KSA REITs Landscape

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KSA REITs Landscape

How are REITs placed in rising interest rate environment?

September 2022

Jassim Al-Jubran

+966 11 2256248

[email protected]

Ibrahim Elaiwat

+966 11 225 6115

[email protected]

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KSA REITs Landscape

September 2022

Table of Contents

Executive Summary ...3

KSA REITs’ financing costs to rise; challenging future expansions ...4

Debt Profiles ...6

KSA REITs vs. global peers ...7

Improved financial performance in H1-22; sector continues to underperform broader markets ...8

REITs Market Data ...9

Real Estate Portfolio: sector and geographic distribution ...10

KSA REITs continue to acquire new assets; commercial real estate prices fall ...12

Increase in trade receivables outpaced growth in rental income ...13

Liquidity as a parameter ...14

Dividend yields to improve but capped by higher interest rates ...15

Scoring mechanism ...16

REITs Performance Scorecard and the Top 5 ...18

Bonyan REIT...19

AlMa’athar REIT ...20

Musharaka REIT Fund ...21

Taleem REIT ...22

Riyad REIT ...23

SEDCO Capital REIT ...24

SICO Saudi REIT Fund ...25

Derayah REIT Fund ...26

Al Rajhi REIT ...27

AlAhli REIT Fund 1 ...28

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KSA REITs Landscape

September 2022

Executive Summary

• Strong economic performance by KSA in H1-22: Saudi Arabia recorded healthy GDP growth in H1-22 when most of the global peers are facing recession concerns. In Q1-22, KSA economy grew 9.9% and expanded 12.2%

in Q2-22. The GDP growth was driven by higher oil prices and increase in oil output. However, recent decline in oil prices and OPEC’s decision to go for an output reduction may tone down oil GDP growth to some extent in H2-22. Nevertheless, KSA is expected to be one of the fastest growing economies in FY22, with IMF estimating a growth of 7.6% for the year. Moreover, the Kingdom’s fiscal strength (a surplus of SAR 135bn in H1-22 vs. full year target of SAR 90bn) would support higher government spending that is likely to accelerate economic activity.

On the other hand, global inflationary pressure and rising interest rates are expected to impact negatively on consumer as well as corporate spending.

• REITs to experience higher finance expenses as they fund further expansions while facing higher rates:

Supply chains issues due to COVID-19 lockdowns and Russia-Ukraine war led to spike in commodity prices and very high inflation levels. To curb the inflation the US Federal Reserve and other central banks around the globe turned hawkish raising interest rates aggressively. Following the US Fed, SAMA also increased repo rate by 275bps in FY22 till date. The increase in interest rates and anticipated rise going forward drove SAIBOR (3M) to 3.6% in September 2022 from 0.9% in December 2021. Higher SAIBOR will lead to higher finance cost for REITs and impact more the ones with higher leverage. Although, we expect increase in dividend for most of the REITs due to improved rental income with easing of restrictions and increased occupancy level, we expect increased burden of higher financing expenses would limit the growth in dividend payments. The amount of borrowings held by REITs has increased by almost doubled since FY19 from 3.8bn to 8.6bn (1H-22), with some REITs reaching close to the 50% cap on borrowings to total assets imposed by the CMA. However, 9 out of 17 REITs are still below the median borrowings to total assets rate, indicating more headroom for funding further expansions using debt.

• REITs to benefit from ongoing recovery in retail and hospitality; real estate activities seen under pressure recently: KSA’s non-oil economy has picked up the pace in Q2-22 with non-oil GDP growing 8.2% Y/Y after growing at low-single-digits in past few quarters. In Q2-22, retail and hospitality also witnessed surge in activities, evident from a 16.4% Y/Y growth in GDP of the segment that includes these activities. Thus, REITs operating in these segments are expected to benefit from the revival. Whereas GDP growth for real estate activities was modest at 1.9% Y/Y. The value of real estate transaction till August 2022 YTD rose 8.2% Y/Y to SAR 127.6bn from SAR 118.0bn in the same period previous year. However, the value fell 9.3% Y/Y in July-August 2022 to the lowest in more than a year, after registering healthy double-digit growth for past few months.

