Emlak REIT - Good Return at Low Risk · 2017-01-02 · Emlak REIT has a land bank totaling 10.5 mln...

[email protected], DENI on Bloomberg

TURKEY | REAL ESTATE

DECEMBER 13, 2016

Common EKGYO TIRecommendation BUYLast price TRY2.97Target price (from TRY3.40) TRY4.00Upside 35%Free float 51%

Market cap $3,278 mlnEnterprise value $2,416 mlnADT, 100 days $24.0 mlnPrices as of December 8, 2016

Key data 2015 2016E 2017E 2018EFinancials (IFRS), TRY mlnRevenues 1,787 3,572 4,690 6,675EBITDA 765 1,641 2,185 3,159EBIT 765 1,641 2,185 3,159Net income 953 1,794 2,385 3,379Adjusted EPS, TRY 0.25 0.47 0.63 0.89ProfitabilityEBITDA margin 43% 46% 47% 47%EBIT margin 43% 46% 47% 47%Net margin 53% 50% 51% 51%Price ratiosP/S 6.3 3.2 2.4 1.7EV/EBITDA 11.1 5.1 3.6 2.3P/E 11.8 6.3 4.7 3.3P/CF 11.8 6.3 4.7 3.3GrowthRevenues �1% 100% 31% 42%EBITDA 16% 115% 33% 45%Adjusted EPS �0% 88% 33% 42%

Price performance, %

1m 3m 6m YTDCommon �4.2 1.0 4.9 14.2Relative to BIST 100 �3.6 3.6 9.0 7.9

Price performance, TRY

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

Dec '15 Feb '16 Apr '16 Jun '16 Aug '16 Oct '16 Dec '16

Share price Relative to BIST 100

Max 3.18 (Oct 24, ’16) Min 2.35 (Feb 15, ’16)

Source: Bloomberg, Deniz Invest Research

Emlak REITGood Return at Low Risk Emlak REIT has several fundamental strengths that should allow it to weather the economic slowdown we anticipate in 2017. These include positive earnings momentum and a good outlook for revenues over the next four years, almost no debt and no exposure to FX borrowing, and a valuable land bank that is ready to be developed in the coming years amid continued strong need for housing. This supports our BUY recommendation on the stock, for which we have recently reinitiated coverage and now have a target price of TRY4.00 per share.

█ Attractive P/E and dividend yield. With Turkey passing through an

economic downturn, asset prices are unsurprisingly depressed. Emlak REIT’s

NAV is currently 44% below its market cap. We instead focus on the 2017E

P/E of around 4.7, for an earnings yield nearly double the rate on Turkey’s 2y

sovereign bond. We expect our forecast dividend yield of 6.4% for 2016 to

increase to 8.1% on average in 2017�20.

█ Structural demand for housing remains. Based on our numbers, which

take into account Turkey’s growing population and shrinking household size

(due in part to urbanization), demand for housing will likely remain strong,

despite expected near�term hiccups in economic activity. We think that about

550,000 new housing units per year will be needed over the next several

years due to structural demand growth and expect additional demand to

come from Turkey’s urban transformation projects. Given Emlak REIT’s good

reputation in Turkey, we think that developers will seek to bring the company

into more projects in order to benefit from its expertise and speed up sales.

█ Risk factors. Higher interest rates are the main risk to our forecasts, as 35%

of new homes have been purchased with mortgages since the beginning of

2013. In addition, in a worse than expected economy, more people may

postpone purchasing new homes. A faster than expected increase in

construction costs due to further lira depreciation could hurt the purchasing

power of potential home buyers as well. We do not see any major company�

specific risks, but the emergence of a powerful competitor for new land

acquisition – more of a threat for urban transformation projects and non�

premium land – could hurt Emlak REIT’s profit margins.

Sadrettin Bagci +90 212 348 [email protected]

DECEMBER 13, 2016 EMLAK REIT – GOOD RETURN AT LOW RISK

2 DENIZ INVEST RESEARCH

Contents

Investment Case ............................................................................................................................... 3

Valuation ......................................................................................................................................... 5

Outlook for the Turkish Housing Market .......................................................................................... 7

Emlak REIT Operating Outlook ....................................................................................................... 12

EMLAK REIT – GOOD RETURN AT LOW RISK DECEMBER 13, 2016

DENIZ INVEST RESEARCH 3

Investment Case

Emlak REIT has several fundamental strengths that should allow it to weather the anticipated economic

slowdown in 2017. These include earnings momentum, good visibility of revenues for the next four

years, almost no debt at the moment, no exposure to FX borrowing and a valuable land bank ready to be

developed in the coming years in an environment of continuously strong demand for housing.

Valuable land bank

Emlak REIT has a land bank totaling 10.5 mln m2, with an appraisal value of about TRY5.5 bln. Istanbul

accounts for over half of the land and 76% of the total appraisal value. A plot in Kucukcekmece, a suburb

of Istanbul, comprises a full third of the total appraisal value. There are also two valuable plots in Ankara,

one of which has a project that is expected to launch in early 2017. The company also owns several land

plots in other Turkish cities, although these are smaller contributors to the NAV.

