sg1 project report
TRANSCRIPT
Time Properties SG1 Project
Prepared by Hamid Abubakr
Table of ContentsTime Properties Project Overview...........................................................................................................2
Time Properties Financial Position...........................................................................................................3
Silicon Gates 1 Project.............................................................................................................................5
RERA Escrow Account Law.......................................................................................................................6
Conclusion...............................................................................................................................................9
Time Properties Project Overview
The client, Time Properties has requested funding of AED60mn to help complete their project Silicon
Gates 1. The project is around 87% complete and according to the client, they need the loan to finalize
this project. If funding is provided the client expects the project be complete in 6 months. The client
intends to pay the loan using receivables he expects from clients and will finished paying off the loan in
two years. According to him, the receivables have still not been paid because receivable payments
usually depend on a lease payment plan schedule. Each client has a different payment schedule plan
depending on the agreement. E.g. some clients have to pay 30% of the lease payment while others have
10% remaining. The client has also posted as collateral 100 unsold apartments and retail space. The
value of the collateral is AED91.5mn.
The company was established and is currently owned by Mr. Abdul Rahman Alattar, and is a very well
known UAE businessman coming from Al Attar Family which is a famous family in the emirate of Dubai.
According to documents provided, Mr. Alattar’s net worth is AED314.4mn and consists of the following:
Plot No. Area Share Cost Market Value
012-017
357-458
325
393
392
Silicon Oasis
Al Saffa Second
Al Fisht – Al Hirah
Mouleh – Commercial
Mouleh – Commercial
50% Free Hold
100% Private
100% Private
100% Private
100% Private
17,000,000
11,000,000
1,222,000
924,000
924,000
60,500, 000
18,000,000
3,500,000
3,030,000
3,030,000
12-005
012-009
23-022
JVC10BMRH009
Burj Dubai
TR005
117-278
11/188
317-1030
Silicon Oasis
Silicon Oasis
Silicon Oasis
JVC
Aprt.3202
IMPZ
Frig AL Murar
Sajaa labour camp
Bur Dubai 4 star hotel
100% Free hold
100% Free hold
100% Free hold
100% Free hold
100% Free hold
55% Private
100% Private
100% Private
33.33%
7,035,760
14,765,085
30,482,989
21,000,000
3,194,800
10,826,130
15,000,000
8,920,665
36,000,000
20,000,000
27,000,000
40,000,000
39,331,250
10,000,000
21,000,000
23,000,000
10,000,000
36,000,000
Total 178,295,429 314,391,250
According to the company’s financial statements, Silicon Gate 1 is the primary focus of the company and
the biggest investment the business is currently involved in. SG1 construction costs and the value of its
land constitute 42% of the total assets of the company. The company has other major projects on the
pipeline including Silicon Gate 2, 3 and 4, but as figure below shows, the small construction costs
associated with them show that they are still in the early stage of development.
Silicon Gate 1 (Incomplete)
Silicon Gate 2 (Incomplete)
Silicon Gate 3 (Incomplete)
Silicon Gate 4 (Incomplete)
0
50
100
150
200
250
300
350
Construction and land costs for Time Properties Projects
AED
(Mill
ion)
Time Properties Financial Position
The bottom line is the company Time Properties is bankrupt. The company’s fortunes have drastically
been affected by the 2008 financial crisis. The company was reliant on the success of the SG1 project
and had no other source of income (which has mostly been used to cover construction costs) other than
advances received from the buyers of SG1 properties. The company has registered negative earnings for
FY11 and FY10 of AED-6.288mn and AED-4.355mn. Earnings only improved in FY11 due to decrease in
general and administrative costs, specifically salary deductions. This decline in earnings happened due to
a combination of factors. First, Liquidity in the market dried up after the crisis hit, leaving demand for
SG1 properties faltering. Second, Real estate prices also fell which reduced the expected profit margin
from the SG1 project. Price/Sqft for SG1 fell by 60% from average of AED750 in 2008 to an average of
AED430 in 2012. Third, accounts receivables stopped since construction costs could not be covered
which further tightened the company’s liquidity position. The company is currently is starved out of cash
and they have had dismal quick ratios of less than one for the last three years at 0.3, 0.08 and 0.11
respectively. Obviously this position is not feasible and the company will need to generate cash as soon
as possible to satisfy its many short to medium term debtors. Given that the company’s other projects
are still in the early phases of development, it is expected that the only source of cash to satisfy those
debtors in the short to midterm is expected to come from expected accounts and unsold properties
from the SG1 project.
2008 2009 2010 2011
-10
-5
0
5
10
15
20
25 Time Properties Revenues and Net Profits
Revenue
net profits
AED
( Mill
ion)
The company has accounts receivable which are expected to improve it’s liquidity position however
most of these receivables (of which 60% belong to SG1) depend on construction of SG1 and other similar
projects to continue. Finally, it is also worth highlighting that the company’s equity is negative, which is
very worrying and clearly signals that the business cannot continue as a going concern. Shareholder
equity is decreasing at a worrying rate and has fallen by 333% YoY in FY11.
2008 2009 2010 2011
-16
-14
-12
-10
-8
-6
-4
-2
0
2
Time Properties Shareholder Equity
AED
(mill
ion)
Silicon Gates 1 Project
According to the sponsor, Time Properties needs AED60mn for construction costs to complete the SG1
project. This figure has been verified by our engineering department and by me through my own
analysis of the audited RERA reports which I have requested from client. The client has put forth two
methods to pay off loan which include:
1. Accounts receivable worth AED100mn.
2. Unsold units worth AED91.5mn (valuation done in August 2011, considered outdated).
Given my review of the company’s financial position, and the fact that the company has outstanding
liabilities amounting to AED77mn which will need to be paid in the next 3 months to 1 year, I believe the
client should post additional collateral to the loan. This is because while the accounts receivable from
SG1 and the value of the unsold properties are expected to cover the value of the loan, there exist
certain risks which will be discussed next.
