MOODY’S Investors Service assigned a Ba3 corporate family rating (CFR) and a Ba3-PD probability of default rating (PDR) to Dar Al Arkan Real Estate Development Company (DAAR). The outlook is stable.
“DAAR’s strength lies in its leadership position in Saudi Arabia’s real estate sector with a valuable land bank of over 34 million square meters situated in some of the most populated and economically important cities of the kingdom,” said Rehan Akbar, an analyst in Moody’s corporate finance group. “Liquidity management has been one of the most important considerations in assigning the Ba3 rating, and in our view, DAAR has adhered to a more conservative set of financial policies in recent years.”
DAAR’s Ba3 rating reflects the strength in the operating and business environment including (1) supportive macro fundamentals in the Kingdom of Saudi Arabia with favorable demographics, large government social spending programs and a housing deficit; (2) significant value in assets with its land bank held at a book value of SR15 billion and investment properties valued at SR3.6 billion; and (3) demonstrated track record of following a more conservative financial policy including pre-funding upcoming debt maturities.
The assigned rating also takes into account certain challenges, including (1) the high exposure to the cyclical and capital intensive real estate sector; (2) earnings volatility and reduced visibility on timing of cash flows as a result of bulk land sales; and (3) execution risk as the company invests in recurring assets and large-scale residential projects (although this will generate a more diversified revenue stream over the long-term).
Moody’s anticipates that DAAR’s credit profile will strengthen over the medium-term as management executes its business plan which includes ongoing investments to replenish and develop its land bank, to grow its investment properties portfolio and to develop its residential project pipeline. At the same time, the lumpy cash flows create the need for the company to continuously and proactively manage liquidity over a rolling 12-18 month time horizon.
DAAR possesses adequate liquidity as at June 30, 2014 in part due to the healthy cash balance of approximately SR3.0 billion of which SR1.5 billion ($400 million) was raised through the international sukuk issuance in May 2014. However, the company has upcoming debt maturities of around SR2.4 billion over the next 18 months of which $450 million (SR1.69 billion) is a sukuk due in February 2015 while the balance being principal repayments on loan facilities.
The stable outlook on the rating reflects our expectation that DAAR’s business profile continues to be supported by the long-term structural demand for housing and the company maintains healthy gross margins in the 40 percent range.© Copyright - Saudi Gazette