Ezdan Holding Group Q.P.S.C. (ERES) Earnings Call Transcript & Summary

Please go ahead.

Thank you. Hi, hello, good afternoon, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Ezdan Holdings Fourth Quarter and Fiscal Year 2021 Results Conference Call. So on this call, we Tamer Fouad, who is the Group CFO of Ezdan; and we have Taha Moursi, who is the Financial Controller and IR Officer. So we will conduct this conference with management first reviewing the company's results, followed by Q&A. I would like to now turn the call over to Taha. Taha, please go ahead.

Good afternoon, everyone. Thanks, Bobby, for your introduction. First, we will start with the disclaimer that some of the information discussed here might contain projections or other forward-looking statements regarding future events or future financial performance of Ezdan Holding Group. These forward-looking statements include all matters that are not historical facts. Any forward-looking statements speaks only as of when it is made. Ezdan undertakes no obligation to publicly update or publicly revise any forward-looking statements, whether as a result of new information, future events or otherwise. We will discuss today the financial performance or financial position for Ezdan for year ended 2021. Investor presentation for this conference call is now available at Ezdan website, www.ezdanholding.qa under investor Relations section. First, regarding the financial performance of the group for the year ended December 31, 2021. Ezdan achieved a net profit to its owner with around QAR 61 million compared to QAR 348 million. Profit and loss statement contain changes in the following factors: rental income increased by around 7%; investment income decreased by 35%; other operating revenue increased by around 24%; operating expense increased by around 17%; finance costs decreased by 12%, there was a net gain from modification of Islamic financing during 2020 with around QAR 100 million compared to 0 in 2021; revaluation loss of QAR 200 million during 2021; ForEx loss increased by around QAR 30 million. For '21, main ratios of financial performance was as following: percent of operating expense compared to rental income was 22% compared to 20%; total gross margin was 79% compared to 81%; net profit margin was 4% compared to 26%; earnings per share was QAR 0.02 compared to QAR 0.13. Regarding the components of profits or loss statement. Ezdan recognized the rental income of QAR 1.260 billion compared to QAR 1.177 billion, with an increase of QAR 83 million representing around 7%. For residential and commercial segment, which is representing 86%, it has -- rental revenue has increased by around 6% with QAR 57 million considering that average occupancy rate was around 86% compared to 84%. Rental revenue from hotel segment, representing around 10% from total rental revenue of Ezdan, increased by around QAR 0.7 million. Average occupancy rate for hotels was around 47% compared to 45%. Rent revenue from malls segment, representing 5% from total rental revenue of Ezdan, increased by around QAR 25 million due to the decision of Ezdan Board of Directors to waive all tenants in malls from rent during the March, April and May due to COVID-19 pandemic. In addition, average occupancy rate in malls was 76% compared to 63%. For other operating revenue, Ezdan achieved other operating revenue of QAR 87 million compared to QAR 70 million, with an increase of QAR 17 million representing around 24%. Other operating revenue from residential segment has increased by around QAR 9 million; for hotel segment, increased by around QAR 4.5 million; and for mall segment, increased by around QAR 3.5 million. Regarding operating expenses. Operating expenses incurred for '21 were QAR 295 million compared to QAR 253 million, with an increase of QAR 43 million representing around 17%. The main components of operating expenses were staff benefits of QAR 68 million compared to QAR 50 million; electricity and water charges with QAR 98 million compared to QAR 82 million; maintenance expenses with QAR 54 million (sic) [ QAR 33 million ] compared to QAR 23 million. Operating expenses for residential segment increased by QAR 50 million; for hotels, decreased by QAR 15 million; for malls, increased by QAR 7 million. Operating profit