Sunday 16, September 2018 BY JESSICA COMBES
The outlook on the rating is stable.
Moody's Investors Service (Moody's) has assigned a Baa1 issuer rating to Aldar Investment Properties LLC (Aldar Investments), a private commercial real estate company that was recently established by Aldar Properties PJSC (Aldar Properties, Baa2 stable) as a subsidiary and into which it is transferring the bulk of its recurring revenue property assets. Aldar Investments is based in Abu Dhabi, United Arab Emirates. The outlook on the rating is stable.
“Aldar Investments' Baa1 rating reflects the high quality recurring revenue asset portfolio, with a stable tenant base and occupancy rates, which partially offsets its geographic concentration risk in the Emirate of Abu Dhabi,” said Lahlou Meksaoui, a Moody's Assistant Vice President—Analyst.
Aldar Investments' Baa1 issuer rating takes into account the company's (1) strong market position in Abu Dhabi and its stable recurring income from investment properties; (2) high-quality portfolio diversified across asset classes (residential, retail, office and hospitality); (3) high occupancy rates and diversified tenant base; and (4) healthy financial profile with limited development risk.
Conversely, the rating also factors in (1) Aldar Investments' geographic concentration, namely its exposure solely to Abu Dhabi; and (2) expected softness in the emirate's real estate market in 2018 with continued pressure on rents, particularly in the retail and office segments where Aldar Investments generated 54 per cent of its net operating income in 2017.
Aldar Investments' Baa1 rating is positioned one notch higher than that of its parent, Aldar Properties, as the newly formed Aldar Investments holds Aldar Properties' lower business risk recurring revenue property assets.
In the event of financial stress at Aldar Properties, we would need to assess the scope for it to translate to Aldar Investments.
The stable outlook reflects Moody’s expectation that Aldar Investments will continue to generate stable recurring cash flow in the current difficult operating environment. The stable outlook also incorporates the ratings agency’s expectation that the company will limit its development risk by primarily investing in projects that enhance its existing asset base or by acquiring completed assets.
With business operations solely in Abu Dhabi, upward rating pressure is unlikely over the next several quarters because of Aldar Investments' high geographic concentration. Although this risk is mitigated by a diversified product mix and tenant base, Moody’s views the substantial concentration as a rating constraint.
Furthermore, Aldar Investments would need to establish a track record of adhering to conservative financial policies under a new corporate governance structure and maintain debt to total assets below 30 per cent as well as EBITDA to interest expense above 6x on a sustainable basis and through an investment cycle.
Downward pressure on the rating could emerge if the operating environment deteriorates, resulting in higher vacancy levels and lower operating cash flow.
The rating could be downgraded if Aldar Investments' liquidity weakens or its credit quality deteriorates such that the adjusted debt/total assets ratio is above 40 per cent or adjusted EBITDA to interest expense drops below 4x.
Negative pressure on the rating could also arise from unexpected difficulties in integrating acquisitions that weaken operational and cash flow performance, as well as higher than expected shareholder pay outs.