• Ranking REITs universe with top ratings: The TASI universe includes 17 listed REITs. Hence, it becomes imperative to evaluate the attractiveness of the REITs and rank them based on the valuation and operational parameters. During current rising interest rates environment, we have given more weightage to debt as one of the key criteria to decide attractiveness of the REITs. Moreover, sectoral and geographical diversification of funds and liquidity of stocks were given due importance. Based on weighted ranking Bonyan REIT, AlMa’ather REIT, Musharaka REIT, Taleem REIT, and Riyad REIT are our top 5 picks from the sector.

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KSA REITs Landscape

September 2022

KSA REITs’ financing costs to rise; challenging future expansions

During ongoing global macro scenario of rising borrowing rates, we focus on how the rising rates will translate to our outlook on KSA’s REITs funds. As the Saudi Riyal is pegged to the US Dollar, KSA’s repo rates move in tandem with the US Federal Fund rates, which are currently actively rising to alleviate the inflationary environment in the US. The market is currently anticipating a FED target rate between 4.25% and 4.5% by the end of 2022¹ . On average, the SAIBOR 6M rate was roughly at a 75bps spread over the FED rate during the past 5 years. Hence, SAIBOR is also expected to move up further by the year end.

Fig. 1: SAIBOR and US FED rate relation

Fig. 2: Total leverage in KSA REITs (SAR mn)

Source: Bloomberg, AlJazira Capital

Source: Argaam, AlJazira Capital, *Excluding non indebted REITs Source: Bloomberg, AlJazira Capital

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 SAIB6M Index FED Rate EXPECTED FED RATE

Projected FED Fund Rate with Current SAIBOR 6M

3.8bn 6.2bn 7.5bn 8.6bn

18.0%

27.4%

31.2% 33.9%

0.0%

10.0%

20.0%

30.0%

40.0%

2019 2020 2021 1H-22 0

2000 4000 6000 8000 10000 REITs' Borrowings to Assets

Total Borrowing Total Borrowing/Assets 0

50 100 150 200 250

Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22

Basis Points

76.74 SAIBOR 6M -FED Rate Spread (bps)

5 Year Average

Rising leverage in KSA REITs: As of H1-22, the total amount of borrowings to assets in KSA REITs universe topped 33.9% (SAR 8.6bn in borrowings), almost doubling from 18.0% (SAR 3.8bn in borrowings) in FY19. With some REITs nearing the 50% ceiling on total bowings to assets imposed by the Capital Market Authority. As the REITs universe takes on more debt, it has become even more exposed to interest rate risk as the market faces an environment of rising borrowing rates. This will ultimately lead to higher finance expenses, constraining net income, as it also poses a challenge on raising funds for expansions that lead to top-line growth. The increase in rental prices and recent expansions are set to outweigh the effect of rising rates for the market.

1 Federal Fund futures are predicting a 37.7% chance of reaching a target fund rate of 4.25% by December’s FOMC meeting, and a 38.5% chance of ending the year at a 4.5% target rate (data from the CME Group, 2022).

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KSA REITs Landscape

September 2022

Table 1: Finance cost control measures by KSA REITs

Fig. 4: Change in REITs’ financial expenses with change in SAIBOR

Source: Bloomberg, AlJazira Capital, *Including all finacial costs, current and non-current, on total debt.

-82bps

-44bps

-14bps

21bps 20bps

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

-100 -80 -60 -40 -20 0 20 40

Dec-18 Apr-19 Aug-19 Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 Aug-21 Dec-21 Apr-22 Aug-22

Percentage

BPS Change

SAIBOR 6M and Y/Y Change in REITs' Total Finance Expenses to Total Debt

REITs EIR bps Change [LHS] SAIB6M Index [RHS]

1H-20 2H-20 1H-21

2H-21 1H-22

REIT Activity

Alkhabeer REIT Fixed ~SAR 400mn debt at a rate of 4.44% until FY25 and signed a hedging swap with AlRajhi Bank.