from main operations was around QAR 1.052 billion compared to QAR 995 million with a gross margin from main operation of 78% compared to 80% Operating profit from residential and the commercial segment was QAR 908 million compared to QAR 893 million with gross margin of 81% compared to 85%. From -- operating profit from hotel segment was QAR 90 million compared to QAR 69 million with gross margin of 63% compared to 51%. Operating profit from mall segment was QAR 55 million compared to QAR 33 million with gross margin of 65% compared to 60%. Investment income, representing dividends income and the share of results of equity accounted investees, was QAR 78 million compared to QAR 120 million, with a decrease of QAR 42 million representing mainly a decrease in dividend income from QAR 93 million to QAR 70 million and decrease in share of results by QAR 19 million. General and admin expenses have increased by around QAR 2.6 million, which was mainly due to increase in staff benefit expenses by around QAR 6 million, while other categories of general and admin expenses have decreased in total by around QAR 3.4 million. Regarding finance costs. Finance costs were QAR 720 million -- QAR 728 million compared to QAR 752 million, with a decrease of QAR 24 million representing 3%. The main reason behind such a decrease in finance costs was modification of terms for specific borrowings and decrease of profit rates, the matter which had started during the second half of 2020. In addition, net gain for modification of Islamic financing incurred in 2020 with QAR 100 million compared to 0 during 2021. Regarding the financial position of the group. At December 31, 2021, the group has total assets of QAR 50 billion, equivalent to USD 13.8 billion, with an increase of QAR 787 million, equivalent to USD 216 million. Total liabilities were around QAR 18 billion, equivalent to USD 4.9 billion, with an increase of QAR 604 million, equivalent to USD 166 million. And total equity including noncontrolling interest was around QAR 32.2 billion, equivalent to USD 8.8 billion, with an increase of QAR 182 million equivalent to use the QAR 50 million. Cash and bank balances have increased by around QAR 439 million, representing 67%, mainly from net cash flows from operations. Investment properties have increased from QAR 44.5 billion to QAR 44.8 billion, with net increase of QAR 315 million representing mainly in capitalized expenditure during the year by QAR 515 million and revaluation loss of QAR 200 million. Equity investment has been increased by QAR 122 million with a balance of QAR 2.7 billion as at December 31, '21 compared to QAR 2.5 billion as at December 31, 2020. And increase was mainly due to changes in market value of equity investments. Investments in equity accounted investees and joint venture have decreased by QAR 28 million as a result of offset between dividends received by QAR 35 million and the share of results of QAR 7 million. Due to related parties increased by QAR 2.2 billion. Movement in the balances with the related parties, representing mainly in development costs charged by main contractor and the related party, SAK Holding, with around QAR 400 million; and a borrowing of QAR 1.8 billion in [ directory ] through other related parties. Islamic borrowings and the sukuk have decreased by QAR 1.6 billion. That decrease resulted mainly from mid-payment of around QAR 2.2 billion and finance costs of around QAR 728 million. Retained earnings have increased by QAR 56 million, representing a net profit of QAR 61 million, legal reserve of QAR 60 million, gain on the disposal of equity investments recorded through retained earnings by QAR 2 million. Revaluation reserves have increased by QAR 120 million as a result of change in fair value of equity investments. The share capital of Ezdan was QAR 26.5 billion, equivalent to USD 7.3 billion, as at December 31, 2021. Regarding cash flows. Net cash flows from operating activities were QAR 938 million compared to QAR 916 million. Net cash flows from investing activities was QAR 45 million compared to net cash flows used in investing activities with QAR 36 million. Net cash flows used in financing activities was QAR 512 million compared to QAR 318 million. Thanks, and operator, you can start session of questions.

