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

Ladies and gentlemen, good afternoon, and welcome to the half year Emirates REIT earnings presentation. We're delighted to be presenting today a very strong quarter, which after an already robust first quarter of 2024, makes up a strong first half of the year. Let me dive first in the key highlights, then I will say a few words about the general economic environment and the real estate market. As you can see, all indicators are very positive with double-digit income growth versus last year's first half. To clarify, these are all consolidated numbers for the first half of the year and against 2023 first half results. Most importantly, our operating profit is up almost 20%. In July 2023, we have set a new strategy for Emirates REIT. I've mentioned more than once the 3-pillar strategy. We said we would reach an occupancy of 90% by end of 2024. You can see that by half year, we have already crossed the 90% blended occupants. This is a great achievement. Our NAV keeps growing by 34%, mainly as our valuations improve. I would also say that we sold Trident Grand Mall, but it's not reflected in these numbers since the sale closed in July. The sale of Trident is a great news as we sold above valuation, and I consider Trident as a difficult asset, especially if the market turns around. A few words now about the economy. Our economy is doing well. GDP growth is planned to be at 3.8% this year, which is slightly above last year. An inflation forecast is going down to 2.3%. And then the office market, supply is slowly growing, but it's still not able to meet demand. And therefore, vacancy is decreasing, and rents have been going up by 5% year-on-year. And if you take great space, rents have gone up by 20%. In retail, the first half saw very little supply of space. Consequently, vacancy went down to 10% and therefore, pushing rents up by 16%. And finally, the education sector to perform well, supported by population increase. 2024 enrollment rates are not out yet, but they will supposedly show a very healthy growth. The by population forecast is to reach 5.8 million by 2024, which will no doubt support the growth in the education market over the long term. I'm going to now pass the microphone to Ross Mclaughlin for a review of our operations. Thank you.

Thank you, Thierry, and good afternoon, everyone. I will now be taking you through the operational highlights for H1 2024 which demonstrate the continuation of strong performance of the Emirates REIT's portfolio and the strength of its asset base. At the portfolio level, occupancy continues to grow, increasing by 5.1 percentage points year-on-year to reach 90.5%. Rates recorded an increase of 10% year-on-year as low vacancy helped to extract more value from leases. Higher occupancy, coupled with growing rates led gross income higher by 12% year-on-year to reach USD 88.8 million. A strict focus on managing costs was successful in reducing operating costs and noticeable achievement considering the inflation rate environment and higher occupancy. So overall, the picture is one of positive momentum on operational performance. Looking in more detail at occupancy. A number of assets have now crossed the 90% occupancy level, key support for rental growth. Strong operating performance was experienced across our office assets which benefited from continuation of high demand for quality space and a lot of adequate supply in their respect to submarkets. Notable performance on occupancy includes an Index seller, where office occupancy grew by 6.8 percentage points to reach 91% and Index mall which witnessed a significant increase, growing 27.2 percentage points year-on-year. Demand for DIFC office space remains high, and we continue to see robust levels of inquiries for both smaller offices and into H1 2024, growing interest for larger shell & core space. A European business center occupancy grew by 16.9 percentage points year-on-year. And that lost offices, the increase in occupancy was 8.8 percentage points with the ongoing refurbishment of units, supporting leasing momentum. Office Park experienced a strong rebound in H1 '24 after a drop in Q4 of '23. Occupancy increased by 9.6 percentage points in H1, bringing the occupancy up to 87.7%. Demand supply in balance and increasing occupancy is creating upward pressure on rents, and the portfolio has been positioned well to capture this growth. Highlights from the portfolio includes Index Tower, where rates increased by 11.7%. Office Park, where the increase was 7.7% our European business center, we saw 17.3% growth in rents. The high rates of occupancy and rate growth is reflecting of continuing high levels of leasing activity across the portfolio and the efforts taken to position the assets as leaders in their submarket. A number of asset improvements have been executed and a plan to continue the modernization of the assets and their positive momentum. In addition, significant value has been captured through lease renewals with a large number of historic leases maturing and higher market rates being captured. In addition to revenue management, the team has been very focused on controlling costs, and that success can be seen in total OpEx falling by 3% year-on-year to USD 12 million down from $12.4 million a year earlier. As the second chart demonstrates, over the past 5 years, efficiency of spending has continued to increase, while occupancy has increased at a sustained rate each year, less has been spent considering each square meter of occupied space. We continually explore ways to save costs across the portfolio. So overall, H1 '24 has been very positive for Emirates REIT's operations, building on the momentum of previous reporting periods and creating strong fundamentals for future growth. This concludes our operational highlights. I will now hand you over to Moeen, who will take us through the financial highlights.

