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

Thank you for attending Emirates REIT 2021 Earnings Call. As you will see, Emirates REIT has initiated a strong recovery following a challenging COVID period. But first, Equitativa has significantly enhanced its management team and Board, and I will present you the new members. So first, Thierry, who was a Deputy CEO since November 2021, will replace me as CEO and will be responsible for the day-to-day management of the REIT. Thierry has a long legal and real estate experience and was managing a Singapore-based REIT with a portfolio about 3x bigger than Emirates REIT today. I will remain Executive Chairman and will focus on the growth of Equitativa and on the strategy of Emirates REIT. On the Investment Board, we appointed Dr. Faisal Alayyan. Dr. Alayyan is the Vice President of Rabdan University and previously filled many key position in government organizations like Etisalat, Emirates Advanced Investment Group and Tawazun. And finally, Simon Townsend was appointed to the Oversight Board. He has an extensive experience in valuations, including leading the CBRE valuation practice for a few years. Now I will let the management team present the results.

Let me first state that I am absolutely delighted to have joined the Equitativa team, and I look forward to serving the Emirates REIT stakeholders going forward. I will give you a quick overview of the highlights of the past year as well as a market update before Alain delves into the portfolio and asset management update and Moeen concludes with the financial statement analysis. If we look at the financial year 2021, I am pleased to report that all key indicators have improved year-on-year, both from an income perspective but also from a balance sheet standpoint. First on the income. The net property income is up 7.7% year-on-year at $56 million. This is principally driven by the team's focus on cost management where we managed to reduce the property expenses by over 10% and also by the gains realized on the disposal of half of an office floor in Index Tower in June '21. The operating profit is up by a strong 59.3% year-on-year at $46.6 million. And the funds from operations are up 36x at $18.4 million, benefiting from the REIT manager's decision to reduce its management fee during the last 3 quarters of '21 and a rigorous [ roll-up ] provision for doubtful debtors. The comprehensive income totals $64.3 million to be compared to the loss of $244.2 million in 2020. It is composed of both $18.4 million of funds from operations and a $47 million increase in the portfolio valuation. Overall, the earnings per share is equal to $0.20 per share, up over $1 when compared to 2020. Turning now to the balance sheet improvements. The total assets are up by over $50 million principally owing to the revaluation of the portfolio done by the REIT's independent third-party valuers, CBRE and Cushman & Wakefield. This increase is reflective of the improving market sentiment particularly towards the latter part of 2021 and of the quality of the portfolio. The liabilities of the REIT have been reduced by approximately $14 million mostly as a result of the contractual amortization of the 2 Ijarahs provided by Dubai Islamic Bank and Ajman Bank, respectively. The reimbursement of part of the principal outstanding on the Ijarahs has contributed to a reduction of 5.4 percentage points to the gearing level that now stands at 56.3%, comfortably below the regulatory cap of 65%. Finally, the net asset value increased by $64.3 million or 28.5%. And the NAV per share jumped from $0.74 on 31st December 2020 to $0.95 per share on 31st December 2021, a 28.3% increase. A quick focus on the property valuation gain illustrates that the independent valuers concluded to a 7.5% or $53 million increase of the value of the portfolio from nearly $709 million at the end of 2020 to over $762 million at the end of last year. However, on a like-for-like basis, that is disregarding the impact of the sale of half of an office floor in Index Tower in June 2021, the uptick in valuation is just shy of $57 million or 8%. So overall, a very good year for 2021, with all key indicators improving significantly year-on-year. Another important 2021 event was the closure of all DFSA investigations consequent to a settlement agreement that the REIT manager agreed to enter into. Further to the settlement agreement, Equitativa has agreed not to further challenge the findings of the DFSA and to pay a fine of $210,000 for reporting breaches. It should be emphasized that the DFSA did not find that Equitativa's fund valuation practices had breached any administered laws. However, Equitativa is always keen to further improve its governance and has therefore also agreed to enter into an enforceable undertaking, pursuant to which it has appointed an additional member to the Oversight Board, Mr. Simon Townsend, to which Sylvain alluded before, and [ chose a ] valuation expert to review the valuation processes throughout 2022. To be very clear, none of the findings by the DFSA alleges any financial impropriety on part of Equitativa or its employees nor do any of these findings have had any impact on any of Emirates REIT's audited financial statements. But the important factor is that having agreed to settle with the DFSA, Equitativa can now turn its full attention to reinvigorating Emirates REIT and accelerating its plans for growth. Turning to the market overview and first from a macroeconomic standpoint. 2021 was significantly better than the 2.1% gross domestic product growth forecasted by analysts, reaching 3.8% as per the publication of the official statistics for the UAE. The 2022 macroeconomic outlook is very positive, with analysts forecasting a 6.2% GDP growth in the UAE to be even further improved in 2023. Inflation on the other side is expected to pick up to about 2% after 2 years of deflation. Focusing on the office market. The occupancy has improved by approximately 2.8% at 78.9% at the end of 2021 compared to 76.1% a year earlier. However, despite this positive trend on the occupancy front, rents have continued to soften throughout 2021, with Prime, Grade A, Grade B and Grade C rents falling, according to CBRE. The expected supply of new office remains moderate for 2022 between 1% and 2% of the existing stock of 9.1 million square meters. Turning to the retail market. The latter part of 2021 was positive for retailers, with an increase in footfall, which reached levels significantly higher than the pre-pandemic levels. This increase in footfall was certainly driven in part by the success of Expo, which lured more than 20 million visitors to Dubai, and the recovery of global tourism. However, despite this positive activity, rents remained under pressure, losing nearly 10% in Dubai, owing to the continued e-commerce penetration and the significant supply coming to market in 2022. I now would like to hand over to Alain who will walk us through a more detailed portfolio and asset management review.