We conservatively forecast a 1.46 multiple on the appraisal value for the existing land bank, well

below the current 2.12 multiplier for the ongoing revenue�sharing model (RSM) projects.

In the medium� to long�term, the company may have some opportunities to acquire valuable land

thanks to urban transformation projects and the removal to outside the city of military facilities that

currently occupy land plots inside the city. It could also potentially acquire land plots near some big

projects, including Istanbul’s third airport, Channel Istanbul and the third highway.

A good dividend payer

Guaranteed earnings from RSM projects should secure TRY8.1 bln in revenues for Emlak REIT over the

next four years. In our analysis, we assume that 40% of net income will be paid out as dividends in

2016 (and 35% in 2017�20), which would bring the dividend yield to 6.4% for 2016 and to 8.1%

on average in 2017�20.

Defensive play thanks to no leverage

The company’s net cash position was around TRY800 mln as of September 2016 (after deducting

TRY1.6 bln owed to Turkey’s housing development administration and TRY400 mln owed to

contractors), which enables the company to acquire new land plots for development. Before the failed

coup, the company had intended to raise financing from financial markets to expand the land bank, but

those plans have been placed on hold. Furthermore, Emlak REIT’s core business is mass housing, which

means it is not exposed to currency�related risks (such as rental income from owning a shopping mall). It

also has almost no liabilities in FX.

Demand for housing will continue despite near�term shake

According to our analysis, which takes into account population size and growth as well as the

decreasing number of people living in houses due to urbanization and urban transformation projects,

demand for housing will likely remain strong, despite the near�term hiccups in economic activity. We

expect that, given the population growth and diminishing average household size, about 550,000

new units of housing per year will be needed in the next several years. Urban transformation projects

will likely support demand as well; the government has been backing urban transformation projects to

limit the vulnerability of Turkey’s aging housing stock to earthquakes. We estimate the average age of

the housing stock at around 26 years and think that about 69% of the residential units in Turkey were



built before the 1999 earthquake in Istanbul and are therefore potentially not in compliance with the

building code that was introduced shortly thereafter. Lastly, as Emlak REIT has a good reputation

across the country, we think that developers will try to incorporate it into more projects in order to

benefit from its expertise and speed up the sales process.

Valuation: Look at P/E, not NAV discount

We are not big fans of the common argument that a deep discount to NAV necessarily implies that a

company is undervalued; rather, we think that any discount needs to be assessed in context. As Turkey is

passing through a temporary down cycle, it is normal for asset prices, in our case NAV, to be depressed

at a time like this. Therefore, we focus more on Emlak REIT’s 2017E P/E of around 4.7, which means that

the inverted P/E ratio is nearly double the Turkish 2y sovereign bond rate. This supports our BUY

recommendation on the stock, for which we have a target price of TRY4.00 per share.

Risks to our forecasts

Emlak REIT’s campaign to boost sales, which began after the failed coup, and included initiatives such

requiring lower down payments, increasing installments and lowering interest rates, has supported

presales volumes but may postpone cash flow. That said, the total sales volumes through this

campaign will likely be limited to about 4,500 units, which is less than half of the company’s 2016

sales; a delay in cash flows from this volume of sales would be tolerable, in our view. However, if the

company further extends the length of this campaign, we may see further delays in cash flow.

We see higher interest rates as the main risk to our forecast. In the past couple of years, 35% of

new homes have been purchased through mortgages. Any rise in mortgage rates, or even

widespread expectations that mortgage rates will increase, could decrease or postpone demand.

Another significant risk to our forecast is lower than expected economic activity, which may cause

people to postpone purchasing a new home.

In addition, a faster than anticipated increase in construction costs due to further lira depreciation

could hurt the purchasing power of potential home buyers.

We do not foresee any company�specific risks, but the emergence of a powerful competitor for new

land acquisitions – more of a threat for the urban transformation projects and non�premium lands –

could hurt Emlak REIT’s profit margins.



Valuation

We use a sum�of�the�parts (SOTP) valuation for Emlak REIT, consisting of a valuation of the ongoing

RSM projects, turnkey projects and the land bank as well as the company’s net cash position.

We use DCF methodology to evaluate future cash flows from the ongoing RSM and turnkey projects

using a 16.9% WACC, which we calculate assuming an 11% risk free rate, a 5.0% equity risk

premium and a stock beta of 1.02.

We value the land plots separately, based on location and size. The appraisal value is TRY5.5 bln,

and we value the land stock at about TRY7.1 bln (130% of the appraisal value and 146% of the

book value). We also assume that this land will be used up in six years’ time.

Valuation

TRY mln TRY per share

Value of RSM projects 11,392 3.00Value of turnkey projects 968 0.25Appraisal value of buildings 484 0.13Value of land stock 3,460 0.91Future value of opex (2,000) (0.53)Future value of net cash 896 0.24

Target MCap/price 15,200 4.00

Current MCap/price 11,286 2.97

Upside 35%

Source: Deniz Invest Research

Smart dividend payer

Emlak REIT has paid out roughly 40% of net income in recent years, and we expect this to continue.

