November 27, 2017 / 7:16 AM / 15 days ago

Fitch Assigns First-Time 'BB+(EXP)' IDR to Emirates REIT with a Stable Outlook

(The following statement was released by the rating agency) LONDON, November 27 (Fitch) Fitch Ratings has assigned a Long-Term Issuer Default Rating of 'BB+ (EXP)' with a Stable outlook to UAE-based Emirates REIT. The expected ratings reflect Fitch's expectation that the company will successfully issue the sukuk and refinance all existing secured credit facilities. Fitch will assign final ratings once the company completes the refinancing and repays all secured debt. If the sukuk is not issued, or is issued under materially different terms than we have assumed, Fitch would need to re-examine the rating. The Stable Outlook reflects expectations of the Index Tower achieving higher tenancy levels, boosting overall occupancy rates and EBITDA margins, as well as of management's ability to prudently expand the portfolio beyond EUR1.5 billion (USD1.76 billion), reducing asset concentration. KEY RATING DRIVERS High-Quality, Relatively Small Portfolio: Emirates REIT owns 10 properties in Dubai with a leasable area of 2.2 million square feet (sqf) and a value of USD845 million as of September 2017. Fitch views the portfolio as relatively low risk with high-quality properties located in prime locations, although Emirates REIT is exposed to its largest asset, the Index Tower office, which accounts for 37% of the portfolio's value. Its properties are a combination of commercial and the education assets, striking a good balance between rental income growth and stability. The average lease maturity for commercial assets is relatively short at one to three years, depending on the unit type. This is mitigated by the education assets, which have long lease maturities of more than 25 years. Low, but Increasing Occupancy: The total occupancy of the portfolio stood at 84% as of September 2017, which is low compared to other rated REITs. Excluding the Index Tower, however, the occupancy is a solid 97%, benefiting from the full occupancy of the schools portfolio. As key infrastructure projects improve road and pedestrian access, as well as retail offerings, occupancy of the Index Tower should increase rapidly. The rate of tenant uptake is difficult to predict given the current soft office market in Dubai. High Tenant Concentration: Emirates REIT has 355 tenants in total, but the top two - GEMS and Jebel Ali School - contribute almost 23% of total portfolio income. Nevertheless, given both tenants are in the education sector with lease expiration beyond 2040, we view tenant concentration as less risky than usual. In addition, excluding the education sector, the largest office tenant, a long-term client, generates less than 5% of revenue. The large tenants are typically multinational companies with relatively low credit risk. Prudent management and business strategy: Emirates REIT's management is experienced and follows a cautious acquisition strategy focused on income-producing assets. Before executing an acquisition, the company vets potential assets through an extensive due diligence process, which includes approval from the Investment Board. The most recent acquisition for Emirates REIT was the European Business Center in August 2017 for USD37 million. As of September 2017, the property had a 94% occupancy rate with a market value of USD40 million. Dividend policy: The company has to pay a minimum annual dividend of 80% of net cash flow, as specified by regulations. An Independent Oversight Board approval is required to distribute any revaluation surplus credited to income and from property disposal gains. Improving Capital Structure: The proposed senior unsecured Sukuk issuance will be used to repay all existing credit facilities. The facility will improve the liquidity profile, which is currently weak, will remove all variable interest-rate risk amid a rising interest-rate environment, and the entire portfolio will become unsecured. Finally, financial flexibility will improve by extending the maturity schedule. Fitch forecasts Loan-to-Value (LTV) to remain around 40%, which is comfortable. REITS in Dubai cannot exceed 50% LTV owing to a regulatory cap. Beneficial Government support: The government's 38% ownership and position on the board is a supportive factor for the overall business model. Through this governmental representation, the company has been able to acquire two exclusive Emiri decrees that allow real-estate ownership in non-free zone areas. In addition, the company gains good insight on the business and economic outlook of the Dubai real-estate market. DERIVATION SUMMARY Emirates REIT's high-quality portfolio is smaller, and more geographically concentrated, than most rated peers. Emirates REIT has the lowest occupancy and EBITDA margins among peers, owing to the Index Tower, which is only 26% occupied. Emirates REIT compares with companies such as Grainger PLC (BB/Stable) which has a much more diverse residential portfolio based in the UK, with strong rent potential, offset by high leverage and a much weaker LTV. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - low single-digit rental growth, driven by a bottoming out of the commercial office market and built-in annual price increases in education contracts; - somewhat slower-than-expected occupancy rates in Index Tower and a delay in launching the retail arm in Index Tower; - value-add capex and acquisitions similar to historical levels and maintenance capex of approximately 3% of revenue per year; - replacement or value-add capex as part of the revaluation gains on the property portfolio; - issuance of the proposed sukuk. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Total occupancy rates consistently above 90% - Reduced concentration with the top 10 assets comprising less than 50% of net rental income or value - Top 10 tenants accounting for less than 30% of annual base rent revenue - Rent-yielding property assets of at least EUR1.5 billion (USD1.76 billion) - Net debt/EBITDA consistently below 9.0x Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Occupancy rates materially falling below current levels - LTV consistently approaching or exceeding 50% - No reduction of net debt/EBITDA from current levels LIQUIDITY Improving Debt Maturity and liquidity: Emirates REIT's current liquidity score is weak. The upcoming Sukuk issuance, however, will replace all existing credit facilities and finance ongoing capital expenditure, significantly increasing liquidity. The proposed Sukuk will not only improve liquidity, but also remove variable interest-rate risk at a time or rising interest rates. The financing will also eliminate all secured debt. Unsecured assets can provide additional liquidity to REITs as unsecured assets can be sold if needed in times of stress. FULL LIST OF RATING ACTIONS Emirates REIT -- Issuer Default Rating (IDR): 'BB+(EXP)' with Stable Outlook. Contact: Principal Analyst Shrouk Diab Associate Director +971 4 424 12 50 Supervisory Analyst Bram Cartmell Senior Director +44 20 3530 1874 Fitch Ratings Ltd 30 North Colonnade London E14 5GH Committee Chairperson Paul Lund Senior Director +44 20 3530 1244 Date of Relevant Rating Committee: 16 November 2017 Summary of Financial Statement Adjustments - - Lease equivalent debt was calculated at USD10 million using an average multiple of 8x Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Sukuk Rating Criteria (pub. 14 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below