Mulkia REIT Fixed SAIBOR margin at 3.71% for borrowings worth SAR 100mn.

Musharaka REIT Restructured debt to reduce fixed finance cost by 24%.

Jadwa REIT AlHaramain Signed a new facility of SAR 300mn with Bank Al Bilad to repay older debt, which will reduce fixed finance cost from 2.0% to 1.75% and allow repayment after five years.

Derayah REIT Restructured financing facility worth SAR 748mn to extend maturity.

Source: Argaam, Tadawul, Company Reports

Fig. 3: Cost Coverage

Source: Argaam, AlJazira Capital, *Excluding non indebted REITs Average Interest Coverage 28.1x

16.2x

11.5x

5.00 10.00 15.00 20.00 25.00 30.00

2019 2020 2021

Average Interest Coverage

Inveresly, as funds raise more debt, financing cost coverage in the REITs universe dropped significantly.

The average to finance cost coverage for KSA REITs dropped from 28.1x in FY19 to 11.5x in FY21 as a result of lesser rental income from COVID restrictions and the larger nominal value of increased borrowings. The rate of decline slowed down as REITs edge towards their regulatory cap on debt. Fund managers have expressed intentions to raise capital to circumvent the limit on raising funds. As of FY21, Jadwa AlHaramain (2.5x) has had the least coverage for two consecutive years, with FY20’s coverage being less than 1, indicating their FFOs were insufficient to pay borrowing costs. MEFIC and Derayah are also among the REITs with lower coverage at 3.0x and 3.2x, respectivly.

REITs’ financial expenses not immune from swings in SAIBOR prices yet cost control measures are mitigating the severity. We observed the degree of change between the SAIBOR 6m and the Y/Y bps change in REITs’ EIR become less severe over time as firms take on hedging innitiatives and managing financing terms.

Mulkia, Derayah, and AlKhabeer are among the REITs with hedging and finace cost control initiatives in place.

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KSA REITs Landscape

September 2022

Debt Profiles

The borrowings to assets for all REITs, along with their ability to cover their interest costs with their FFOs, are considerable specifications for the sector as it heads towards a high interest rate environment. Riyad REIT for example, holds a total borrowing to assets close to the regulatory limit at 44.6%. Yet concerns on the size of their debt can be alleviated to some extent, given the fact that Riyad REIT covers their interest rate expenses by almost 6 times with the fund’s FFO. Some notable funds are Taleem, with a total borrowing to assets at 14.6% and an ability to cover their interest expenses by 20.7x. The specifications within Taleem’s contracts grants it a favorable, steady, variability in their total financial costs (current and non-current) over time. On the other end of the scale, Musharaka REIT’s finance expenses to total debt rates swings by 1.6% on average. There are certain fund managers with financial cost control measures in place such as AlKhabeer fixing a little less than SAR 400mn of their borrowings at a rate of 4.44% until FY25 as well as participating in a hedging swap with AlRajhi Bank. Mulkia fixed the funds SAIBOR margin on SAR 100mn of their borrowings to 3.71% until repayment as well. Musharaka reduced finance costs by 24% through debt restructuring. Derayah also announced that it is restructuring its financing by reducing profit spread and extending their financing maturity date.

Effective Interest Rate (EIRs) for REITs totaled to 2.8% during 2021, where the SAIBOR 6M was at an average of 0.86%. Financing costs for REITs could then rise; as the floating SAIBOR rate is expected to rise with the FED aim towards an expected target of around a 4.375%. In addition to higher financing rates, 9 REITs are below the median borrowings to total assets for the sector. Some REITs possess the headroom to facilitate future expansions with more borrowings, indicating more room for higher financing costs in that the sector may see in the upcoming future. Notably, MEFIC holds the highest EIR, with a historic sensitivity in changes in its finance costs to total debt (top three most sensitive) and no indication of financial control measures. AlKhabeer, on the other hand, pegged almost half of its SAR 747mn in borrowings to at a rate of 4.44% which could prove to be competitive in the coming future where FED rates are expected to top 4%. A fixed cost could translate into better fixed rates on its floating financing costs as well.