We expect 2016 net income of TRY1.8 bln, which would result in a 6.4% dividend yield, based on

our assumed of a 40% payout.

The company has roughly TRY8.1 bln in guaranteed income from RSM projects and around

TRY1.0 bln from turnkey projects. This should be recorded in the company’s P&L by 2020. We

assume a dividend payout ratio of 35% between 2017 and 2020, in order to leave some room for

the company to make land acquisitions. Despite the lower payout ratio, this should result in an

average dividend yield of 8.1% over the period.

Dividend yield and payout ratio

0%

2%

4%

6%

8%

10%

30%

35%

40%

45%

50%

55%

20

11

20

12

20

13

20

14

20

15

20

16

E

20

17

E�2

0E

Dividend payout ratio Dividend yield (rhs)

Source: Company, Deniz Invest Research

Net income and EPS forecasts

0.0

0.2

0.4

0.6

0.8

1.0

0

1,000

2,000

3,000

4,000

5,000

2015 2016E 2017E 2018E 2019E 2020E

Net income, TRY mln EPS, TRY (rhs)




NAV discount has widened due to probable delay in cash flow

Emlak REIT’s NAV discount has substantially widened on the back of lower presales volume growth

expectations, which could delay future cash flows. We do not think that the widened NAV discount

alone should trigger support for the share price. It is important to look at the interest rate and NAV

discount together to derive a more realistic view; there is a strong reverse correlation between

interest rates and the NAV discount, which means that interest rates need to come down before the

NAV discount can narrow.

Historical NAV discount

�60%

�40%

�20%

0%

20%

2012 2013 2014 2015 2016

NAV discount Historical averageLast 1y average discount Last 2y average discount


Emlak REIT 12m forward P/E versus bond rates

4

6

8

10

12

14

2012 2013 2014 2015 2016

12m fwd P/E 2y bond rate, % Source: Company, Deniz Invest Research

Share price sensitivity to delays in project completion

4.00

3.55

3.2

3.4

3.6

3.8

4.0

4.2

Base case If due date is missed by 1 year


Share price sensitivity to project multiple

4.00

3.9

3.5

3.7

3.9

4.1

Base case If project profit multiplier declines by10 bps


Mortgage rates versus Emlak REIT share price

1.0

1.5

2.0

2.5

3.0

3.5

6%

8%

10%

12%

14%

16%

2011 2012 2013 2014 2015 2016

Mortgage rates Emlak REIT share price, TRY (rhs) Source: Deniz Invest Research

Target price drops by 11% if project due date is missed by 1 year.

Target price drops by 2% if project multiplier declines by 10 bps.



Outlook for the Turkish Housing Market

Demand outlook

We are constructive on medium� to long�term demand for new residential units in Turkey. We

expect demand to be driven by structural changes, including population growth and demographic

shifts (e.g. the shrinking average household size), as well as urban transformation projects aiming

to upgrade Turkey’s aging housing stock to minimize the risks from potential earthquakes.

We forecast that around 550,000 new residential units will need to be built each year on average to

accommodate the demand growth stemming from structural changes and expect another 125,000

units to be built annually as part of Turkey’s urban transformation initiative.

However, in the shorter�term perspective, 2017 may turn out to be one of the worst years in recent

history due to the decline in disposable incomes and unattractive mortgage rates. This will hit

consumers hard in the first half of the year, but we think that they will adapt and the housing

market will rebalance in the second half of the year.

DEMOGRAPHIC FACTORS

As we mentioned before, we estimate that around 550,000 new residential units will be needed per

year due to Turkey’s demographic changes alone. We used the Turkish Statistical Institute’s mid�

year population estimates and assumed that the average household size will gradually decline to 3.2

by end 2026, from 3.6 as of 2015.

Over the last decade, the number of one�person households has nearly tripled to over 3 mln, while the

share in total households has more than doubled, climbing from 6% to 14%. Later marriages, an

increased appetite for single living and a rising number of university students have helped drive this trend.

Number of households vs average household size

3.2

3.4

3.6

3.8

4.0

4.2

14

16

18

20

22

24

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Number of households, mln Household size (rhs) Source: Turkish Statistical Institute, Deniz Invest Research

One�person households

5%

7%

9%

11%

13%

15%

0

1

2

3

4

5

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

One�person households, mln Share of one�person households (rhs)

Source: Turkish Statistical Institute, Deniz Invest Research

URBAN TRANSFORMATION

The government has been backing urban transformation projects to limit the vulnerability of

Turkey’s aging housing stock to earthquakes. We estimate the average age of the housing stock at

around 26 years and think that about 69% of the residential units in Turkey were built before the

1999 earthquake in Istanbul and are therefore potentially not in compliance with the building code

that was introduced shortly thereafter.

