(MENAFN- Khaleej Times) Emaar's strong cash flow generation, solid liquidity and growing business diversification will enable it to weather the more uncertain investment climate, Moody's Investor Service said on Tuesday following its upgrade of the outlook for the property developer last week.
On February 25, 2015, Moody's Investors Service changed to positive from stable the outlook on the Ba1 corporate family rating (CFR) and the Ba1-PD probability of default rating (PDR) of Emaar Properties. Concurrently, Moody's has affirmed all ratings including the Ba1 ratings on the two sukuks issued under Emaar Sukuk Limited.
The outlook on all ratings is positive to reflect the strengthening of both the company's financial and business profiles, Moody's said.
The ratings agency believes that more uncertain investment climate stemming from regional geopolitical tensions, low oil prices and strengthening of the US dollar are likely to weaken demand for Dubai property.
"We believe that slowing demand and rising supply pressures will lead to a moderate correction in Dubai's real estate market in 2015. The market has reached an inflexion point, with real estate prices stabilising in the second half of 2014 after a strong performance since the beginning of 2012. Although we anticipate property prices to soften moderately in 2015 as the market corrects itself from the unsustainable trend line seen in previous years, we do not expect it to weaken to such an extent that it would impair Emaar's cash collection from existing development projects," the ratings agency said.
Proceeds from property sales and revenue from fixed assets will support Emaar's credit profile, Mooyd's said.
"There is substantial cash flow visibility over the next 18-24 months across Emaar's business segments. Emaar has booked real estate development sales in excess of Dh26 billion since 2012, and we estimate that about half of the cash proceeds have yet to be received. Additionally, about 50 per cent of Emaar's total revenues are generated by recurring revenue property assets, income that can support the company's operating expenses in a more challenging business environment," it said.
Last week, Standard & Poor's Ratings Services affirmed its 'BBB-' long-term corporate credit rating on Emaar Properties, and also affirmed the 'BBB-' senior unsecured issue rating on Emaar Properties' $1 billion trust certificates.
Emaar's liquidity has improved due to "the strong cash flow generation of the company's high-margin, largely presold, Dubai-based development business and lower near-term debt maturities with liquidity sources comfortably exceeding," according to S&P's report.
Due to this improvement, S&P revised its assessment of Emaar Properties' liquidity to "strong" from "adequate." As of December 31, 2014, Emaar Properties had presold properties worth Dh24 billion in Dubai.
Robust performance
For 2014, Emaar Properties has announced a record Dh3.350 billion net operating profit, 30 per cent higher than 2013 net operating profit of Dh2.568 billion.
Underlining the robust performance of its real estate business as well as the strong recurring revenues from its shopping malls, retail and hospitality businesses, Emaar achieved 2014 revenues of Dh9.893 billion. Shopping malls, retail and hospitality businesses contributed over 54 per cent of the total revenue. At Dh5.367 billion, it is 12 per cent higher than the Dh4.8 billion generated in the previous year.
The company's international operations also recorded robust growth with 2014 revenue at Dh1.899 billion, totaling 19 per cent of the total revenue. This marks a growth of 63 per cent compared to Dh1.167 billion in 2013.
According to Moody's, Emaar has also displayed a disciplined approach towards capital expenditure during the recent market up-cycle, while building its solid liquidity position and leveraging the market to create a sizeable property sales backlog.
"Emaar's revenue mix has improved significantly since the last real estate downturn observed in Dubai in 2008-2010. The company's business model has evolved to become fairly robust through a balanced mix of the cyclical real estate development operations and the more stable hospitality and retail operations," according to the rating agency.
Emaar has a significant multi-year capital expenditure programme with budget estimated at Dh5.5 billion for 2015. Emaar's budgeted capital expenditure for 2014 was similarly high at Dh5 billion, but only Dh950 million was spent in the first nine months of 2014.
"Although we anticipate capital expenditure in 2015-16 to be significantly higher than in previous years, past behaviour alleviates execution risk concerns and points to the discretionary nature of the capital expenditure programme. We view the large cash dividend of about Dh10 billion for 2014 as a one-off because Dh9 billion of it was a special dividend related to the capital restructuring of Emaar Malls Group (EMG, Baa2 stable) and the subsequent proceeds from its IPO," Moody's said.
The rating agency further observed that Emaar's strongest assets reside in Dubai, but international operations will provide growth opportunities over time.
"We continue to believe that Emaar's international operations in core countries such as Egypt, Turkey, India and Pakistan are constrained by socio-political and economic challenges, which creates uncertainty around the timing and quality of investment returns. However, Emaar will benefit over the longer-term from the economic potential and fundamental housing demand that exists in these countries."
Cash cushion
The ratings agency noted that Emaar's liquidity profile is robust. The company leveraged the buoyant market to build a sizeable cash cushion, terming out debt maturities at historically low interest rates and reducing asset encumbrance.
Moody's believes that Dubai's real estate market has reached an inflexion point, with real estate prices stabilising in the second half of 2014 after a strong performance since the beginning of 2012.
"Although we anticipate prices to soften moderately in 2015 in the face of slowing demand and rising supply pressures, we do not expect the market to weaken to such an extent that it would impair Emaar's cash collection from existing projects that have been launched in the off-plan market."
Moody's said weakness in demand could be attributed to investors' perception that the market has reached its peak after three years of strong growth in conjunction with the introduction in late 2013 of tighter regulatory measures aimed at curbing speculation.
"Given that Dubai's real estate market is significantly influenced by the purchasing power of foreign investors and expatriates, regional geopolitical events, economic slowdown of oil-exporting nations as a result of low oil prices, and a strengthening of the dollar-pegged UAE dirham against the euro and emerging market currencies, such as the Russian rouble, will all contribute to weakness in demand," the report said.
Credit profile
Moody's said Emaar's credit profile is fairly well insulated against the effects of a moderate price correction in the Dubai real estate market for three main reasons.
"Firstly, there is substantial cash flow visibility over the next 18-24 months across Emaar's business segments. Emaar booked real estate development sales in excess of Dh26 billion since 2012 from the sale of primarily residential and serviced apartment units. Of this amount, we estimate that about half of the cash proceeds have yet to be received. As most of the projects that have been launched are centrally-located in prime areas where the surrounding infrastructure has already been built, we would expect customers to remain committed in paying their installments on time," the agency said.
Emaar has robust liquidity as a result of it leveraging the buoyant market to build a sizeable cash cushion. As of end-September 2014, this comprised cash balances of Dh9.3 billion as well as Dh7.6 billion of cash in escrow accounts or to be maintained as deposits. These cash sources as well as a $500 million undrawn committed line are more than adequate to meet the total amount of Dh723 million in short-term debt as well as the next material debt maturity, the $500 million sukuk due in August 2016, said the ratings agency.
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