Thank you, Ross. Good afternoon, ladies and gentlemen. I'm pleased to present before you the financial highlights for Emirates REIT's for the half year period ended June 30, 2024. During this period, the REIT continued to record excellent performance, both in terms of operating profitability and asset growth. Driven by the growth in portfolio occupancy and improvement in the rental rates, the total property income recorded a year-on-year increase of 12% and closed at USD 40.4 million. Property operating expenses registered a 3% year-on-year decline during the period, which is a direct result of cost rationalization measures taking -- aiming to enhance the operating efficiency across the portfolio. Consequently, the net property income for first half was up by 16% and amounted to $34.4 million. Incorporating the effect of fund expenses, the operating profit for Emirates REIT for the first 6-month period registered a strong growth of 19% and closed at $25.2 million. This impressive operating performance was muted by the high finance costs that the REIT has to bear, which is mainly on account of rising Sukuk coupon rate and the effect of rising benchmark rates for the REIT's volatile facilities. As a consequence of this, the fund from operations or the FFO, despite recording an improvement on a year-in basis, remained under pressure and amounted to negative USD 1.5 million for the period under review. The effective of the overall strong operating performance supported by a strong real estate market, the REIT's investment portfolio continued to record growth as a result of which, the unrealized gain on the revaluation of investment properties for the half year ended 2024 amounted to USD 65 million, which is up by 30% as compared to $50 million posted a year ago. Consequently, the profit for the half year 2024 amounted to $63 million, up by 27% from $46 million posted in the same period last year. This slide shows the double-digit year-on-year growth in net property income and operating profit, which is a direct result of incident performance by the REIT. This was, however, countered by a high finance cost, which has also recorded a year-on-year increase of 7%. The following side exhibits consistent improvement in operating efficiency as a result of which, the ratio of property operating expenses over the property income continue to record improvement by closing at 15% as at 30th June 2034. Despite this, the REIT continued to face challenge from a high finance cost and as you can see on the chart on the right side, the net finance cost constitute a substantial portion of the total property income reduction of this is -- remains to be a key priority for the REIT strategy going forward. Moving onwards. If you see the balance sheet overview, we will see that driven by the revaluation gains, the fair value of investment properties recorded a year-on-year increase of 18%. Total assets of the REIT amounted to USD 1.1 billion as of 30 June 2024. Coupling with the above and the overall improved operating performance, the net asset value continued to rise during the period and amounted to USD 563 million as at 30th June 2024. This is up by 34% from $419 million reported same period last year. Islamic Financing amounted to $442 million as of June 30, 2024, including the secured Sukuk. The financing-to-total value or the FTV as of end of the June period amounted to 40%, which is better by 6 percentage points for 46% reported a year ago. During the period, the REIT exercised extension option to extend the maturity of its $324 million Sukuk until December 12, 2025, which is subject to meeting certain conditions before the initial maturity date as for the timely provision of the secured Sukuk. The REIT manager in this respect is working on a refinancing plan as per which multiple options are available with the REIT, including asset divestment, facility refinancing and [indiscernible] options [indiscernible] to Sukuk. Asset divestment has already started in this respect, as subsequent to the reporting period, sale of one of the select assets has been completed. This was followed by a redemption of Sukuk by $19.27 million in July 2024. The next slide exhibits the annualized trend of operating profit, operating cost, the net finance cost based on first half year actuals. Going forward, the REIT plans to continue focusing on enhancing the portfolio occupancy and the rental rates aiming towards ensuring a sustainable revenue stream with a special emphasis on concluding the refinancing plan, which will result in optimizing the financial structure and reducing the finance cost impact for the REIT's profitability. With this, I would like to thank you for your time and invite Thierry to please continue with the presentation.