Around 12.2 mln occupancy permits have been issued since 1964, 6.9 mln (57%) of which were

issued after 1999. Given that there are roughly 22.4 mln households in Turkey, we can estimate



that only around 31% of the housing stock was constructed after the new housing legislation came

into effect. This means that around 15.4 mln residential units may be eligible for Turkey’s urban

transformation program. Assuming that older units (more than 40 years old) will be given priority,

we could see an average of 125,000 units rebuilt per year over the next five years.

Occupancy permits issued and demand forecasts, ’000 units

0

200

400

600

800

1,000

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

E

20

17

E

20

18

E

20

19

E

20

20

E

20

21

E

20

22

E

20

23

E


Residential units vs occupancy permits

22.4

6.9

0

5

10

15

20

25

Number of households Occupancy permits (2000�16)


HOME OWNERSHIP

The home ownership rate in Turkey is actually quite high. According to a survey published by the Turkish

Statistical Institute, around 60.4% of residential units were occupied by their owner as of 2015.

The survey also showed that home ownership has increased substantially among middle�income

households, while among the high� and low�income categories, the homeownership ratio has declined.

Unsurprisingly, home ownership among low�income households is below the national average.

This leads us to believe that most new housing projects will target low� and middle�income families.

Given the declining household size and scarcity of land in or close to city centers, we expect massive

projects with smaller individual units to dominate the new housing market.

Home ownership in Turkey, share in total

2014 2015 2014 2015 2014 2015 2014 2015

Owners 61.1% 60.4% 57.8% 57.2% 58.6% 58.5% 65.4% 64.2%Tenants 22.1% 23.3% 24.5% 25.8% 23.0% 23.9% 19.7% 21.4%Lodgers 1.6% 1.4% 0.5% 0.3% 0.9% 1.0% 2.8% 2.4%Other 15.3% 14.8% 17.1% 16.7% 17.5% 16.6% 12.1% 11.9%

Below 60% of 60�120% of Above 120% of Totalmedian income median income median income

Source: Turkish Statistical Institute

Home ownership by income group

54%

56%

58%

60%

62%

64%

66%

68%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Overall Below 60% of median income60�120% of median income Above 120% of median income


Mortgage issuance

0

50,000

100,000

150,000

200,000

250,000

0

4,000

8,000

12,000

16,000

20,000

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Value, TRY mln Mortgages issued (rhs)

Source: Banks Association of Turkey

Occupancy permits issued

Demand forecasts

There may be around 15 mln residential units that were built before the 1999 earthquake, meaning they might not comply with the current building code.



Housing price growth may decelerate

There are two commonly asked questions regarding the Turkish housing market. The first is whether

there is a bubble and the second is whether there is excess supply. Our answer to the first question is

a definitive “no,” as the average annual increase in real housing prices has been running at around

5.3% since end 2010, which seems very reasonable to us, given rental yields of 5�7%. As for the

second question, our answer is “kind of.” New home sales since the beginning of 2013 lag

occupancy permits issued by 621,000 units, or 23%. The difference is partly due to Turkey’s urban

transformation projects, for which the new units have not been sold but still require an occupancy

permit. Another major factor behind the lag is intensive construction in non�premium locations,

especially on the outskirts of large cities. New homes sales are lower in these areas because the

infrastructure is far less developed and commutes take longer.

According to the CBRT’s housing price data, prices have grown at a 5.3% CAGR in real terms since

end 2010. Although we expect housing prices to continue rising in 2017, price growth will likely

decelerate due to sluggish demand.

Additionally, housing will become less affordable for Turks, given slower income growth and a

probable rise in mortgage rates. Therefore, contractors’ profit margins may take a hit next year.

Moreover, lira depreciation will inflate construction costs.

Housing price growth vs CPI growth

0%

4%

8%

12%

16%

20%

90

100

110

120

130

140

2011 2012 2013 2014 2015 2016

CPI�adjusted housing price indexHousing price growth (rhs)CPI (rhs)


New home sales vs occupancy permits issued

0

200

400

600

800

2013 2014 2015 9m16

New home sales Occupancy permits


FACTORS WEIGHING ON THE CONSTRUCTION SECTOR

Interest rates obviously play a major role in the real estate market. Based on a recent Turkish

Statistical Institute survey, pressure on the construction sector from insufficient demand and

financial constraints eased considerably immediately following the CBRT rate cut in early 2015.

However, the pressure from these two factors has been mounting recently. The CBRT’s rate hike on

November 24 will also most likely have caused postponed demand for housing and a heavier

financial burden for the construction sector. We calculate the debt service ratio (debt service

payments/income) at over 5%, near its historical peak level, as of 3Q16. Therefore, it would be

difficult at this stage for Turks to manage any additional debt burdens. However, our sensitivity

analysis shows that the annual burden per TRY100,000 in mortgage loans drops by TRY1,240

(2.1% of average annual household disposable income) if mortgage rates drop 15 bps to 0.90%

per month. So, a decline in interest rates is necessary to accelerate home sales in the country.

Another survey from the Turkish Statistical Institute indicated that the percentage of Turks planning

to build or buy a home has been on the rise over the past year or so despite the country’s economic

woes. In addition, housing prices have outpaced headline CPI, which suggests that Turks view real

estate as a sound investment. Mortgages also reached 8% of GDP in September 2016, more than

twice the level seen ten years ago.



