INTERVIEW: Equitativa CEO sceptical on buyback route for Emirates REIT

Sylvain Vieujot wants to be prudent with the use of the fund's capital

Index Tower, Dubai International Financial Centre

Index Tower, Dubai International Financial Centre

Equitativa Group/Handout via Zawya

The chief executive of the fund manager responsible for Emirates REIT has said that it is not considering buybacks of the REIT’s stock, despite the fact that its share price is currently languishing well below its net asset value (NAV).

In a telephone interview with Zawya last week, Equitativa CEO Sylvain Vieujot said that although it had the authority to buy back shares, this was not an option it is currently considering.

“First, we want to be prudent,” he said. “We think probably increasing the dividend as soon as we can might have a better effect than buying back the shares.”

He also said that there were “great opportunities” to use available funds to buy more assets at attractive valuations.

“I don't think it's a stupid option (buying back shares), otherwise we would not have asked for approval, but I think it is a tool you have to use very cautiously.”

Emirates REIT, which recently clocked up its fifth anniversary since its listing on Nasdaq Dubai, posted financial results earlier this month which showed a 57 percent decline in net profit for 2018 to $22.3 million. Net property income also fell 24 percent to $64.3 million, although this was largely due to lower unrealised gains on its portfolio.

The company’s share price closed at $0.74 last Thursday and is 20.4 percent lower since the start of the year. It trades at a 57 percent discount to the most-recently announced NAV per share of $1.74 at December 31, 2018.

Harshjit Oza, vice-president of research at Shuaa Capital, said the company’s 2018 profits was hit by the fact that a school operator had defaulted on a long-term lease agreement.

“While they’re looking for another operator to run the school, they took required provisions because of the operator’s default,” Oza said in a telephone interview with Zawya last week.

Emirates REIT announced a deal in September 2016 to fund the development of the British Columbia Canadian School at Dubai Investment Park. The deal involved Emirates REIT acquiring a 25,000 square metre plot of land and funding construction of the school, putting in an overall investment of 88 million UAE dirhams ($24 million). 

British Columbia Canadian School signed a 28-year lease on the building. It occupied the site for one year, before closing its doors at the end of the last school year.

Problems at home

Vieujot said that the school operator, whom he did not name, “had issues in their home country”.

“When you start a new school, you are not breaking even on the first year. You have to wait two or three years to break even. Whilst they were expecting their income in their home country to be able to fund the school here, there was a big devaluation in their home country and therefore the profit over there became losses, and they were unable to continue to fund the school,” he explained.

He added that it is currently in talks with “an existing local operator” about taking on the site.

“That's why we like schools, because they are very generic buildings. We are talking with the operator with a few changes, but they are very, very minimal compared to a hospital or a very specialised building.”

Emirates REIT bought another school, Lycée Français Jean Mermoz, a French curriculum school in Al Quoz, in the second quarter of 2018 and added three more floors of Index Tower to its portfolio last year.

Vieujot argued that “there is a lot of upside on Index” Tower, where the fit-out of a mall on its lower floors has been completed and is due to open in the second half of 2019, when it will connect directly to the rest of Dubai International Financial Centre through the new Gate Avenue project.

 “This one was more affected before because it was not very well connected to the DIFC. It was really a building completely isolated, even without good access. This has started to change,” he said.

Occupancy of Emirates REIT-owned space at Index Tower reached 50 percent at the end of last year, and Vieujot said that income derived from Index Tower increased by 35 percent last year as more leases were signed, and as rent-free periods agreed in earlier periods ended.

Overall, he argued that Emirates REIT’s portfolio had been afforded some protection from the worsening conditions in Dubai’s real estate market by the fact that it generally has quite long leases agreements in place.  The company’s weighted average unexpired lease term, a measure of the typical lifespan of its portfolio of leases, stood at 7.8 years at the end of 2018.

He also said that Emirates REIT was not the only real estate company in Dubai to be trading at a significant discount to its book value, adding that the fact that listed REITs publish NAVs more frequently merely made this more visible than for other listed developers.

The other REIT listed on Nasdaq Dubai, ENBD REIT, managed by Emirates NBD Asset Management, is also trading at a significant discount to its net asset value, despite the fact that it has launched a buyback programme.

The company said earlier this month that it has bought back 3.25 million shares at a cost of over $1.9 million between February 21 and March 31 during the first phase of a programme allowing it to repurchase just over 4.4 million shares by the end of September. Yet despite its intervention, its share price closed at $0.515 on Thursday, 53 percent below its last declared NAV per share of $1.11 at December 31, 2018.

“If you look at Emaar and the like, there is a similar, or if not higher, discount to book values than we have,” Vieujot said.

Discount factors

At close on Thursday, Emaar Properties’ market capitalisation of 34.5 billion dirhams indicated a 40 percent discount to its book value at December 31, 2018 of 57.3 billion dirhams, while Damac Properties’ market capitalisation of almost 7.75 billion dirhams represented a 45 percent discount to its book value of $14.1 billion on the same date.

Vieujot also argued that the Emirates REIT had been “quite successfully” marketed to overseas investors in the U.S. and Europe, but that over the past two years fund managers in both markets had been wary of investing in emerging markets generally, and the Middle East in particular.

“So we saw a lot of emerging market finds or MENA funds in the UK, in the US, just closing - redeeming all of their shares and closing because there was no appetite for this type of stock,” he said. “Since we marketed a lot to foreign investors, we suffered on that front.”

Shuaa Capital’s Oza said that Emirates REIT’s income was also weakened by higher financing costs. A 500 million dirham, seven-year loan was agreed with shareholder Dubai Islamic Bank in November at a 2.95 percent margin, and Vieujot said that part of this was drawn down to close a deal which then did not proceed.

Vieujot is hopeful of being able to secure more assets for the REIT’s portfolio this year, however.

“We believe this is indeed a very, very attractive market and we are doing our best to find opportunities,” he said.

Long term view

Oza said that despite Emirates REIT’s lower profitability in 2018, “for the long term, we like the story”.

“We expect Index Tower occupancy to improve organically, possibly benefiting from launch of Index Mall and improvement in access through Gate Avenue.”

He said that the company’s funds from operations (FFO) – a measure of the cash flow generated by REITs – should improve given the addition of three extra floors at Index Tower.

“The stock also provides an attractive 10.7 percent dividend yield based on the current price,” he said.

In a note published last week, Arqaam Capital cut its target price on Emirates REIT to $0.81 and maintained its Hold rating on the stock.

Arqaam Capital said that Emirates REIT’s “heavy market discount to NAV” was justifiable given that 40 percent of the gains in the fund’s value made over the past five years were the result of non-cash gains on valuations of its properties.

It said that even without the school default last year, funds from operations generated by the REIT would have been $17 million, which was below the $24 million in dividends paid out.  It also said it does not expect FFO this year to exceed last year’s dividend payment, suggesting that there is little scope to increase dividends.

Oza said that the tough market conditions in the UAE’s real estate sector also limit an operators’ ability to increase rents and occupancy levels.

A Q1 Dubai Real Estate Market Update published by JLL MENA earlier this month stated that both sale prices and rents in Dubai’s central business district declined by 9 percent year-on-year to 1,543 dirhams per square metre per annum, while vacancy rates climbed 3 percent to 12 percent.  It also said that although a recent ruling allowing 100 percent foreign company ownership of onshore companies in the UAE would be a boost to the market in the long run, over the next 12 months “the market is expected to move further in favour of tenants”.

(Reporting by Michael Fahy; Editing by Mily Chakrabarty)


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