EMAAR DEVELOPMENT
Fitch Ratings has upgraded
The Outlook is Stable.
The upgrade reflects EP's reduced cash flow leverage, as well as good operational performance. Fitch-calculated EBITDA mall-derived gross leverage was 3.6x at end-2022 (end-2021: 4.2x) and is forecast to average 2.7x over the next three years. The deleveraging reflects higher EBITDA, as the group continues to benefit from growth in revenue and EBITDA in all business segments, as well as a 20% reduction in gross debt in 2022.
A portfolio of quality assets generating stable recurring revenue and accounting for about half of group EBITDA, helps mitigate the inherent volatility of its residential development business, Emaar Developments (ED). EP typically develops and sells residential properties, but retains ownership in retail, leisure and other assets, which are leased or operated.
As the one of largest real estate companies in the Gulf Council Cooperation (GCC), EP benefits from a strong international brand name.
Key Rating Drivers
Lower Cash Flow Leverage: Increased cash generation across EP has enabled the group to reduce cash-flow leverage. Gross debt at end-2022 was AED14.5 billion, compared with AED17.9 billion in 2021 and AED21.4 billion in 2020. EBITDA grew to AED9.3 billion in 2022 (2021: AED7.7 billion).
In particular, we forecast declining Fitch-calculated gross debt/EBITDA at
Analytical Approach: EP uses a central treasury with no ring-fencing across the group. Fitch, therefore, rates EP on a consolidated basis. The structure includes a range of businesses with different risk profiles and debt capacity, but is anchored by the investment portfolio. In its analysis, Fitch allocates group debt to ED in amounts that are consistent with an investment-grade risk profile. The remaining debt is then allocated to EMM, whose recurring revenue can support higher debt. This allows a comparison of the resulting debt/EBITDA metrics with other property companies.
Continued Strong Residential Sales: ED's domestic residential sales surpassed AED30 billion in 2022, up 12% from 2021, and more than double 2019's levels. ED also delivered more than 6,100 units, generating revenue and EBITDA of AED11.5 billion and AED4.2 billion, respectively. ED expects to deliver more than 9,000 units in 2023. The current backlog is around AED41 billion, which will be recognised over the next three to four years. More than 25,000 units are under construction, 98% of which have been sold. Customers are largely cash buyers, mitigating the risk of higher mortgage rates, and around 50% are local residents, with the balance from a range of countries.
Sustainable, Favourable Economic Conditions: The
Building Costs Pre-funded: Before starting construction, ED generally collects 30% or more of sales, which will substantially meet building costs. Payments are collected in instalments during construction, with 10-20% collected on handover. ED no longer offers post-handover payment plans. Under local regulations, funds sufficient to cover construction costs must be held in an escrow account dedicated to each individual project. Cash is gradually released to meet building costs, usually based on construction milestones. Remaining funds are released to ED following completion. Of more than AED18 billion of reported cash at EP level, around AED13 billion is in escrow and will be released as the backlog of units are delivered.
Community Projects Sustain Growth: Ongoing growth will stem from multi-phase community projects, as well as developing EP's land bank. In 2022, EP fully acquired its JV Dubai Creek Harbour, a 65 million square foot (sqf) community development on the
Strong Performance at EMM: EMM owns and operates 37 malls and other assets with a gross leasable area (GLA) exceeding 9 million sqf. Its 4.2 million sqf
EMM's EBITDA in 2022 grew 8%, driven by higher occupancy, increased turnover rent and a 5%-7% uplift on renewal rents. Footfall in 2022 already exceeded pre-pandemic 2019 levels and tenant sales were 40% higher. The average lease length is fairly short at 3.3 years, which allows EP to increase rents in the growing market and to re-zone tenants, but also exposes the group in a downturn.
International Development Mitigates Geographic Concentration: EP generates more than 80% of revenue in
Although the international subsidiaries are intended to be self-funding, EP is not fully ring-fenced from them.
Derivation Summary
As a conglomerate, EP differs from most rated EMEA real estate companies. With its wide range of businesses, the structure adds revenue diversification, albeit with some correlation given the primary focus on real estate and home building.
EP's conglomerate structure is not unusual in the GCC and is akin to
All three companies generate recurring revenue from a portfolio of high-quality shopping malls and hotels in prime locations with good market positions. All have single-asset concentration: EP owns
EP's and Aldar's focus on home building, which is an inherently volatile sector, sets them apart from MAF, which has only a small development business. With about two-thirds of EBITDA generated by recurring rents, MAF's cash flow is generally less volatile than EP's and Aldar's, especially given MAF's Carrefour business generates stable, but low-margin, EBITDA.
EP's and Aldar's home building businesses operate as master builders locally and internationally, with a focus on large community projects, which means they operate different business models to EMEA homebuilder peers, such as
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Flat revenue growth in 2023, followed by strong growth in 2024 and 2025, mainly from ED deliveries
Steady growth in EBITDA from EMM, excluding the effects of the sale of on-line retailer Namshi in 2023
EBITDA margin at 38% for 2023-2026
Capex averaging 20% of revenue to 2026
Dividend of around AED3.1 billion per year during 2023-2026
Repayment of EMM sukuk due in 2024
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Material decrease in geographic and asset concentration contributions to group EBITDA
Maintaining prudent development with pre-sale rates of at least 60%
Significant proportion of rental-derived EBITDA rather than profits from development activity
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
A deterioration in the domestic property real estate market, materially affecting ED's working capital and business profile
With the current mix of group activities, consolidated EBITDA gross leverage consistently above 3.5x.
Fitch-adjusted mall rental-derived EBITDA/remaining gross leverage greater than 8x
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
Healthy Liquidity: EP's reported cash at end-2022 was AED18.3 billion (end-2021: AED8.6 billion). The significant increase was largely due to AED15.6 billion of cash deposits in escrow accounts, which reflects a significant increase in advances received from customers against property sales. We have restricted this cash as it will remain in escrow and until released over time to fund construction. The remaining cash will be released to ED after handover is achieved.
EP has been streamlining its capital structure over the past two years, which now comprises four fully drawn sukuks totaling AED9 billion. In addition, EP has three committed revolving credit facilities totaling around AED12.9 billion. The outstanding availability at 1Q23 was AED9.1 billion.
Limited Short-term Debt: EP has a smooth debt maturity profile. It has about AED1 billion of debt due from 1Q23 to end-2023 and AED3.2 billion in 2024, which is mainly the sukuk held at EMM that is expected to be repaid. With a low amount of debt maturing in within the next 24 months and the majority of debt being fixed-rate, rising interest rates will have a minimal effect on cash flows. Cash, positive free cash flow and undrawn facilities comfortably cover short-term debt. EP's liquidity score is forecast at more than 10x in 2023 and 8x in 2024.
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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