Thank you, Thierry, and good afternoon. I will be taking you through the portfolio and the asset management highlights. 2021 was a year of recovery, with a good pickup during the second half, which is continuing in 2022. Occupancy across the portfolio has increased by 2.8 percentage points to 71.8% at 31st of December 2021, with headline rents increased by 3% to AED 1,430 per square meter and a weighted average lease term at 7.1 years. Our focus remains on commercial operations. During the period, we have concluded a good number of new leases and ensured we retain our clients. We have completed 141 renewals for 24,970 square meters, 98 new leases for 14,771 square meters and 51 exits for 6,181 square meters. And in total, we have 327 tenants at 31st of December. The demand during the second half of 2021 was mostly in DIFC, benefiting Index Tower, where the occupancy has increased by 13 percentage points to 62%, which is also a strong income growth in excess of 36% for the REIT's largest asset. Dubai Media City, Internet City and Knowledge Village have been a bit more quiet with lower levels of demand in general. However, we are now seeing some encouraging inquiries, especially at Office Park. As a brief update to the start of the year 2022 and owing to the successful conclusion of negotiations since quarter 4, occupancy across the portfolio has now reached 81% at 31st of March 2022, which is a strong growth of 9.8 percentage points during the quarter 1 alone. Notably, Index Tower grew further by 9 percentage points during quarter 1 2022 and is now 71% occupied. The school in DIP was also leased to Durham School in March '22, commencing with the offices at Index Tower. Index has really benefited from a good market in DIFC during the second half in the opening of the Gate Avenue in June 2021. The occupancy for the commercial floors stands at 66.4% at 31st of December, which is a strong growth of 16.3 percentage points year-on-year and strong demand for our fully fitted premium floors. During the period, we have signed 41 new leases, 59 leases have been renewed, and we have had 12 exits. We have also announced in June 2021 the sale of half floor at Index at the value of AED 36,059 per square meter. The dynamics in DIFC are really good. We have a strong level of inquiries for larger spaces since quarter 4 2021. And as a result, occupancy at Index offices has now reached 79% as at 31st of March 2022. Moving on to Office Park, our second largest office building located in Knowledge Village. Office Park has an occupancy of 72.3%, which is now stabilized after 2 large leases have expired and several corporate clients downsized during the pandemic. Retail at Office Park remains under pressure as most large corporate tenants are still working from home or were still working from home for most of 2021. During the year, 10 new leases were signed, 10 leases were renewed, and we lost 3 tenants, of which 2 were retail tenants. Office Park was refurbished in 2020, 2021, and we are confident that the property is well positioned to continue to compete and remain attractive to the larger corporate clients. We are having a strong start to 2022 at Office Park with the renewal of our largest clients and encouraging inquiries for larger offices during the first quarter. At the nearby lofts in Dubai Media City, occupancy is at 38.3%. And the loft is the property that was most impacted by the COVID disruption as we have a concentration of creative companies and SMEs, which are characterized with shorter-term leases. We have concentrated the business in the lofts 1 and 2 whilst the loft 3 remains vacant