Fitch Ratings has affirmed
EP operates a broad conglomerate structure, which generates a diverse revenue stream. About 50% of EBITDA is from recurring revenue-generating businesses led by high-quality shopping centres, helping to offset the inherent volatility of residential development property sales. EP typically develops and sells residential properties, but retains retail, leisure and other assets, which are leased or owned and operated. EP, one of the largest real estate companies in the GCC, benefits from a strong international brand name.
The group is benefiting from
EP's growing international operations now account for 17% of group revenue, but it remains concentrated in
Key Rating Drivers
Economic Recovery: GDP growth in 2021 exceeded 3% and is expected to surpass 6% in 2022, spurred by high oil prices and, following a successful Covid-19 vaccination programme, the early reopening of international tourism and business. The government has also initiated several economic reforms, including liberalising residency and visa rules.
In addition, investors can be eligible for long-term visas after investing above certain thresholds. Official statistics show population growth of almost 2% in 2021.
Strong Sales Growth: Consolidated revenue at end-2021 reached AED28 billion, more than 50% above that at end-2020 and 18% above pre-pandemic levels. EBITDA reached AED8 billion (2020: AED3.3 billion). Residential property sales in
EMM Recovery: EP, through wholly owned subsidiary
Footfall, aided by tourism and consumer confidence, is expected to exceed 2019 levels by end-2022. Occupancy at 1Q22 was 93% (1Q21: 91%). The average lease length is a relatively short at 3.4 years, which allows EP to increase new rents in the current growing market, but also exposes the company in a downturn. In
International Development Reduces Concentration: EP is geographically concentrated in
Construction begins once deposits of 25%-30% of a project's the total sales value have been collected, which is used to fund construction costs. Final payments are collected on handover. Under local regulations, all funds must be kept in an escrow account dedicated to each project. Cash is then released to pay building costs and, once a project is complete, remaining cash can be released to
Fitch's Analytical Approach: EP operates a central treasury policy with no ring-fencing in the group structure. We, therefore, rate the company on a consolidated basis. Given EP's range of business activities, Fitch's analytical approach redistributes group debt relative to the primary divisions' EBITDA at levels consistent with an investment grade for their business activities. The remaining group debt is then added to EMM, which generates recurring rents that can support higher levels of debt than development or hospitality companies.
Conservative Financial Position: FFO gross leverage is expected to average about 3.0x by end-2022-2023, a significant improvement from 6x in 2020. Similarly, interest coverage improved to 10.4x at end-2021, but is expected to remain at about 8x for the forecast period. Under the debt allocation approach, EMM's net debt/EBITDA is forecast to be 7.7x at end-2022(2021: 6x) and expected to remain below 7x going forward supported by strong malls EBITDA generation
Derivation Summary
EP is a conglomerate structure, akin to
Both companies generate stable recurring revenue from a portfolio of shopping mall and hotels. Like EP, MAF's shopping malls are mainly high-quality assets in prime locations. Both companies have single-asset concentration - EP owns
EP's focus on home development sets it apart from MAF. EP, through
EP's position as a master-builder locally and regionally, and in conglomerate structure, means it operates a different business model than peer homebuilders, such as
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenue rebounds in 2023 following slight decrease in 2022
EBITDA margin 28% for 2022-2026
Low capex intensity ratio at 8% over the forecast period
Dividend pay-out ratio similar to pre-pandemic levels at 85% of share capital
High average occupancy ratio at 95% for EMM
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Overall improvement in domestic property real estate, lowering the oversupply of units and reducing EP's business risk.
With the current mix of group activities, consolidated EBITDA gross leverage consistently below 3.5x.
Decrease in existing asset concentration contributions to group EBITDA.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Under Fitch's analytical approach, the group's remaining gross debt/recurring rental income-derived EBITDA leverage increasing above 9.0x.
With the current mix of group activities, consolidated EBITDA gross leverage increasing beyond 4.5x
Liquidity Score below 1x.
Material deterioration in property market adversely affecting
Volatility in international property development causing EP to increase borrowings to finance international projects.
Material decrease in occupancy rates at EMM leading to a material reduction in profits.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Ample Liquidity: EP had reported cash of AED8.6 billion at end-2021, including AED5.9 billion in escrow accounts, which are subject to RERA regulations and which hold advances received from customers against property sales and unclaimed dividends. We have restricted this cash, along with AED126 million under lien. Restricted cash will be released to EP from escrow accounts as projects reach completion. The company had about AED9 billion available under committed revolver facilities (RCF) with a limit of AED12.8 billion. One RCF, a
The company has a smooth debt maturity profile, although there is close to AED4.5 billion due in 2022, mainly short-to-medium term working capital facilities that are typically rolled over. Short-term debt and undrawn facilities comfortably cover short-term debt. Despite significant working capital outflows from development, and planned capital expenditures and dividends push, liquidity coverage is expected to remain above 3.0x on average.
Debt is mainly senior unsecured, apart from a small amount of low-cost secured debt over five hotels to
Issuer Profile
EP is a
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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