Thank you, Moeen. I'm just being told that the volume was very low at the beginning of the presentation. So I'm just going to go back to the key highlights very quickly. The key highlights, what is important to know is our operating profit is up by 19% at $25.2 million. What is important to know is part of our strategy was to achieve an occupancy of 90% by the end of 2024. We've already crossed that, the 90%, at half year. We're quite happy with leasing the vacant space over the last 12 months. And the net asset value has increased by 34%, but it's mostly from the valuations. What I also want to say, I want to talk a little bit about our strategic journey. You might have heard me before talking about the 3-pillar strategy that we have launched in July 2023. The first pillar is the optimization of the revenue across the entire portfolio. After today's presentation, you can surely see that we are on a very positive track. And please remember that since we still have a lot of what I call the COVID leases, and those leases should be renewed at higher terms. And therefore, I'm quite confident that the positive trend will continue. The second pillar is asset disposition. And obviously, some of you know that we have closed our first sale of Trident for the amount of AED 76 million, which is 5% above our latest valuation. The benefits of this sale will only be reflected in the third quarter as the deal closed in July. You will hear more news in the next few weeks on other dispositions. So some people wonder why it has been taking so long to close those deals. The reason is simple, we want to get the highest price and it takes time. And then the third pillar will naturally follow once we complete the dispositions and it's the refinancing of the sukuk, which we continue to work very hard on. So that concludes our presentation. And I would like now to open the forum to the questions and answers.

So there was a question from [indiscernible] which was up there for quite some time, and I will answer that question. The share price is a function of several things, but it's a function of going back into a positive FFO. Our FFO in 2023 was negative $3.6 million. Now our FFO is negative $1.5 million. So the situation is improving despite the fact that we still have heavy financing costs and in fact, our financing costs have been increasing. Once we are back and we achieve the 3-pillar strategy with the refinancing, we will be back into substantial positive FFO. And I can tell you that I believe that the share price will follow. So that will be the consequence of finishing a strong year. As for the dividend payment, I believe it's the dividend payment for the 2022, which is the question, I believe, and that resolution was voted with a no. So no scrip dividend payment distribution for 2022, if that's the question. And then the third one is a question regarding the sale of Trident. We obviously have to deal with the market that we face at the time that we disposed of in assets. And we take as a benchmark mainly the valuation, and we have sold Trident 5% above the current valuation. Unfortunately, it is correct that we have purchased that asset many years ago at a higher price. Today, I mean, it's not correct, though that it was excluding refurbishment because there were no refurbishments -- no significant refurbishment on this asset. But I can tell you that Trident is an asset that I identified from the very beginning as a difficult asset. And I'm very pleased that we disposed of that asset and think we will create much more value on some of the other assets that we are in the process of disposing of. So I see several questions regarding when we go back to paying dividends. And what is the strategy to handle the sukuk. I believe I've already partly answered to that question with the 3-pillar strategy, higher performance, disposition of assets to create liquidity and decrease LTV. Once we have a lower LTV, it's the right time to strike a deal and refinance the sukuk. So we are focusing on that right now. And as soon as we've done that, we will be back in a position where we can pay cash dividends. So there's a question regarding the following sales. I cannot really disclose any information until those sales are completed. I can tell you that I am still very confident that we will, with those sales, decrease the LTV to a much more comfortable level, and the level is still -- is already 39.9% today, but it will be in a much lower level and therefore, will generate the liquidity that we require and again, will be much more attractive for refinancing purposes. And we're talking about the next couple of months, not far away. So there's a question regarding the outlook for rent growth heading into next year. The office market, as I explained during the presentation, is very, very strong right now. I continue -- I believe that it's going