and would be repurposed to cater to larger corporates with 6 large offices. During the period, we have signed 5 new leases, 26 leases have been renewed, and we have, however, seen 11 exits. Over the last 2 years, the community area has also been improved, and we remain confident that Media City will continue to be a location of choice as the market returns. Turning to European Business Center in Dubai Investments Park. Occupancy at EBC is at 75.5%, up by 4.9 percentage points year-on-year, with rates up by 8.5 percentage points year-on-year. We have signed 21 new leases, renewed 45, and 15 have exited. The property has large and flexible floor plates, which are ideal for large corporates and SMEs alike. The opening of the metro station, which is also a significant advantage for the property, is making it a great property. We are now commencing refurbishment work, starting with all exteriors to improve the appearance and the [ overall ] experience. And the refurbishment of the common areas is planned for this year. Building 24 in Dubai Internet City is 44.7% occupied and is a property that is impacted by new competition and refurbished properties within the free zone. The location, the visibility is excellent. However, it is an aging property in need of a refurbishment to remain competitive in the market. We are having discussions with TECOM in relation to working closely together to taking an active role in leasing and managing the property. We are also exploring interest for leasing the full building, which is a nice size in a beautiful location between Facebook headquarters and Mastercard headquarters. Indigo 7 on Sheikh Zayed Road is 100% occupied, with 3 new leases during 2021, which include the leasing of the larger ground floor retail space in March 2021 to Dalona Cafe. The opening of the Gate Avenue in June 2021 and the connectivity of the DIFC community really creates a buzz at Index Mall where we are seeing increased footfall from office clients, from residents at Index and from nearby developments as the mall activation is having a positive impact on the wider community. However, retail remains particularly challenging as it recovers from the pandemic and a lot of new supply. Occupancy for retail was stable at 38%, with 2 new leases and 1 exit, and we have some interesting inquiries at the moment. At Trident Grand Mall in Dubai JBR, occupancy is stable at 71.5%, with 1 new lease, 2 renewals and 1 exit. 100% of our tenants are retail and are still recovering from the COVID-19 pandemic. We are working to optimize operational costs further and to improve service charge recovery and also assessing a soft refurbishment of the common areas. Finally, on the education sector and starting with Lycée Français Jean Mermoz, we have now commenced work for phase 3, which is the final phase with 2 sports hall, a pool and a dance studio and will allow the school to increase the capacity to 1,480 students. The school has a waiting list and a positive momentum in enrollments for September 2022. In DIP, the school was leased to Durham School in March 2022, and we are engaged in completing and servicing the phase 2 with the school due to open and welcome students in September 2022. In Jebel Ali School, as we have announced, we are in discussions with the school operator and pursuing discussions in relation to the possible sale of the school. Finally, GEMS World Academy continues to do well, having completed the refurbishment plan with an upgrade to the decor and to the facilities. This concludes our operational review. Thank you. Moeen will take us through the financial highlights.

