Moody's affirms Emaar Properties' Baa3 ratings; changes outlook to stable from negative

Moody’s Investors Service (Moody’s) affirmed Emaar Properties PJSC’s (Emaar or Emaar Properties) Baa3 long-term issuer rating on Tuesday. Moody’s has also affirmed the Baa3 ratings on the three backed senior unsecured sukuk due in 2026, 2029 and 2031 and the (P)Baa3 rating on the backed senior unsecured MTN programme issued by Emaar Sukuk Limited. The outlook on all ratings has been changed to stable from negative.

“The rating action is on the back of the strong financial performance that Emaar has been reporting over the past several quarters and is a reflection of the improved macro-economic prospects for the Emirate of Dubai as well as better operating conditions for the local real estate sector,” said Lahlou Meksaoui, vice-president-senior analyst at Moody’s.

The decision to change the outlook to stable from negative reflects Emaar’s strong operating performance supported by the improving macroeconomic outlook for the Emirate of Dubai. In 2021 and Q1 2022, Emaar’s property development business recorded robust revenue growth. This was due to the accelerated pace of construction and unit handover which led to high revenue recognition, as well as off-plan sales stemming from existing development projects and new launches.

As of December 31, 2021, Emaar had a total revenue backlog of Dh46 billion to be recognised over the next 3-4 years which offers strong revenue visibility. This strong operating performance is supported by a positive market sentiment resulting in solid demand from local and international investors. Successful vaccination campaign, limited travel restrictions and tourist inflows particularly during Expo Dubai 2020 supported international demand. At the same time, local demand increased because more end-users have taken the opportunity to enter the market as it became more affordable in 2020-2021.

As of Q1 2022, residential prices continued to increase with average increases of 11 per cent in Dubai, according to Jones Lang Lassalle, and they are now close to the peak observed in late 2014. However, Moody’s believes that rising interest rates and higher residential prices that reflect inflationary pressures are likely to soften local demand in the coming months, particularly in the secondary market, which could lead a stabilisation of residential prices.

In Moody’s view, in the medium to long term, recent government initiatives such as new labour laws or visas options have the potential to strengthen the UAEs’ (Government of United Arab Emirates, Aa2 stable) competitiveness and attractiveness to expatriates. Moody’s expects the Dubai economy to continue growing at a robust pace as the Emirate has almost fully reopened because of progress on vaccinations that allowed the authorities to ease coronavirus restrictions. This is positive because it will contribute to balance supply and demand dynamics in the residential market.

In addition, Emaar’s strong operating performance is also due to the strong recovery of its recurring businesses. Higher footfall, robust occupancy of 92 per cent and significant growth in tenant sales led to higher rental revenue across Emaar’s malls. Going forward, Moody’s expects the recovery in tourism as well as local consumption to support healthy consumer spending growth over the next 12-18 months, which will in turn provide a boost to retail sales.

The affirmation of Emaar’s ratings recognizes its healthy credit metrics and good liquidity. Moody’s also considers Emaar Properties’ stated commitment to an investment-grade rating and prudent measures it has taken to reduce cost and boost liquidity during the pandemic. As of December 31, 2021, adjusted EBIT to interest expense was at 5.6x and adjusted debt to EBITDA was at 2.3x. In 2023, Moody’s forecasts adjusted EBIT to interest expense of 6.9x, and adjusted debt to EBITDA of 1.3x. These ratios are well within the rating agency’s guidance for the Baa3 rating.

Emaar Properties’ investment grade credit profile reflects the company’s solid business foundation and track record of maintaining a conservative financial profile over several real estate cycles. This is due to its portfolio of mature recurring-revenue assets that contribute about half of Emaar’s EBITDA; substantial property sales backlog which offers revenue visibility; access to a sizeable land bank in Dubai primarily through strategic joint-venture (JV) partnerships with government-owned entities; and good liquidity profile.

The rating also takes into account the development and execution risks given the capital-intensive nature of the business and sentiment-driven customer base; concentration risks stemming from Emaar generating the majority of its cash flows from Dubai; and limited visibility into the joint venture developments and the uncertainty around the timing and access to JV profits. — business@khaleejtimes.com

• Dubai