RERA Escrow Account Law
In 2007, RERA set a legislative framework that regulates the relation between the different contractual
parties, guaranteeing their rights and establishing their duties and commitments through legislations in
force. Precise mechanisms and regulations were put in place to regulate investment activities in the
sector in the way that achieves highest return. Given the outstanding liabilities the company has, the
logical question to ask is whether these other debtors have recourse to the accounts receivables
expected from SG1 or any income for the expected value of any unsold properties? The sponsors reply
to this was the following:
1. RERA regulations stipulate that each real estate project and the cashflows to deal with it are to
be included into an escrow account.
2. Any revenues from the project will be used to cover construction costs specific to that project.
3. Any revenues remaining after accounting for construction costs will be used to pay off debts
that are specific to that project.
4. The SG1 project does not have any other outstanding liabilities, therefore the receivables will be
fully available to pay off the EG loan.
5. Customers who paid in advance have no recourse on the amounts they have paid in advance
and that they are legally obliged to pay any outstanding amount.
6. In the event that time properties do not pay their outstanding receivables, then time properties
has the right to auction the property to the public to retrieve the outstanding amount.
I have checked with RERA regulations and all the above statements made by the client are true. What
the client however didn’t mention was the fact that the RERA escrow account law, more specifically
article 17, states that the developer will become de-registered in the event that it is declared bankrupt.
557 61
40456 364
92 3.7 16 76
To
tal P
roje
ctva
lue
Un
sold
resi
den
tial
Un
sold
ret
ail
So
ld V
alu
e
Co
llect
ed
O/S
Rec
eiva
ble
Cas
h In
Ban
k
O/S
Mo
rtg
aged
O/S
No
nM
ort
gag
ed
Project Value
34
31347 394 334
60
Lan
d
Co
nst
ructi
on
Oth
ers
To
tal B
ud
get
To
tal P
aid
Bal
ance
tob
e p
aid
Project Costs
What this means is that as long as the company’s liabilities are not resolved within the next three
months to 1 year, there remains a probability that some of these debtors might seek legal recourse and
the company will be forced to declare bankruptcy. If this situation materializes then EG’s recourse for
the loan will be very difficult, given the fact that company has many other debtors, and with unknown
seniorities to the company’s assets. The audited financial statements however state that the client has
promised that he would pay off the company’s liabilities from his own equity, if deemed necessary. In
addition, according to my review of the escrow account law, the terms for managing the account, the
rights and obligations of the contracting parties and other terms and conditions, are set at the initial
establishment of the account. Given that our financing for the project is to be done after establishment
of the escrow account, it is unclear to me whether EG will have it’s rights established or whether the
escrow account terms and conditions can be updated to account for the new financing. This point needs
to be clarified, preferably from RERA.
In addition, according to a research study by Hadef & Partners law firm, the laws introduced by RERA
have been helpful but there remain some difficulties with regards to their actual enforcement. The study
has also found that courts have been giving different decisions for similar disputes. The study also
reveals that the general feeling among investors is that no remedies are easily available to settle
disputes. What this implies is that there remains a possibility that accounts receivable will be not be
received in full from the customers.
The client has also posted the value of unsold properties as collateral and said that they amount to
approximately AED100mn. To arrive at this amount the client has assumed that the market price/sqft.
for its unsold apartments is AED515. My review of the current market prices for customers who plan to
sell their SG1 holdings reveals that they are currently selling them at an average of AED430 per sqft. I
have also lowered the provided price/sqft for the retail space from 920 to 700. At these prices the
current market value of the unsold apartments stands at AED81mn. It is in my expectation that this is
the lowest expected price which is based on distress sales prices. Once the project is complete and
running it is expected that the apartments will be selling at a premium. Therefore I believe that the
prices used by the client to value the unsold units at AED100mn as reasonable. I also requested the
client to provide me with a third party evaluation of the value of the unsold apartments. He provided me
with an evaluation done by J&J reports which stated the value at AED91.5mn. This evaluation however
was done in August 2011 and is considered outdated. I have requested the client to produce a new
valuation and he has stated that it could take approximately 1 month to prepare. I still believe the value
of AED100mn to be more reasonable since the value of residential real estate has since picked up
marginally in Dubai in general. In my opinion, selling the unsold units should not be difficult Given the
relative quality of the SG1 project, the limited number of unsold apartments, and the fact that the
completion of the project will coincide with an expected overall positive movement in the Dubai
residential market. According to various readings of the Dubai market from such sources as Cluttons and
Jones Lassalle, the current residential market in Dubai is expected to have bottomed out in the first half
of 2012 and demand is expected to increase marginally during FY13.
Conclusion
In conclusion I believe that the value of the client’s receivables and unsold units will cover the value of
the loan. According to my analysis, I also believe the AED100mn value of the unsold collateral to be fair
and descriptive of the current market value. However the company’s current weak financial situation,
issues with whether RERA can protect our investment and the fact that RERA’s regulation have
historically been applied haphazardly, all lead me to conclude that the company should provide
additional collateral to cover this investment. As shown earlier in the report, the client’s assets amount
to almost AED314mn and thus he should have no difficulty securing sufficient additional collateral to
cover the AED60mn loan.
Disclaimer: Although this review has been prepared in good faith and with professional care, EG research cannot make a representation on the warranty or representation of the accuracy of the analysis. Inferences made on this review are subject to the limitations of the available information and the time frame for preparation.