Thank you, Alain. Salaam alaikum, and good afternoon, ladies and gentlemen. The year 2021 was another challenging year with the impact of global pandemic prevailing during most of the year. The landscape was equally challenging for Emirates REIT where pressure was seen on rates, occupancies and overall demand. Despite the effect of these on core rental revenues, the total property income for FY 2021 recorded a 3.9% increase and closed at $68.6 million, up from $66 million reported last year. This included the impact of sale of vacant half floor in Index Tower that was sold in June 2021. Resulting from a continued focus on cost rationalization, the property operating expenses registered a year-on-year decline of 10.4%, as a result of which, the net property income closed at $56.0 million versus $52 million reported during last year. This translated into a growth of 7.7%. The REIT manager's voluntary reduction in the management fee that was offered in 2021 helped reducing the fund expenses by 8% on a year-on-year basis. Resulting from a partial recovery and developments on receivable during the year, the REIT booked a net reversal of ECL provision amounting to $5.2 million as compared to a net charge that was booked of $6.8 million last year. Consequently, the operating profit for the REIT registered a sizable increase of 59.3% over last year levels and closed at $46.6 million, up from $29.3 million in 2020. With finance costs remaining in the same range, the FFO also recorded a substantial increase and closed at $18.4 million versus [ $492,000 ] posted last year. The effect of revaluation on the investment property portfolio was 6.8% in terms of value. For the P&L, it meant booking an unrealized fair value gain of $44.7 million this year. This is a significant improvement as compared to the fair valuation loss of $243 million that was booked last year when the investment property values fell by around 25% from 2020 levels as compared to 2019 levels. Taking into account the above, the total comprehensive income for the REIT amounted to $64.3 million versus a loss that was booked last year of $244.2 million. Accordingly, the EPS recorded a growth of 1.3x and to close at $0.20 per share versus a loss of $0.80 per share reported last year. Moving to the next slide. We will see that the total assets have grown by 6.3% year-on-year basis, which is mainly driven by investment property revaluation gain recorded in FY 2021. With the repayment of bilateral facilities during the year, the total borrowing reduced by 3% to close at $481 million as at December 31, 2021. This has improved the LTV position by 5.4 percentage points, after which the LTV of the REIT amounted to 56.3%, well within the regulatory threshold of 65%. Taking into account the asset growth driven by improved property valuation and increased profitability, the NAV has also improved and recorded as 28.3% rise. NAV per share now amounts to $0.95 per share versus $0.74 per share last year. Going forward, with Dubai real estate market picking up momentum now and the effects of pandemic gradually receding, coupled with the strategy the REIT has adopted, the REIT outlook looks promising in terms of overall portfolio value, the profitability levels and the net asset value. The next slide exhibits an update on REIT's borrowing, particularly the $400 million sukuk. In order to seek refinancing of the sukuk, the REIT made a voluntary consent solicitation offered to its sukuk bondholders in 2021. This was done with an aim to secure the instrument, extend maturity, defer profit installment while keeping the pricing unchanged. This offer did not get the required votes and was therefore rescinded by the REIT. As a result of this, the REIT manager has been working on multiple options available to the REIT for the upcoming sukuk maturity falling due in December 2022. Since this maturity is falling due in less than 12 months, the liability is shown as current in 2021 audited financial statements. Consequently, the current liability exceeds the current assets by $415 million, raising the going-concern assumption issue, which is fully explained in Note 2.1(d) of the audited financial statements. Given the remaining duration of the sukuk, the state of discussions with counterparties and improvement in real estate outlook, the REIT manager believes that the REIT has ability to execute the best available refinancing plan, which is in the best interest of the REIT shareholders. With this, I would invite Thierry to please conclude the presentation.