[Operator Instructions] Our first question today comes from Lee Beswick from QNB.

I just wanted to delve into the value of your assets on the balance sheet, particularly the properties at QAR 44 billion. Your rental income is QAR 1.2 billion, which gives a yield of about 2.8%. In the valuation at the back, in Note 27, you said terminal yield is between 4% and 5%, I believe, 4% to 5.2%. You're assuming that the terminal yield goes up from here. I just wonder how that's possible in a market where residential, commercial and also retail vacancy rates are 20%, 30%. They're massive. How is it possible that you're assuming that the yields are going to go up for your terminal value from where they are today?

Thanks for your questions. Regarding the comparing rental income to our investment properties, investment properties include the projects under construction and the lands. The completed was around QAR 38 billion. If we normalize this revenue, because this year has specific factors which affect our revenue this year, but we hope and expect during the next year will not be there. One of the risk factors, around 50% of the rooms in hotels was out of order. So this is not generating revenue. Most of our completed units was not injected into market. Also, this affected the revenue. So when we compare the yield based on the actual results with the terminal yield used and the valuation and the loss of the financial statements, first, we showed -- normalized the revenue. As we normalize the revenue, we make this one internally, and it is matching. Normalization yield for Ezdan is estimated from 4% to 5% during this year and the coming 5 years.

Okay. So in terms of your revenues -- normalized revenue, it's probably around QAR 2 billion. Is that correct?

It will be between QAR 1.5 billion and QAR 2 billion.

When do you expect to be get QAR 1.5 billion to QAR 2 billion of revenue? Next year, 2023?

It is not specific -- it is not specifically -- again, please?

Sorry. I just wondered which year do you expect to hit that revenue target of QAR 1.5 billion to QAR 2 billion, which specific year.

You are referring to the disclosure of the valuation, right?

Yes. I just wanted -- sorry, we just said that the revenue that you've assumed is based on 4% to 5%. I've calculated your revenue assuming, and you just said it's QAR 1.5 billion to QAR 2 billion. So I just wondered which specific year do you expect to hit QAR 1.5 billion to QAR 2 billion of revenue. Is that 2022, '23, '24? Which year would you expect to hit that?

No. We can't specify what year exactly because each year has specific factors. For example, in 2020, we have World Cup. In addition for 2023, we have additional units will come in by the end of 2022. But on average, during 2022 until 2026, it will be ranged from QAR 1.5 billion to QAR 2.3 billion.

Sorry. You wouldn't project QAR 1.5 billion to QAR 2 billion in 2022 given this is going to be the highest demand -- domestic demand year for Qatar for at least 7 or 8 years? You don't think you'll achieve QAR 1.5 billion to QAR 2 billion this year?

Yes. It is -- here, we are talking about average, average estimation during the next year and the following 4 years.

Yes, that's what I mean. You're talking about an average. Therefore, at some point, you have to hit that number. So will you hit QAR 1.5 billion to QAR 2 billion in 2022?

Yes. We expect it to hit more than QAR 2 billion during 2022.

Okay, okay. And do you think that you'll be able to -- given 2022 demand, economic demand is going to be much greater than '23, do you think you can sustain QAR 2 billion into 2023, again, making an outreach of QAR 1.5 billion to QAR 2 billion?

Yes. Of course, it will be more accurate if we are talking about at the end of 2022 because we are now talking based on the factors in front of our eyes now, the outlook, the events, the inflation rates, everything. So it is not -- it will be not fair to make accurate estimation for 2023 or 2024 for the time being. If you are talking about conference call event of 2022, of course, we will have a better view about the results.

Right. Okay. And the -- in terms of the projects that you have under development at the moment, I think that's QAR 2.5 billion -- just under QAR 2.5 billion in the accounts. What kind of revenue -- or what kind of valuation is that going to be worth once it's finished? And secondly, what revenue would you attach to that?

Regarding these projects, it is -- as we mentioned before,in conference calls, we expect this project to be completed through phases during 2022. By the end of 2022, we will have this full project. To expect now the full of -- the valuation for this one, I think this will be a different story to value under completion, to be completed for the time being because we need to know when it's complete and the factors at that time. At that time, we will be able to have what's called a clear idea and a clear view about generating revenue and expecting generating revenues, OpEx, the percentage of development. All the things will be in front of us and we will have a clear vision to value a complete property based on the given factors at that time.

[Operator Instructions] We now have a question from Chetan Joshi from Al Rayan Investments.

This is Ejayan Al-ahbabi from Al Rayan Investment. I just have 2 questions, please. My first question is about the provision on your investment properties. Could you shed some light on that? And my second question is about the rental rates and the outlook for the company.