Home sales to foreigners declined 35% from 2015 to 2016 due to adverse economic and

geopolitical conditions. We do not expect to see an immediate recovery next year, but we may see

one after 2017, once the tension eases.

Factors limiting production in the construction sector

10

15

20

25

30

35

40

2011 2012 2013 2014 2015 2016

Insufficent demand Financial constraints Note: Figures are based on an index created by the Turkish Statistical Institute. The higher theindex, the more of a constraint the factor puts on the construction sector.


Probability that Turks will buy or build a home in the next 12 months

6%

7%

8%

9%

10%

11%

12%

13%

2012 2013 2014 2015 2016

Note: Based on a survey in which respondents are asked to rate the probability that they will buyor build a home in the next 12 months. Survey results above are the average of all responses.


Total home sales by line of financing

0

300,000

600,000

900,000

1,200,000

1,500,000

2013 2014 2015 10m16

Mortgage�backed Other Source: Turkish Statistical Institute

New and existing home sales

0

300,000

600,000

900,000

1,200,000

1,500,000

2013 2014 2015 10m16

New home sales Existing home sales


New home sales by line of financing

0

200,000

400,000

600,000

800,000

2013 2014 2015 10m16

Mortgage�backed Other Source: Turkish Statistical Institute

Existing home sales by line of financing

0

200,000

400,000

600,000

800,000

2013 2014 2015 10m16

Mortgage�backed Other




Debt service ratio (debt service payments/income)

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10

2Q

11

4Q

11

2Q

12

4Q

12

2Q

13

4Q

13

2Q

14

4Q

14

2Q

15

4Q

15

2Q

16

Source: Banks Association of Turkey, Turkish Statistical Institute, Deniz Invest Research

Mortgage affordability (monthly payment per TRY100,000 of mortgage)

1,300

1,350

1,400

1,450

1,500

120 months, 1.05% rate 120 Months, 0.90% rate

Source: Banks, Turkish Statistical Institute, Deniz Invest Research

Home sales to foreigners

2013 2014 2015 10m16

Istanbul 4,894 11,160 14,986 9,260Rest of Turkey 19,468 26,758 30,674 20,292Total 24,362 37,918 45,660 29,552


Annual difference is TRY1,240, 2.1% of annual average household disposable income.



Emlak REIT Operating Outlook

Emlak REIT’s main aim is to develop mass housing on land acquired from either Turkey’s housing

development administration or the market. After that, depending on the land’s expected

profitability, it is either tendered to contractors to develop, or the company develops the land itself.

In the former case, this is done under a revenue sharing model (RSM). In the latter case, this is done

under a turn�key model. The company’s current project pipeline is dominated by RSM projects – in

fact, these projects account for 90% of the total project value.

RSM projects

In a typical RSM project, Emlak REIT tenders one or more of its land plots to a contractor and agrees on

a guaranteed minimum payment, which usually corresponds to roughly 30% of the total revenues

expected from the project. The company currently has 35 RSM projects, which will yield a minimum of

TRY13.8 bln in revenues, resulting in circa TRY8.1 bln in net income over the next four to five years.

CAN RSM PROJECTS REMAIN AS PROFITABLE?

Emlak REIT has enjoyed a multiplier of over 2.0 on land developed through RSM projects. The key

question is whether the company will be able to maintain this multiplier on future projects.

We think this will depend on two major factors. The first is the location of the land. As long as the

land is in premium locations, we think that Emlak REIT can keep the multiplier over 2.0. Given the

premium location of the company’s current land stock, we do not expect the multiplier to drop

below 2.0 in the near future. However, Turkey’s premium land stock in large cities is shrinking,

especially in Istanbul, where the company has already developed many valuable projects. Thus, the

multiplier could drop below 2.0 in the long run. In our projections, we have applied an average

multiplier of 1.46 to the existing land stock.

The second major factor is the rising cost of construction due to lira depreciation. The share of

construction costs for residential units is higher in non�premium locations than in premium

locations. If the increase in construction costs is passed on to home buyers, this could slow the

speed of sales, we think. To prevent this from happening, Emlak REIT and, to some extent,

developers, may have to sacrifice some of their profit margins going forward.

Base value of land and revenues from completed RSM projects, TRY mln

2,914

4,578

6,095

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Base value of land Emlak REIT'sguaranteed minimum

revenues

Emlak REIT's actualrevenues

Source: Company

Net income expected from RSM projects, TRY mln

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2016E 2017E 2018E 2019E 2020E


Multiplier set at tender: 1.57

Multiplier at project end: 2.09

TRY8.1 bln in net income is expected to be recorded between 3Q16 and end 2020



Emlak REIT’s ongoing RSM projects

Location Project Book value, Minimum revenues, Projected NI, ProjectTRY mln TRY mln TRY mln due date

1 Istanbul Sarphan Finans Park 12 233 222 Sep ’162 Istanbul Bulvar Istanbul 14 38 24 Oct ’163 Istanbul Bahcekent Flora 56 110 55 Dec ’16

