INTERVIEW - Azizi Developments wants to improve cash flow, tap the debt market

Dubai-based developer will focus on building a recurring income portfolio, says its CFO Mika Toivola

  
Rendering of Azizi Developments' Azizi Mina project on the Palm Jumeirah, Dubai

Rendering of Azizi Developments' Azizi Mina project on the Palm Jumeirah, Dubai

Azizi Developments/Handout via Zawya Projects

As part of a strategy to further improve its cash flow, Dubai-based Azizi Developments is working on developing a strong portfolio of assets that will generate steady recurring incomes for the group.

The developer, which had completed over 2,650 residential units up to 2019, currently has over 13,000 residential units under construction, according to its Chief Financial Officer (CFO) Mika Toivola.

"This stock of 100 plus buildings [existing and under-construction] allows us to do facility management [and] generate recurring income ..., which is important and allows us to support our communities as part of our core competence," said Toivola in an interview with Zawya Projects.

He said these communities would have retail stock of about 100,000 square metres up till 2024 - something that will "allow us to generate recurring rental revenue and additional earnings".

Moving forward, he said the company might acquire lands and develop an additional 10,500 residential units depending on market conditions - 6,000 in Riviera and another 4,500 in Victoria, both in MBR City - that would take its residential units under construction to around 23,500 to be delivered up till 2025.

Mika Toivola, CFO, Azizi Developments

"In our plans, we also have hospitality, including serviced apartments, mixed-use and other hospitality components, that will also be generating recurring income in the future," said Toivola who took charge last year to oversee the company's financial planning and strategy initiatives.

With the demand slump pushing down Dubai property prices, many developers are resorting to offering attracting payment plans and rent-to-own schemes to clear unsold inventories and improve their cash flow.

Having sold more than 73 percent of its under-construction units, Azizi is looking to complete up to 3,500 units this year, and about 7,300 units in 2021.

"A part of our residential stock will be kept as rental units in our balance sheet to generate additional recurring income. So, the target is really to generate a certain type of portfolio that will allow us to have a steady income flow to cover our interest expenses," said Toivola.

Transition phase

The real estate veteran who has over 25 years of international experience working for companies like Dar Al Arkan, Al Arrab General Contracting, Skanska and Tellabs said one of his priorities as CFO is to transform the family-run entity into a "real enterprise".

"One of the things that we are doing is preparing the company for debt capital market access, either private or public. Just like any company, with growth like we've had, [we] should have the capacity and the processes in place to access debt capital markets," he said.

Azizi's growth was funded by equity in the beginning and then by local banking and funding arrangements as "it wasn't easy to keep up with this pace of growth through equity."

"But eventually we needed to observe what happens in the public market as we want to fund our next round of growth," explained Toivola.

"We want to have all policies and procedures in place that are at the level of a public listed company even though we are in the private space. This is something that I'm doing as we speak, and it's a process that takes time. But we are solidly moving on," he said.

The obvious implications for the finance department, he continued, is transforming from a transactional finance department to having new and value-added resources and having proper policies and systems in place at a level that supports a listed company.

"Likewise, we want to have proper quarterly reports and interim audits and all. These processes - be it in the finance department or the company in general - are linked with the requirements of having access to public funding," he explained.

Credit rating

The company's effort received a significant boost when it managed to secure a 'BB-' rating with a stable outlook from Fitch.

"Our credit rating is naturally good for the company, for brand and perception point of view in general, but, in particular, it's of interest for the banks," said the Azizi CFO, adding that an external rating agency digging into what the company is doing and being happy with it gives comfort to bankers and investors.

"It will open up diversified sources of funding to all types of products that we can use from different geographies as well as build interest across the world among high-yield and emerging market investors. And then if you're lucky and things work well, you can access that market," he added.

Types of funding

In terms of types of financing the company would be looking at, Toivola said this would depend on product types.

"Currently, we are funding ourselves with very high pre-sold base," he noted.

Given that Azizi is predominantly into selling off-plan residential projects, he said the company is still missing the recurring asset portfolio that could be mortgaged and have related funding.

While the company has strong cash flow with payment plan tail effect coming next year and the year after, Toivola said they would still need additional funding to diversify and support future growth.

"We need to acquire new land; we need to be able to launch new projects and fund our expansion."

In terms of financial strength, he said Azizi has about 6 billion UAE dirhams of revenue to be recognised, 6 billion dirhams to collect and is almost entirely funded to deliver the sold base.

Having an edge

While, historically, there have been minor delays in some projects for certain reasons, the Azizi executive said the company has benefited from a competitive contracting market and the fact that it is fully funded.

"We also speak to contractors and try to understand [payments] from their points of view and have a consensus on how we pay them. So, they are very happy to work with us," he said, adding that the products that they are doing are very straightforward, well-designed and tested.

He also emphasised that the contracting market for a 100-storey tower is different from that for a 10-floor building.

"The complexity is very much different. The competitive environment is different. Hence, you have a much larger base to tap into when you're doing these pretty basic buildings," Toivola concluded.

(Reporting by Syed Ameen Kader; Editing by Anoop Menon)

(anoop.menon@refinitiv.com)

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