Thanks for the question. Regarding the provision of QAR 200 million, it is related to the full portfolio. So we can't say that the full portfolio has been decreased by QAR 200 million, no, as these sectors has been affected -- decreased in value such as malls and hotels. Because, as I mentioned earlier, that the hotels, we have around 50% from the -- out of order during 2021. And for malls, due to COVID-19 and the development and the evolution of new Omicron, and this one is affecting malls. On the other hand, I have projects under construction. As long as the percentage of completion for these projects are approaching the completion, the value of these projects is increasing. So the net effect from all these factors give us QAR 200 million. For example, hotels decreased, but residential sector has increased, the net effect of QAR 200 million. Regarding your next question regarding rent rates. Our estimation for rental rates during 2022, of course, all of us know that the event of World Cup during 2022, it will increase the demand, it will increase the rent rates. Consider the fact that we are already have a competitive price during 2021. And also, we already announced in January 2022, we are in the process of developments around 17 compounds of Ezdan. So all these factors will estimate to enhance our rental rates and occupancy. Occupancy, as I mentioned in my first introduction, it was average 84%. Actual occupancy at December 31, 2021 was around 93%, and we expect this occupancy to be stable during 2022.

And what is your outlook post-2022 after the World Cup and after all these events?

I think it is not clear for the time being. But we expect to -- and estimate not a significant impact as we are now at the end of 2021. We have available units in the market with around 26,000. We expect another 3,000 units, which is already completed but not injected in the market. It will be injected in the market during 2022. We have around another 4,000 units. Projects under construction will be completed during 2022. And also, we have 50% of the hotel that has been out of order will be also developed. And all these factors, of course, it will be during the phases of 2022. So the impact of World Cup will not be -- have a significant decrease in our revenue because it will be compensated by additional units injected in the market by the end of 2022.

We now have a follow-up question from Lee Beswick from QNB.

Sorry, you just talked about the additional units. Vacancy rates in retail, the last numbers I saw are about 30%. Residential, they're about 20%. Commercial, they're probably, I think, slightly less but something in that region. How would additional units actually -- and those kinds of vacancy rates are enormous. They're really, really, really big when you compare them internationally. How will additional units bring more revenue? And what will the rate of those -- rates of revenue be on those additional units when vacancy rates are so extreme?

Can you repeat the last part of your questions, please?

Yes, sure. The vacancy rates across Qatar are extremely high when you compare them internationally, really, really high. So my question is, if you bring additional units into the market after 2022, at a time when demand will inevitably be lower at the start of 2023, how will those additional units add to revenue or how much revenue will those additional units add. Surely the unit cost of those additional units or the unit prices will be significantly lower than your existing units.

Frankly, it is a good question. But we should consider the components of our tenants in Ezdan. Ezdan doesn't depend mainly on corporates or government because more than 70% of the individuals is the tenant of Ezdan. So the World Cup, it is not affecting too much on the, what we call, the types of tenants in Ezdan Holding Group. Regarding the vacancy rate. Our, what's called, stabilized occupancy rate in Ezdan during the years, it is -- we are talking about from 85% to 90%. So I don't think -- it is not a matter of World Cup, no. It is a matter of regulation mainly, especially then targeting middle-income individuals here in Qatar. Also, we should consider that a significant portion of population here, it is expats. So I think the formula or the impact of World Cup and the impact of occupancy rate will not significantly hit Ezdan because we already survived during, I think, during the diplomatic dispute, during the COVID-19, during another factors. I think it is already resolved now. So I am -- I don't agree with you regarding that occupancy rate will be significantly decreased after 2022 because the track record of Ezdan during the last years, it is on average from 85% to 90%. Above of all of that, a significant part of the revenue, it is coming from residential sector. We are talking about more than 85% of the revenue coming from residential segment. Yes, I agree with you if we are talking about hotels, malls, yes. But hotels is around -- as I mentioned at the beginning, it is around 10% of the rental revenue. Malls is around 5%.

Thank you. At this time, we have no further questions in the queue.

Okay. Hi, operator, this is Bobby Sarkar again. If you have no further questions, we can end the call for today. I want to thank Ezdan management for taking the time to answer investor questions, and we'll pick this up next quarter. Thank you so much.

Thank you. This concludes today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.