Many bondholders at Dubai’s Emirates REIT oppose $400m Sukuk conversion plan

Emirates REIT
Emirates REIT’s assets include the Index Tower in DIFC, Trident Grand Mall, the 3 Loft Offices buildings. Image Credit: Gulf News archives

Dubai: Dubai-based real estate fund operator Emirate REIT’s plans to issue a new debt offering is meeting “significant resistance” from a “majority” of its existing bondholders, highly placed sources have told ‘Gulf News’.

These bondholders have called a virtual meeting later today to discuss the options available to them, including legal means, these sources add. “We believe that there is a widely recognized view that the company (Emirates REIT) proposal, in its current form, largely fails to address the long-standing concerns regarding other core issues,” said a source at one bondholder holding exposure in a $400 million, five-year Sukuk issued in late 2017.

These bondholders represent some of the biggest names in the global and local institutional investment space.

What bondholders want

Want more clarity on “risk/reward compensation” as well as sufficient downside protection to Sukuk certificate holders from the conversion plan.

More transparency and information reporting on “key matters such as valuation (and its underlying assumptions and methodology), individual historical and present performance and prospects of each of the assets within the Emirates REIT portfolio”.

The bondholders say they also want some disclosures on the allegations leading up to the investigations by DFSA.

What brought this on?

It was on Saturday that Emirates REIT – which operates properties such as the prestigious Index Tower in DIFC and GEMS Academy in its portfolio – said it “seeks to exchange” its current unsecured Sukuk certificates with new secured ones at the “same profit rates”. The effective profit rate would be maintained at 5.125 per cent, albeit extending the maturity by two years.

The replacement Sukuk certificates would mature in 2024 as against the 2022 on the previous issue. This is what brought on fresh concerns for some of the bondholders.

“We find there’s poor past and present performance of the underlying real estate portfolio – beyond the COVID-19 factor,” said the source. “There’s also been, in our opinion, excessive cash leakages to the REIT (real estate investment trust) manager given poor past and present performance, coupled with burdensome G&A (general and administrative) costs.”

Most tellingly, the bondholders also want clarity on the status of an investigation launched by DFSA (Dubai Financial Services Authority) last year. “There is also no clarity on the ongoing DFSA investigation against Equitativa (which is the Emirates REIT fund manager),” the bondholders’ representative said, and who will be attending today’s virtual event. “We believe that this is a significantly important event and therefore requires full disclosure on the current status and the nature of allegations before any discussion on the Sukuk.”

Emirates REIT’s conversion plan

Existing Sukuk certificate holders will be issued new ones, and which will extend the maturity date to 2024 from the current 2022 on the existing one.

Emirates REIT has launched a ‘Consent Solicitation’ process to seek to exchange these existing unsecured Sukuk certificates with new secured Sukuk Certificates.

The new certificates will be secured by a very substantial part of the assets of Emirates REIT. “Emirates REIT believes that Sukuk holders will benefit by moving from the current unsecured Sukuk to the new secured Sukuk which includes security over several prominent revenue-generating properties, such as part of Index Tower in DIFC, Office Park, Trident Grand Mall, the 3 Loft Offices buildings, and Building 24,” the fund manager said in a statement.

Mounting losses

Emirates REIT recorded steep losses of Dh897 million in 2020, brought on by continuing erosion of value in its property portfolio, which features a mix of office, educational and healthcare assets. In response, Emirates REIT fund manager earlier this month confirmed it will be cutting its management fees by 20 per cent starting this quarter and up to the end of the year.

At its formation, Emirates REIT was seen as a pioneering move in Dubai’s property market, and both its 2014 IPO and 2017 Sukuk generated significant investor interest. What these funds do is bring together multiple investors into prime real estate investment options and thus create more depth for the broader market.

In fact, the order book of the Sukuk peaked at $1.1 billion and was 2.5 times over-subscribed by “90 global investors”.

Voluntary decision

In Saturday’s statement, a top official at Equitativa, the fund manager, had outlined what the new Sukuk certificates would mean. “This is a voluntary transaction designed to support the Sukuk holders and is the most investor-friendly option we could envision, which provides security over all the properties we could mortgage to our new Sukuk holders,” said Sylvain Vieujot, CEO of Equitativa. “Further to the recent announcement of a 20 per cent reduction in the management fee, Equitativa views this transaction as another opportunity to demonstrate our stewardship of the company.”

Will need convincing

The value of the security package proposed is $280 million. “With the recovery of the Dubai real estate market, and the steps taken by Emirates REIT to increase its occupancy rates, we expect the valuation of the security package to register sustained improvement going forward, hence providing added coverage to the Sukuk holders,”

Bondholders meeting today will decide whether that’s enough.