United Real Estate Company’s bond rating affirmed
Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed the ‘BBB’ Rating of the KWD60mn Unsecured Bond issued by United Real Estate Company (URC), which matures in June 2018. The Outlook for the Rating is ‘Stable’.
The Rating is underpinned by the Company’s still sound financial profile, notwithstanding the weaker earnings performance in the period under review.
The major positives for the Company, which also support the Rating, are the much improved debt maturity profile, the sizeable portfolio of income generating properties and hotels, its demonstrated ability to term out existing debts, as well as to source new funding, including on an unsecured basis.
The Rating is also a reflection of the Company’s well-established franchise and the ownership and support of the KIPCO Group (Kuwait Project Company), which is one of the largest diversified holding companies in the Middle East. This support remains an integral factor to the Rating of the Bond.
The main constraints to the Rating are the Company’s tight liquidity (with some funding dependence on short-term revolving facilities), the reliance on refinancing and asset sales for servicing large debt facilities, and the substantial decline in profitability ratios at both the operating and net level in 2014 and Q3 2015, on an annualised basis.
While the operating environment has become more challenging given the impact of the lower oil price on GCC countries, as well as geopolitical risk, CI has maintained the Outlook for the Rating at ‘Stable’ as maturity on the Bond is not due until 2018 and the effects of short-term oil-related economic headwinds should be limited. That said, any further rise in debt and leverage, as well as a continued decline in profitability, could put some downward pressure on the Rating.
URC remains a leading real estate development company in the MENA region. Its well established franchise and successful completion of various projects in the GCC continue to support its good reputation in the real estate market. Being an important part of one of the largest holding companies in the MENA region also remains among the Company’s strong supporting factors.
In the period under review, the Company’s assets base continued to expand with the further development of various on-going projects, as well as investments in new projects. At end Q3 2015, the Company’s asset base remained characterised by its sizeable portfolio of high end properties with good occupancy rates, and its book of hotels. This is expected to rise with the completion of the Abdali Mall towards the end of 2015. These properties are the mainstay of the Company’s high and growing level of rental income − another major support factor to the Bond Rating.
On the liabilities side, while the Company has been repaying a fairly large amount of debt, it has also raised new borrowings, and this has led to a higher debt level and an increase in leverage. The Company’s ability to term out existing debt and raise new borrowings, largely on an unsecured basis and in the current market, is a positive factor which also supports the Bond Rating. Liquidity on the other hand remains tight and is a constraint to the Rating. However, this is mitigated to a large extent by URC’s unutilised credit lines, the large base of unencumbered assets, as well as by the support of its major shareholder.
Rental income from developed properties and hotels grew at a healthy pace in the period under review. This sustained growth in core revenues is a positive for the Company. Asset sales were reasonably good in 2014, although this has tapered off in the first nine months of this year. The drop in earnings in 2014 was attributed to the lower gains from disposals and revaluation of investment properties compounded by a higher operating expense and increased finance cost.
As a result, the return of average total assets (ROAA) saw a sizeable decline in 2014. In the first nine months of 2015 however, the more robust pace of growth in core revenue was able to lessen the impact of a net loss in non-operating income. The latter was related to the ending of the capitalisation of interest and the beginning of the depreciation on the newly completed Abdali Boulevard, as well as the limited revenue from asset sales.
Notwithstanding the modest growth of net profit, the annualised ROAA however registered a further decline to what is now a fairly moderate level. The decline of profitability ratios in 2014 and Q3 2015 on an annualised basis is a constraint on the Rating. That said, it should be noted that revaluation gains or losses are generally taken into profit and loss in Q4. Upon completion of the revaluation exercise, the Company is most likely to register a revaluation gain, which would boost the profitability ratio for the full year 2015 to a higher level than 2014.
URC was established in 1973 and its shares are listed on the Kuwait Stock Exchange. The Company remains one of the larger players in the real estate sector in Kuwait and the wider MENA region. URC is an indirectly-held subsidiary of the KIPCO Group, which remained one of the biggest diversified holding companies in the MENA region. At end Q3 2015, the Group’s consolidated assets totalled KWD9.5 billion, it had an equity base of KWD1.2 billion and reported a net profit of KWD77.1mn.