82 382 300

4 Istanbul Evvel Istanbul 89 189 100 Jan ’175 Istanbul Metropol Istanbul 182 299 117 Apr ’176 Istanbul Gol Panaroma Evleri 79 148 69 May ’177 Istanbul Maslak 1453 Istanbul 295 880 585 Jul ’178 Istanbul Karat34 68 172 103 Jul ’179 Ankara Sofaloca 37 54 17 Aug ’17

10 Istanbul Istmarina 187 672 486 Oct ’1711 Istanbul Park Mavera 116 420 304 Oct ’17

1,053 2,834 1,781

12 Istanbul Kagithane Seyrantepe 118 637 519 Jan ’1813 Istanbul Avrupa Konutlari Basaksehir 115 350 235 Feb ’1814 Istanbul Nidakule Kayasehir 118 408 290 Apr ’1815 Istanbul Uskudar Barbaros 108 440 332 Apr ’1816 Istanbul Avrupark 72 157 85 Apr ’1817 Istanbul – 66 106 40 May ’1818 Istanbul Tual Adalar 92 124 32 Jun ’1819 Konya Temasehir Konya 87 212 125 Jun ’1820 Ankara Koordinat Cayyolu 96 180 84 Jul ’1821 Istanbul Buyukyali Istanbul 657 1,569 912 Sep ’1822 Istanbul Bakirkoy Yenimahalle 30 62 32 Oct ’1823 Istanbul Eyup Alibeykoy 30 168 138 Oct ’1824 Istanbul Ispartakule 5.Etap 58 132 74 Dec ’1825 Istanbul Tual Bahcekent 105 275 170 Dec ’18

1,752 4,819 3,067

26 Denizli Evora Denizli 76 93 16 Jan ’1927 Istanbul Hosdere 6.Etap 45 151 106 Feb ’1928 Istanbul Avcilar Ispartakule 6.Etap 48 86 38 Feb ’1929 Istanbul Sariyer Istinye 1,006 1,876 870 Jun ’1930 Istanbul Hosdere 5.Etap 48 157 109 Jul ’1931 Istanbul Koy 225 476 250 Jul ’1932 Ankara Ankara Yenimahalle Istasyon 635 1,258 624 Jul ’1933 Istanbul IFC 0 29 29 Sep ’1934 Kocaeli – 70 83 13 Dec ’19

2,153 4,208 2,056

35 Istanbul Maltepe Kucukyali 667 1,527 860 Aug ’20667 1,527 860

Total 5,707 13,770 8,063

4Q16 total

2017 total

2018 total

2019 total

2020 total


Emlak REIT’s presales peaked in 2013, when it sold 15,000 units thanks to the availability of very

low mortgage rates, especially in 1H13. Sales volumes then dropped to less than 10,000 units in

the following years.

Emlak REIT sold 8,926 units in January�November 2016, which puts it close to its full�year target of

11,000. We think that presales from turn�key projects will help it achieve this goal. Revenues,

meanwhile, were TRY6.2 bln as of November, exceeding 2015 annual revenues of TRY5.9 bln.

The increase in price per m2 for Emlak REIT projects between end 2010 and now is larger than the

increase in the CBRT’s new home price index for Turkey but smaller than the increase for projects

completed in Istanbul. The CAGR of prices for Emlak REIT over the last five years was 13.6%, higher

than the average in Turkey of 12.5% but below the average in Istanbul of 17.3%.



Emlak REIT presales

0

1,500

3,000

4,500

6,000

7,500

6,000

8,000

10,000

12,000

14,000

16,000

2010 2011 2012 2013 2014 2015 11m16

Units sold Revenues, TRY mln (rhs) Note: Revenues include the contractors’ share.


Price increase comparison

2,000

2,500

3,000

3,500

4,000

4,500

5,000

0

50

100

150

200

250

300

2010 2011 2012 2013 2014 2015 11m16

Emlak REIT price/m², TRY (rhs) Emlak REIT average priceNHPI Turkey NHPI Istanbul

Note: NHPI means New Housing Price Index. The base year (100) for the price indexes is 2010.

Source: Company, CBRT, Deniz Invest Research

Land bank

CAN EMLAK REIT EXPAND ITS LAND BANK?

Emlak REIT has a land bank totaling 10.5 mln m2, with an appraisal value of about TRY5.5 bln. More

than half of this land is located in Istanbul, and the area there constitutes 76% of the total appraisal

value. There are also two valuable land plots in Ankara, one of which has a project that is expected to

launch in early 2017. The company also owns several plots in other Turkish cities, but these are smaller

contributors to NAV. For the time being, Emlak REIT has valuable land in its land bank. However, the

main question now is whether the company will be able to expand its portfolio going forward.

The company currently has almost no debt, though it intends to increase its leverage in order to

expand the land bank. It disclosed its plan to raise TRY2.0 bln in financing to do so on the day of the

failed coup. We think that the company still intends to do this, but not before end 2017 because of the

less favorable outlook for interest rates. The company’s net cash position is around TRY900 mln,

according to its latest financials, which could be used to expand its existing land stock by about 15%.