to continue to be strong because the only substantial supply of space will come with the second phase of the IOC, which is -- we don't know the dates, but it's quite a few years away. Until then, there is no significant supply of office space coming and therefore, no one should think that we have reached the top in terms of rental level in the office market. There's still growth coming. I would also like to say that we have a significant part of our portfolio still made of what I call COVID leases, which I explained earlier. Those COVID leases were signed at lower rentals. And over the next 2 years, we will renew those leases at higher rates. And therefore, just the renewal of our existing leases will generate a substantial growth in our revenue. I mean there are a lot of questions out there, and a lot of them are regarding future sales. I would love to be able to share that with you, but I cannot. So unfortunately, I won't be able to give more information about the future sales. But I can tell you that it's -- a couple of them are very advanced. There's a question about how much -- what is the worth -- total worth of properties we are planning to sell. We have to be under $230 million of LTV by December 12 and possibly we'd like to be under $200 million in order to protect the existing rate that we have with the sukuk. That's just in case we are extending into next year. But as you all know, our goal, and I still believe that we will soon be able to completely refinance at much better terms. So this is just a contingency plan. There's a question regarding the fund expenses increasing by 12%. It's obviously also a function of the management fees [indiscernible] is going up because yields and cap rates are going up in the market, and therefore, our NAV is -- keeps going up. So that's the reason. Okay. So there's another question about what happens if we don't meet the deadline. I want to tell you that we have several contingency plans. And the contingency plans include dispositions, which have started quite a long time ago. It includes discussions that we have with some banks. And it includes as well the possibility of being below $200 million and therefore, not needing to redeem the sukuk. I personally don't believe this is an option right now because we have so many different contingency plans in place. One last question regarding will we see the share price go above $1. Again, as I explained earlier, when we are -- when we achieve a very low LTV, and we either remain -- redeem the sukuk or refinance with bilaterals, we are going to have an impact, a very positive impact on the FFO. We will be able to pay the cash dividends and I can tell you the perception of the market will follow, and you will see some positive movements on the share price. It's a natural process from my perspective. There's a question which is, do you see undervalued assets in the market. Actually, not so much because the market is -- it's not overvalued, but the market is very expensive right now. So we believe right now is not the time to make acquisitions. Right now, it is the opportunity to take advantage of the expensive market to dispose of some assets. Now there's not the same level of demand for every asset class. The asset class of retail doesn't get anywhere close to the -- to the interest that is given to the office market as an asset class. So if you sell office today, you can sell well. But right now, we don't believe there's a lot of opportunities of undervalued assets in the market. I would add also that that's why there's much more -- many more developments because the market offers development opportunities these days, not so much acquisition opportunities. And maybe this is when we have turned the corner, and we are back into a very strong FFO position. Maybe development eventually sold to the REIT would be an opportunity. But right now, our focus is on completing the 3-pillar strategy. And I think I'm going to finish with that because I don't see any other questions right now. I want to tell you that I continue to feel very strong about the outcome of this strategy that we've put in place. Things are taking time because we want to do it right. But we feel strong that we will be able to achieve the objectives that we shared with you today. And the team is extremely motivated and working extremely hard. So if there are questions that I was not able to share with you, please reach out to me. A lot of shareholders have reached out to me. I had many calls with them, shared the strategy in detail, and I'm more than happy to continue to do that. So any questions, any ideas, because we all are on the same boat right now. Please do not hesitate to contact me. This is extremely important for me. And with this, I will finish today's presentation, and thank you very all much for being here today and have a good end of your summer.