Fitch Ratings has placed Dubai-based Emirates REIT’s ‘BB’ Issuer Default Rating (IDR), as well as the sukuk trust certificates issued by Emirates REIT Sukuk Limited, which is also rated ‘BB’, on Rating Watch Negative (RWN).
The RWN on Emirates REIT reflects uncertainty over its ability to increase occupancy and rent across its portfolio in current challenging economic conditions in Dubai. It also reflects the possibility of rent concessions, which may result in lower cash generation.
In addition, we see limited visibility as to the outcome of the company’s arbitration with Jebel Ali School, which has stopped paying rent, and whether the company will be able to lease the School in DIP, which has been vacant since the operator’s default in 2018, ahead of the beginning of the school year. Fitch expects to resolve the RWN when current uncertainties on cash generation are known.
EBITDA-based net leverage at end-December 2019 remained high at 13.8x and is expected to further increase in 2020 in COVID19-affected markets. If the company is able to increase cash generation, Fitch forecasts net debt/EBITDA could fall within our current rating sensitivity of 12.0x by end-2021. If, however, leverage remains persistently high, Fitch would expect to downgrade the rating.
Similar to Emirates REIT, Arabian Centres Company (ACC; BB+/Stable) has geographic concentration as it operates only in Saudi Arabia. Nevertheless, ACC has 25 assets spread across the country, while Emirates REIT has only 11 assets, all within Dubai.
The effects of COVID-19 have been more substantial on retail real-estate companies such as ACC, as most assets were shut during the government-imposed lockdown in Saudi Arabia. ACC has a conservative financial profile with 2019 net debt/EBITDA of 5.0x and occupancy above 90%, but also operates in the nascent Saudi retail market, which can be volatile owing to the substantial influence of oil prices, government policies and geo-political issues.
Dubai-based Majid Al Futtaim Holding LLC (MAF; BBB/Stable) also has material geographic and asset concentration in its investment portfolio, which comprises 26 shopping centres. The Mall of the Emirates – one of the premier shopping centres of Dubai – alone generates about 40% of the group’s property EBITDA.
Nevertheless, MAF, as a conglomerate, owns a portfolio of more than 280 Carrefour stores throughout the GCC and has shopping centres in Egypt, Oman, Bahrain and Lebanon. Occupancy is consistently around 95%.
Emirates REIT’s cash flow leverage of 13.8x at end-2019 is also among the highest in EMEA real estate. Ronesans Gayrimenkul Yatirim A.S. (RGY; B+/RWN), a Turkish retail real estate operator, had net debt/EBITDA of 11.3x at end-2019, but is also exposed to the significantly volatile Turkish economy and lira.
Source Fitch Ratings