FREE

Saudi REITs | Unique exposure to sector; Derayah top pick

REITs can weather short-term challenges. A number of factors would help REITs absorb short-term challenges (expats exodus, consumption pressures), including: i) rental income, backed by long-term contracts (6+ years for our coverage) and, in some cases, rental guarantees (c35% of rental income for our coverage), ii) most REITs giving exposure to institutionalised income-generating assets in diverse segments/geographies and resilient segments, iii) the emergence of opportunities for value-accretive acquisitions, feeding into the growth story. REITs provide stable dividends, with regulations in Saudi Arabia requiring a payout ratio of 90% (80% in Dubai). Current market prices represent a good entry point for a number of Saudi REITs. P/NAV averages c0.83x vs. c1.0x for global REITs, while the dividend yield averages c7.2% vs. c6.0%. 

Initiate coverage on 5 names; Derayah is our top pick. Derayah provides: i) the lowest asset, segmental, and geographic concentrations, ii) rental guarantees, covering c40% of rental income, iii) rental yield of 8.5%, iv) mostly new assets (good asset condition and lower risk of downward revision to rental income), v) high growth prospects, on an unlevered balance sheet, with facilities (c35% of current portfolio) in place and yet to be drawn-down, vii) highest dividend yield (8% in 2018-19e, c9% if management guidance for distribution materialises), viii) attractive valuation (P/NAV 2018e: 0.80x, at 12% discount to peers).

Jadwa REIT Saudi and Riyad REIT also attractive. Jadwa REIT Saudi has a particularly high visibility on cash flows with: i) rental guarantees in place for all 5 assets for periods ranging between 4 and 8 years, ii) the longest WAULT, at 7.5 years, and iii) caps in place for committed costs. We also favour its: i) high ROE (7.4% vs. peer average of 6.3% in 2018-20e), ii) high FCF yield (7.3%), iii) high dividend yield (7.8%), and iv) unlevered balance sheet. Riyad REIT recently concluded a SAR1.1bn capital increase, with a clear pipeline of new acquisitions, which, upon completion, would help grow its already attractive dividend yield (7.4% in 2018-20e) and ROE (6.6%).

We assign Neutral ratings to AlAhli REIT and Al Rajhi REIT. AlAhli REIT carries an inherently higher risk profile than its peers, given the high asset, sector, and geographic concentration of its 2-asset portfolio, which is comprised of a shopping mall and a hotel in Jeddah. Its dividend yield is attractive (8.0% in 2018-20e), but the downside risks do exist, given its need to grow and diversify its portfolio. We favour the dominance of the long-term, triple net nature of contracts within Al Rajhi REIT’s well-diversified portfolio, but flag its moderate rental (6.8%), dividend yields (5.5% in 2018e), and limited room for expansion as reasons behind our Neutral rating.