Fitch Ratings has affirmed Turkish residential developer
The Outlooks are Stable.
The ratings reflect the company's unique revenue-sharing model (RSM), which generates guaranteed revenue and upside gains, while passing nearly all development risk to developers. Rating weaknesses are exposure to volatile housing demand and price risk as well as regulatory and political risks.
The RSM accounted for 86% of EBITDA in 2020. Emlak Konut holds a priority agreement with
Emlak Konut mainly operates in
Key Rating Drivers
Challenging Operating Environment: Economic uncertainty remains in
Sales Dependent on Interest Rates: Housing sales in
RSM Removes Most Development Risks: The RSM generates most of the company's EBITDA, provides revenue visibility and eliminates most risks faced by housing developers. Under the RSM, the contractor takes on almost all development risks, including design, build, finance, sales and marketing, while guaranteeing Emlak Konut a minimum revenue that at least covers the cost of land. The contractor shares upside gains with Emlak Konut in pre-agreed percentages. Returns have historically exceeded minimum revenue amounts by more than 2.5 times. The RSM is expected to drive business over the medium term.
Overseer of all Projects: Emlak Konut oversees the building process and collects and distributes project cash flows, including contractor revenue, which is shared at defined milestones. This control provides flexibility to alter projects if demand dynamics change. In 2019, when sales slowed under high interest rates, Emlak Konut delayed the latter stages of three projects. It can cancel projects for any reason, including if bids fall short.
TOKI Relationship Mutually Beneficial: Its exclusive priority agreement with TOKI allows Emlak Konut to buy land from TOKI at independently appraised values with no tendering process. This ability to acquire large plots in good locations, mainly in and around
Large,
Exposure to Contractor Performance: Contractor failure is a risk, but is partly mitigated by the bidding process. Contractors must first meet financial and technical requirements and, if successful, must propose estimated project values and revenue-sharing. If all requirements are met, the highest bidder wins. The preferred bidder must provide a down-payment equal to 10% of the minimum revenue, as well as a guarantee of about 6% of the total estimated project revenue. If Emlak Konut is concerned that a contractor may be unable to complete a project, it can step in and complete the project. No projects have failed to date and the company has only stepped in once, completing the project successfully.
Improved Debt Profile: Emlak Konut took advantage of banks offering low interest rates in 2020 to lower its average cost of debt to 10.9% at end-2020 (end-2019: 17.7%). In addition, it extended its debt profile to around three years. It has 56% of debt on five-year maturities, which is long for the Turkish market. Liquidity is a risk due to large working-capital swings, the short-term nature of its debt, and dividend payments, which were TRY74 million in 2020. We expect FFO leverage to remain high at 5.9x (gross) and 4.2x (net) on average for 2021 and 2022.
Derivation Summary
Emlak Konut does not have a direct peer. While its turnkey model is similar to home builders', the RSM, which generates most revenue and EBITDA, is unique. Under this model, the company only contributes land to the project. It receives a minimum guaranteed revenue amount that will cover the cost of the land, and will receive a share of any upside gains, while passing nearly all development risks to private contractors. In addition, the priority agreement with TOKI-unique among rated home builders - provides access to significant and desirable parcels of land that other developers do not have. This also exposes Emlak Konut to potential political or regulatory risks that do not affect peers.
The operating and regulation environments differ across EMEA, making a direct comparison difficult, especially given Emlak Konut's distinct business model. Emlak Konut is of similar size to
Emlak Konut historically had FFO leverage of under 1.0x, but debt has been increasing, particularly in 2020, owing to low interest rates. Projected FFO gross leverage is 5.8x (4.2x net) to 2022. FFO gross leverage is therefore forecast to average 3.3x between 2020 and 2023.
Emlak Konut is in a much more volatile operating environment than rated peers. While
Key Assumptions
Sustainable EBITDA margin above 20% as EBITDA generation increases from 2021 onwards
Working-capital outflow totalling about TRY800 million in 2021-2023
Stable dividend policy averaging 50% of net income
Relationship with TOKI unchanged during 2021-2024
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade (provided that
Reduced volatility of profits derived from the Turkish housing market
Consistently strong GDP growth, along with political stabilisation
FFO gross leverage below 2.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Deterioration of the operating environment and downgrade of the Country Ceiling
FFO adjusted gross and net leverage above 5x and 4.5x, respectively
Material change in the relationship with TOKI, causing deterioration in Emlak Konut's financial profile and financial flexibility
Deterioration in liquidity profile over a sustained period.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Lumpy Debt Profile: Liquidity improved in 2020 with readily available cash of TRY1.2 billion and in 1H21 with TRY1.45 billion. We expect liquidity to remain sufficient in 2021 despite short-term debt amortisation of TRY1.16 billion in 2022 and 2023. The average interest rate increased slightly to 11.43% in 1H21 from 10.9% in 2020 after a significant drop from 2019 levels of 17.7%.
Its debt maturity profile remains short relative to peers', at three years on average, due to limited long-term funding in the Turkish market, increasing the company's liquidity risk. Emlak Konut is expected to use readily available cash to expand its land bank and meet short-term liquidity needs in 2022. All debt is lira-denominated.
Issuer Profile
Emlak Konut is the largest real estate investment company in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING PRIOR
Emlak Konut Gayrimenkul Yatirim Ortakligi A.S . LT IDR BB- Affirmed BB-
LC LT IDR BB- Affirmed BB-
Natl LT AA(tur) Affirmed AA(tur)
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