65.7% as of the end of September 2021. Similarly, the FFO movement, as shown in the next slide, exhibits the trend since last 8 quarters. Here, we can see the FFO grew on a year-on-year basis by 12.4x. Moving on to the balance sheet overview. The value of investment properties as of the end of third quarter 2021 amounted to approximately $723.4 million, which is up by 4.8% from December 31, 2020, levels. Supported by revaluation gain, the total asset of the REIT also recorded a similar growth and improved by 5.5% from December 2020 mark. In line with the scheduled repayments, the Islamic financing continued to show gradual decline in Q3 2021. This decline, supported by growth in total assets, has improved the LTV position by 4.5%, which closed at 57.2% from 61.7% as was reported in December 31, 2020. Driven by portfolio evaluation and positive development seen in the 9-month period ended September 30, 2021, the net asset value amounted to $275.5 million, which is up by 22% as compared to the December 2020 levels, which closed at $225.4 million. This translates into an NAV per share of $0.91, up from $0.74 reported in December last year. The commercial real estate market has started showing sign of improvement, but the outlook remains challenging going forward. The REIT continues to focus on its core business with emphasis on enhancing sustainable revenue flows and improved profitability. With this, I would like to thank you for your time, and we shall now proceed ahead with question-and-answer session.

Thank you, Moeen. This will close our presentation. We'll now proceed with a Q&A session. And for this, you can enter your questions in the chat. So we have the first question, which is, how confident are you in the recovery of the market? Indeed, at the moment, we see a significant recovery in Dubai market. We see it generally in the market, we see it also in terms of inquiries into our key assets. We usually don't do forward-looking statements. However, we can say that we are quite optimistic that this movement will continue. It's quite difficult to quantify it. But as we said, there is a lot of good thing going for Dubai at the moment. The government has been very proactive, and we see the economy recovering quite significantly. I have a question on the sukuk whether Emirates REIT will be able to pay the sukuk. So we already announced that we have no liquidity issue for the next sukuk installment, which is at the end of December. We have another question asking about the impact of the Expo. Here again, it's quite difficult to quantify. However, it goes along with the good dynamics that we see in Dubai at the moment. We especially see a renewed interest in our office in DIP, which is Dubai Investments Park, which is very close to the Expo. And just as a recap, we have 2 properties in DIP, European Business Centre, which is just next to the Metro station, which is the last Metro station on the line to the Expo and the school. And in DIP, we start to see a good increase in both occupancy and rates. And in the school, this is a school that is empty today. We have good interest also from operators generally, and we are quite optimistic on the outlook. So that's the easiest way to quantify because it's a site that is closest to the Expo. For the rest, I think it goes along with a good dynamic we spoke about before. Question says, when do you think the share price will start to rise? That's very difficult. We think the share price should not be at this place in the first place. And I think it's also due to the liquidity of the market. Now you might have heard there's a lot of announcement on the market at the moment. I don't want to speculate what will be the impact on us or on Nasdaq Dubai. So it's a very difficult question to answer, sorry for that. There's one question saying investing in Index Tower, how much will the value increase once the mall is open. So first the mall is already partly open. We opened one floor, which is the lower floor of the mall, which is doing quite well. And recently, we started an activation program, which significantly increased the footfall. We are starting to look at marketing the park that has recently been finished. And generally, I think Index has got a lot of things going forward with the connection last year of the Gate Avenue. And now with mall's activity also, how is it called, investment hub -- innovation hub, innovation hub, sorry, just on the side of the mall. So we see a really good pick up in the mall today. So we expect this to have a significant impact, and we already see a significant impact on the mall. So you announced a REIT in Indonesia, does this impact Emirates REIT? So indeed Equitativa as a group level has a partnership in Indonesia to start a REIT. The REIT is not started yet, but we hope it will start soon. This will have no impact on Emirates REIT or Equitativa Dubai. This is a separate team. This is a separate project. However, we expect this to increase our visibility with investors and potentially, if anything, benefit Emirates REIT. There's a question on when do you expect to pay dividend? So indeed, you've seen in the presentation that the FFO went back in positive territory, which is a prerequisite to pay the dividend. Now the dividend will be declared after the -- this year's account are fully audited and public, so we don't want to speculate on this. But I think we are -- at least we are on a good track to restart paying dividend. Do you expect valuation to continue to increase? So I think the valuation has dropped a lot last year with COVID. So it's quite normal they would rebound somehow. They already rebounded and we already see a good positive movement here. Again, we don't do the valuations. They are done by independent valuers. What we see in the market generally is that the valuations are going up, and more today, to be very honest, on the residential sector than in the office sector, but at least, I don't -- we don't expect the valuation to go down or to go significantly down and probably they might even go up soon. There's a question on the effect of the sale of the Index floor on the occupancy. So you've seen our occupancy in Index has gone at 13.7%. And the -- would we -- the effect of the sale is roughly around 1.2%. So it's not very material. It needs the increase in occupancy, thanks to increase the occupancy, but roughly around 1.1% only. So the rest of the occupancy is just generating new tenants that are expanding. We have some tenants actually that had rights to expand or first right of refusal if we were to lease space next to their space, and some have exert -- have used this right. And generally, we see a good attractiveness of the DIFC and of Index. There's one question on the impairment reversal related to Jebel Ali. So I will let Moeen answer to this one. So the question is, is the impairment reversal related to Jebel Ali?

Yes. In June, we did the reassessment of the provision, which we had taken for Jebel Ali in December and earlier part of the year. And after -- it was after the payment that we have received for around $21 million plus service charges that we have reviewed the percentage provision. And this is the result of that we have reversed provision half -- in half year and in Q3 as well.

I don't see any new question we need to address. There is one is, what occupancy level do you expect next year? Again, we don't like to provide forward-looking statement, but the trend is quite positive at this time, and we hope -- we believe and we hope it will continue. So we are not going to give you a figure, but again, we see a lot of dynamism in the market, and we hope this will benefit not only to the occupancy but also to the rates where we have some of our assets, where the rates have increased also, which is a good news after the half year we had last year. There's one question, which said you increased the NAV by 22%. What are the key reason for this? So actually, there's not one single reason. It's really most of the key indicators increased, starting with the occupancy, which is -- the occupancy and the rate, which was the key driver. Then we have the recovery of bad debt, the reduction of the expenses and ultimately the increase in valuation. So it's really a combination of all of this. As a one-off, the most important one is probably the increase in valuation. But overall, we see all the indicators contributing to this increase in the net asset value. One question on, the expenses have lowered and what are the key expenses that have been reduced? So, Alain, why don't you take this question.

Thank you. Well, we've got a continued policy to review the contracts with the vendors. We have done a lot of that, especially during the COVID time. And we also have savings in the energy costs. Thank you.

Okay. Well, thank you very much. Thank you for attending this call. If you have any other question you want to ask us, you can please ask us directly in writing to [email protected], and we'll be happy -- or if you want to meet with us, we'll be happy to do that. Otherwise, I think we'll talk when we have the next call. Thank you very much. Have a good evening to everybody.