Thank you, Moeen, for the update. Before opening the Q&A session, I would like to bring back to the attention of our audience the key achievements of the REIT over 2021. All metrics have had a positive outcome last year. The occupancy is up 2.8 percentage points at 71.8% with a very strong start of 2022. The net asset value is up 28.5% at $290 million. The net property income is up 7.7% at $56 million. The operating profit is up 59.3% at over $46 million. The funds from operations or distributable income is up 36x at over $18 million. And finally, the earnings per share stand at $0.20 per share for the year ended on 31st December 2021. With this, I would like to thank you for your time and now open the Q&A session. I will hand over to our moderator.

Thank you very much. We'd now like to open up for some Q&A. [Operator Instructions] Please bear with us as we run through any questions that might be proposed. We'll now open it up for any questions. First question proposed, the numbers have improved year-on-year during 2021. Do you anticipate these trends to continue? And what will be drivers of these trends throughout 2022?

Thank you, [ Nicholas ]. Well, it is true that 2021 was good overall with -- as we've seen all key indicators being positive. This is on the back of a recovering economy. I mean the GDP in the UAE was up 3.8% in 2021, and the supporting measures provided by the government certainly assisted. From a pure macroeconomic standpoint, the GDP forecast, as was shown in the presentation, is -- for 2022 is 6.2% and even 6.7% for 2023. So the real estate market should, in all logic, benefit from this sustained growth. In addition, if we look at the potential of our own portfolio, zooming into the assets themselves, the leasing has picked up strongly in Q1 2022, with occupancy now reaching already 81% as at March 31. And that's to be compared to 72% at the end of '21. So this increased occupancy will obviously be conducive of increased income going forward. And so we are reasonably optimistic that the operational positive trends should continue.

Thank you. Next question. Since there is an FFO of $0.06 per share, will there be -- do you see a dividend for 2021?

Perfect. Thank you. I mean as per the regulations, I mean the REITs are mandated to distribute minimum 80% of the distributable income. So there will be a dividend paid in the year 2022 relating to the 2021 results. As to whether it will be scrip, cash or part scrip, part cash, this is a decision that the Management Board will reflect on and that will be communicated to the shareholders and presented to the shareholders' general meeting in June.

Next question. You've increased the management and the Board in the last couple of months. Could you elaborate as to why you did this? And where do you see any growth coming from?

Yes. Thank you. So first, you've seen in 2021, we solved a lot of problems, market problems, which led to occupancy, so the key occupancy have increased. The main problem with our schools have been resolved or are being resolved. The market is recovering. The investigation is done. So I think now it's really a time to focus on growth, and that's why we increased our management team and our Board. And that's why we hired Thierry, and we have also 2 new Board members. Personally, I will remain Executive Director, and my key job is really to support the team and to focus on the strategy and to help the REIT take advantage of those new opportunities due to the market.

Thank you. Next question, can you please give a further update on the refinancing activity and plans?

Yes. There's quite a lot of questions obviously around the sukuk. As Moeen indicated, I mean there was a consent solicitation last year, which, although supported by a strong majority of 57%, did not reach the supermajority threshold. As a result, it has been rescinded. There is a maturity in December 2022. And in -- obviously, in June, there will be a coupon payment that will be met. In terms of this is at the forefront today of the management team's priority to finally deliver on a successful refinancing of the sukuk. And when you weigh both the improved results, the good real estate markets, our fairly low LTV and, as Moeen will say, the time line that we still have to deliver on that refinancing, the REIT manager believes that the REIT is in a position to successfully deliver a timely refinancing of the sukuk this year.

Thank you. Next question. The bulk of March 2022 occupancy increases seem to be driven by DIP and Index Tower. What is the increase strategy from here on? Also, what was the like-for-like occupancy at Index Tower year-on-year?

Thank you. The sale of the half floor at Index represents 2.7% occupancy. So out of the occupancy today, we'll have -- just picking it up, our total occupancy at 31st of March was 71.1%. You can net off 2.7%.