Another question is where to acquire land. As we mentioned previously, the valuable land in large cities

has, for the most part, already been developed. However, space could be freed up if military bases are

moved out of city centers, something the government declared it intended to do back in late July. It could

also potentially acquire land plots near some big projects, such as Istanbul’s third airport, Channel

Istanbul and the third highway.

Urban transformation projects may provide an opportunity as well, but we do not think these

projects would be particularly profitable for Emlak REIT. Its Esenler Urban Transformation Project,

for instance, will likely yield a low profit, in our opinion.



Emlak REIT land bank Location Site

area,Cost to

purchase,Appraisal

value,Expected

multiplierExpected

revenues,

m2 TRY mln TRY mln TRY mln

Istanbul / Kucukcekmece 959,389 1,823 1,823 1.50 2,734Ankara / Cankaya Muhye 193,858 327 476 1.00 476Istanbul / Sisli 24,469 455 455 1.50 683Istanbul / Zeytinburnu 36,783 400 411 1.25 514Istanbul / Arnavutkoy 3,645,528 333 381 1.50 569Ankara / Bali Kuyumcu 1,919,107 273 348 1.00 348Istanbul / Basaksehir 203,949 219 257 1.25 322Istanbul / Tuzla 65,122 206 208 1.25 260Yalova / Ciftlikkoy 1,455,000 178 194 1.00 194Istanbul / Kartal 73,270 132 145 1.00 145Istanbul / Basaksehir 363,979 140 127 1.25 159Istanbul / Basaksehir Hosdere 286,162 79 111 1.25 138Tekirdag / Cerkezkoy 371,236 8 107 1.00 107Istanbul / Esenyurt 53,689 49 84 1.00 84Istanbul / Atasehir 27,789 40 80 1.00 80Kocaeli / Gebze 234,213 57 70 1.00 70Bursa / Osmangazi 54,745 27 33 1.00 33Istanbul / Umraniye 17,068 2 27 1.25 34Istanbul / Tuzla 12,286 20 25 1.00 25Nigde / Merkez 25,643 22 22 1.00 22Izmir / Urla 368,343 20 22 1.00 22Istanbul / Sile 34,590 12 13 1.25 16Kocaeli / Korfez 28,577 3 11 1.00 11Izmir / Konak 6,810 1 11 0.75 8Tekirdag / Corlu 35,923 6 8 1.00 8Eskisehir / Odunpazari 23,942 5 6 1.00 6Istanbul / Besiktas 1,298 0 4 1.00 4Ankara / Cayyolu 779 1 1 0.75 1Istanbul / Bagcilar 532 1 1 0.75 1Istanbul / Zekeriyakoy 992 1 1 0.75 1Ankara / Cankaya 400 0 0 0.75 0Istanbul / Buyukcekmece 78 0 0 0.75 0Nevsehir 26 0 0 0.75 0

Total 10,525,575 4,842 5,462 1.46 7,075 Source: Company, Deniz Invest Research

Turn�key projects

Emlak REIT currently has ten turn�key projects, including one that was recently launched in

Muhye/Ankara. The cost of these projects to the company is currently around TRY1.2 bln, and we

expect this to rise to TRY2.1 bln by the time they are completed. We expect that they will yield

around TRY1.0 bln net income in about three to four years. The total cost of these projects to Emlak

REIT includes land and construction costs. The company has already presold about 80% of the units

from these projects.

Ongoing turn�key projects

Projectdue date

Total numberof units

Unitssold

Expectedrevenues,

Land andconstruction costs,

Expectedprofit,

TRY mln TRY mln TRY mln

Esenler UTP Dec ’16 989 481 40Ayazma 1.Etap Feb ’18 1,239 1,217 674 475 199Korfezkent 4 Nov ’17 1,124 1,096 276 137 139Ispartakule 1.Etap 1.Kisim Mar ’18 978 902 437 260 177Ispartakule 1.Etap 2.Kisim Mar ’18 904 893 364 267 96Istanbul Kayabasi Emlak Konutlari 2.Etap Sep ’17 271 265 152 114 37Nevsehir Emlak Konutlari Nov ’18 420 317 202 167 35Ayazma Emlak Konutlari 2 Apr ’18 470 0 116 106 9Gebze 3 – 1,955 1,725 884 578 306

Total 8,350 6,896 3,105 2,105 1,040 Source: Company, Deniz Invest Research



Net income from turn�key projects, TRY mln

0

100

200

300

400

500

600

2015 2016E 2017E 2018E 2019E




Ownership structure Emlak REIT IFRS financials, TRY mln Mass Housing Development Agency 49.3%Free float 50.7%

