- The good performance of Dubai-based property company Emaar Properties PJSC’s leasing and hospitality assets, and fewer handovers of developments, has raised the proportion of the company’s recurring net income.
- Still, Emaar faces challenges in international development activities, where it has a relatively short track record and is encountering political risk in key markets.
- We are affirming our ‘BB’ long-term ratings on Emaar and revising the outlook to stable from negative.
- The outlook is stable because we see recurring cash flow generation from leasing activities and improving performance of Emaar’s hospitality assets, which offsets uncertainties in international development activities.
Standard & Poor’s Ratings Services today said it affirmed its ‘BB’ long-term corporate credit and senior unsecured debt ratings on Dubai-based property company Emaar Properties PJSC (Emaar). At the same time, we revised the outlook to stable from negative.
We have also affirmed our ‘BB’ issue rating on the $500 million trust certificates issued by Emaar. Our recovery rating on these certificates is unchanged at ‘3’, indicating our expectation of “meaningful” (50%-70%) recovery prospects in the event of a payment default.
The affirmation reflects the good performance of Emaar’s leasing and hospitality assets, which constitute an increasing share of total earnings (68% of earnings in first-half 2011 versus 28% in first-half 2010). We believe this uptrend helps offset the uncertainties and the relatively short track record in Emaar’s international development activities. Under our criteria for rating real estate companies, we generally view revenues and earnings derived from leasing activities to be more stable and supportive of a higher business risk profile than those from development activities. Emaar’s liquidity position, which we qualify as adequate, has also strengthened with the USD750 million commodity murabaha forward start facility repayable by 2014. In our sector methodology, we consider asset quality and asset diversity as the main supporting factors when we assess business risk for property investment companies.
Emaar’s Standard & Poor’s adjusted total net debt stood at UAE dirham (AED) 8.1 billion (USD2.2 billion) on June 30, 2011. Adjusted debt includes AED513 million of guarantees and AED64 million employee end-of-service benefit obligations, and is net of bank and cash balances, excluding AED0.5 billion of maintenance cash.
The ratings factor in Emaar’s business risk profile, which Standard & Poor’s views as “fair.” The company is highly exposed to cyclical and capital-intensive property development activities, with a focus on large master-plan developments. We consider that Emaar is pursuing an aggressive international growth strategy in markets where it lacks a track record and it is significantly exposed to markets subject to political risk. Mitigating these weaknesses are the increasing earnings contribution from more stable property investment and hospitality activities, the good track record and high quality of rental assets in Dubai, and geographical diversification of the development businesses.
The ratings also take into account our assessment of Emaar’s financial risk profile as “significant.” Although the company’s financial leverage is moderate, discretionary cash flow for 12 months to June 2011 remained negative owing to significant capital expenditure, investments, and resumed dividend payments. We view positively Emaar’s low loan-to-value (LTV) ratio of 32.4% on Dec. 31, 2010, relative to other ‘BB’ rated property investment companies. The LTV ratio is based on investment properties and fixed assets over total debt adjusted by Standard & Poor’s (the ratio excludes net development assets and investments in and loans to associates).
The stable outlook reflects our opinion that Emaar’s relatively stable leasing activities, accounting for over half of total earnings in first-half 2011, and an improving performance of hospitality activities balance uncertainties in international development activities. To date, Standard & Poor’s has rated Emaar broadly in line with industrial medians (median financial ratios across all industries). We are changing our approach now given the higher contribution from Emaar’s relatively stable leasing activities. Based on Emaar’s current business mix, we expect the Standard & Poor’s ratios of adjusted debt to EBITDA below 4.0x and EBITDA interest cover of above 4.5x at year-end 2011.
Over time, we expect changes in the ratio targets for Emaar, as its profile evolves. Financial ratio targets will constitute a blend of industrial medians and more lenient ratio targets for property investment companies. For instance, if the company’s leasing activities grow or diminish in importance, we would likely set more or less lenient ratio targets, respectively.
We could upgrade Emaar if sales, margins, and collections in international operations prove resilient, the rental and hospitality assets continue to perform well and remain a key source of earnings for the company, and if, consequently, it generates robust operating cash flow and positive free cash flow. Maintaining adequate liquidity is also a precondition for an upgrade.
We could lower the ratings if Emaar fails to maintain the ratio targets mentioned above or cash flow from operations turns negative.
RELATED CRITERIA AND RESEARCH
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
— 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
— Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
— Methodology And Assumptions: Standard & Poor’s Standardizes Liquidity Descriptors For Global Corporate Issuers, July 2, 2010
— Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
— Criteria Guidelines For Recovery Ratings On Global Industrials Issuers’ Speculative-Grade Debt, Aug. 10, 2009