Look, if I may, I think if you look at Index Mall, in Index Mall, you have the office and the retail part. So the retail part for the moment has been fairly stable at 38% occupancy. And yes, we're starting to see some interesting inquiries. On the Office Park, it is true to say that we have now gone up quite significantly by almost 16% since last year on the office sector. DIP has obviously been a key achievement in terms of leasing since the school have been vacant for quite a while. We see, however, other pockets of occupancy where we can improve, notably in Office Park where there is strong inquiry levels. Loft 3 that we are currently refurbishing and repositioning more to cater to slightly larger occupiers will also be marketed going forward. And EBC has obviously benefited from the opening of the metro station in 2021, and we are now also repositioning the retail front, attracting new quality tenants there.

Thank you. Next question. Can you please comment on the impact of one-off sales and the discounted management fee vis-à-vis the underlying performance?

Sorry, can you...

Sure. Can you please comment on the one-off sales and discounted management fee on the underlying performance?

All right. So on the one-offs, we had last year a couple of one-offs that were the results of active asset management, and that is the reversal of the receivable of the Jebel Ali School, of strategic disposal of a floor in Index Tower and obviously of the voluntary reduction by Equitativa of its management fee. I appreciate that those are qualified as one-offs. But when you disregard those, the operating profit would still stand at about $31 million and the total income at $48 million versus a loss of $242 million. So yes, it contributed to excellent results. But by and large, there are strong fundamental operating improvements, leasing pickup and cost management efficiencies that have driven the results and should going -- should continue driving the recurring operating results going forward. Apologies.

There are a number of questions around the DIP valuation and the leases with regards to that asset as well. Can you -- are you able to comment on those?

So on the leases, I mean we're obviously delighted to welcome Durham School as one of our new tenants. For confidentiality reasons, we're obviously not at liberty to disclose any specific terms of the lease. And in terms of the valuation, I mean the independent valuers are currently preparing the Q1 valuation. So I cannot comment at this stage as to what the impact on valuation should be.

Can you give some sort of guidance as with regards to CapEx for 2022?

I'll pass that question to Alain.

So our overall CapEx budget for 2022 is approximately AED 60 million, of which AED 15 million is towards the projects that were commenced and payments, and AED 45 million are the project -- the CapEx project planned for 2022.

Thank you. Next question. Is the Jebel Ali School sale likely to take place during 2022?

Well, we've been -- we made it clear that we were discussing both with the Board of Governors of Jebel Ali in order to find a sustainable long-term solution but also entertaining proposals for disposal of the asset. But the progress is being made on both fronts. And obviously, as soon as there is something which requires disclosure as per market regulation, we will make sure to swiftly announce.

Can you comment or give any other insight into any other potential asset sales during the year?

Sorry. Should we expect more asset sales, you're saying?

Yes. Could you please comment or give any insight into any further asset sales during the year?

Sure. If you look at asset sales -- and I'll take maybe a quick step back, I think our goal is clearly to deliver sustainable growth both in income and value to our shareholders. And that's done through active asset management and also optimized capital structure. So once you've said that, what does it mean? It means that asset disposal is obviously one of the tools that you can work with. And for us, when an asset no longer fits the REIT strategy or when an asset has, in our view, peaked in the value that it can deliver to shareholders, we will certainly consider disposing of it with a view to redeploying the capital in yield-accretive opportunities. Now with Index Tower specifically, I mean Index Tower is clearly very core to our strategy. Given the recent valuation uptick that we've seen -- and please bear in mind that the current valuation is still well below the valuation that was realized through the disposal proceeds. So we still believe that there is a significant potential value creation by keeping Index Tower. But otherwise, we'll continuously monitor the portfolio.

With that, there are no further questions. I'll hand back to Thierry to...

All right. Well, thank you, [ Nicholas ], for that. I'm very happy again to have joined the Equitativa team a few months ago and now to assume the CEO position with the support of the team and of the Board. We certainly look forward to providing regular updates to the investors and to continue on the improving trend that we've seen through, again, razor-sharp focus on cost management, reducing leakage and also finding accretive asset enhancement initiatives in the portfolio. And again, as stated, if we see that there are opportunities to realize assets noncore to our strategy and redeploy the equity, we'll certainly also look into that. With this, I really thank you all for your participation. Thank you.