2014 2015 2016E 2017E 2018E 2019E 2020EINCOME STATEMENTRevenues 1,805 1,787 3,572 4,690 6,675 4,639 4,446 COGS (1,033) (899) (1,797) (2,359) (3,358) (2,334) (2,236)Gross income 772 888 1,775 2,331 3,317 2,306 2,210Gross margin 42.8% 49.7% 49.7% 49.7% 49.7% 49.7% 49.7% SG&A (112) (123) (134) (146) (158) (170) (183)EBITDA 659 765 1,641 2,185 3,159 2,135 2,027Adjusted EBITDA 659 765 1,641 2,185 3,159 2,135 2,027EBITDA margin 36.5% 42.8% 45.9% 46.6% 47.3% 46.0% 45.6% DD&A – – – – – – –EBIT 659 765 1,641 2,185 3,159 2,135 2,027 Interest income 190 34 (47) – – – – Forex gain – – – – – – – Revaluation gain – – – – – – – Other gains 105 154 200 200 220 245 270 Exceptionals – – – – – – –EBT 954 953 1,794 2,385 3,379 2,380 2,297 Income tax – – – – – – – Minority interest – – – – – – – Discontinued operations – – – – – – –Net income 954 953 1,794 2,385 3,379 2,380 2,297Adjusted net income 954 953 1,794 2,385 3,379 2,380 2,297Net margin 52.9% 53.3% 50.2% 50.9% 50.6% 51.3% 51.7%EPS, TRY 0.25 0.25 0.47 0.63 0.89 0.63 0.60Adjusted EPS, TRY 0.25 0.25 0.47 0.63 0.89 0.63 0.60

BALANCE SHEETAssets Cash and equivalents 2,843 3,149 3,214 3,724 4,467 4,782 5,194 Receivables 1,603 1,910 1,636 1,896 2,274 2,434 2,644 Inventories 740 1,807 1,427 1,654 1,984 2,124 2,307 Other current assets 264 200 200 232 279 298 324 Total current assets 5,450 7,066 6,478 7,507 9,004 9,639 10,468 Total non�current assets 9,503 10,161 12,164 14,097 16,908 18,100 19,659Total assets 14,953 17,228 18,642 21,604 25,912 27,739 30,127Liabilities Short�term borrowings 172 231 226 262 314 336 365 Payables 1,892 3,071 4,622 5,356 6,424 6,877 7,469 Other current liabilities 3,648 4,330 3,236 3,750 4,498 4,815 5,230 Total current liabilities 5,712 7,632 8,084 9,368 11,236 12,028 13,064 Long�term borrowings 434 214 49 57 68 73 79 Other non�current liabilities 56 56 15 18 21 23 25 Total non�current liabilities 490 270 64 75 89 96 104 Total liabilities 6,202 7,902 8,148 9,443 11,325 12,124 13,168 Minority interest – – – – – – – Equity 8,751 9,325 10,494 12,161 14,586 15,615 16,959Total liabilities and equity 14,953 17,228 18,642 21,604 25,912 27,739 30,127Net debt/(cash) (2,237) (2,704) (2,939) (3,406) (4,085) (4,373) (4,749)CASH FLOW STATEMENTNet income 954 953 1,794 2,385 3,379 2,380 2,297 Minority interest – – – – – – – DD&A – – – – – – – Working capital change – – – – – – – Other assets change – – – – – – –Operating cash flow 954 953 1,794 2,385 3,379 2,380 2,297 Maintenance capex – – – – – – – Expansionary capex – – – – – – – Other investments – – – – – – –Investing cash flow – – – – – – – Change in debt (163) (162) (170) 44 64 27 35 Dividends paid (468) (367) (368) (718) (835) (1,183) (833) Share issues/(purchases) – – – – – – – Other – – – – – – –Financing cash flow (631) (528) (537) (674) (771) (1,156) (798)Forex effects – – – – – – –Net change in cash – – – – – – –RATIOSP/E 11.8 11.8 6.3 4.7 3.3 4.7 4.9EV/EBITDA 13.7 11.1 5.1 3.6 2.3 3.2 3.2P/BV 1.3 1.2 1.1 0.9 0.8 0.7 0.7Net debt/EBITDA neg neg neg neg neg neg negTotal debt/EBITDA 0.9 0.6 0.2 0.1 0.1 0.2 0.2ROE 11.2% 10.5% 18.1% 21.1% 25.3% 15.8% 14.1%ROIC 8.2% 9.4% 17.1% 19.1% 22.6% 14.9% 13.2%Dividend per share, TRY 0.12 0.10 0.10 0.19 0.22 0.31 0.22Dividend yield 4.1% 3.2% 3.3% 6.4% 7.4% 10.5% 7.4%P/S 6.3 6.3 3.2 2.4 1.7 2.4 2.5P/CF 11.8 11.8 6.3 4.7 3.3 4.7 4.9Revenue growth �23% �1% 100% 31% 42% �31% �4%EBITDA growth �27% 16% 115% 33% 45% �32% �5%EPS growth �10% �0% 88% 33% 42% �30% �4%




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Emlak REIT - Good Return at Low Risk · 2017-01-02 · Emlak REIT has a land bank totaling 10.5 mln...

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Transcript of Emlak REIT - Good Return at Low Risk · 2017-01-02 · Emlak REIT has a land bank totaling 10.5 mln...