SEDCO and Riyad REIT possess notably competitive rates at 2.03% and 2.05% respectively, despite being the fourth and first most debted REITs in the market.

Borrowings Financial Cost Coverage and Effective Interest

Rate (EIR) - FY21 Volatility of Financing Expenses (FY19-1H22)*

REITs Borrowings to

Total Assets Borrowings

(SAR mn) REITs Coverage EIR REITs Standard

Deviation

ALJAZIRA REIT 0.0% N/A ALJAZIRA REIT N/A N/A TALEEM REIT 0.55%

ALINMA RETAIL REIT 0.7% 6.5 TALEEM REIT 20.7x 2.32% Jadwa Saudi 0.60%

Bonyan REIT 20.2% 389.4 ALINMA RETAIL 75.9x 4.65% JADWA REIT ALHARAMAIN 0.60%

SICO SAUDI REIT 22.4% 150.4 AL Maather REIT 15.7x 2.54% Bonyan REIT 0.62%

JADWA REIT ALHARAMAIN 24.6% 252.8 Bonyan REIT 14.7x 2.22% SICO REIT 0.73%

AL Maather REIT 28.5% 209.7 AlAhli REIT 1 8.6x 2.52% RIYAD REIT 0.78%

AlAhli REIT 1 28.6% 559.1 Jadwa REIT Saudi 8.5x 2.78% AL Maather 0.86%

MEFIC REIT 33.7% 576.1 MULKIA REIT 6.9x 2.74% AlAhli REIT 1 0.87%

Jadwa REIT Saudi 34.4% 252.8 RIYAD REIT 5.9x 2.05% Al Rajhi REIT 0.87%

TALEEM REIT 34.9% 295.8 Al Rajhi REIT 4.3x 2.66% ALKHABEER 0.96%

MUSHARAKA REIT 38.8% 656 SEDCO REIT 3.4x 2.03% MULKIA REIT 1.05%

ALKHABEER REIT 39.2% 747 DERAYAH REIT 3.2x 2.91% DERAYAH REIT 1.11%

Al Rajhi REIT 40.9% 896.4 MUSHARAKA 3.7x 4.24% ALINMA RETAIL 1.14%

SEDCO CAPITAL REIT 43.1% 793.1 JADWA REIT ALHARAMAIN 2.5x 2.65% MEFIC REIT 1.27%

MULKIA REIT 43.2% 576.1 SICO SAUDI REIT 3.5x 2.44% SEDCO CAPITAL REIT 1.49%

DERAYAH REIT 44.3% 748 ALKHABEER REIT 3.3x 4.03% MUSHARAKA REIT 1.60%

RIYAD REIT 44.6% 1360.8 MEFIC REIT 3.0x 4.78% ALJAZIRA REIT N/A

Source: Bloomberg, AlJazira Capital, *Including all finacial costs, current and non-current, on total debt.

Table 2: Debt Specifications:

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KSA REITs Landscape

September 2022

KSA REITs vs. global peers

Dividend yields for REIT indices have improved in FY21 compared to the previous year. The TASI REITs Index dividend yield currently stands at 4.60% (based on FY21 dividend). Average dividend yield for Tadawul-listed KSA REITs stands higher in comparison with global and developed markets’ REIT indices. As of August 2022, dividend yield for major global REIT indices stood ~40-130bps below that of KSA REITs. The yield for MSCI World REIT and S&P Global REIT stood at 3.27% and 3.90%, respectively, while REITs in the US (MSCI US REIT) and Europe (FTSE EPRA Nareit Developed Europe Index) had a dividend yield of 3.61% and 4.17%, respectively.

Dividend yields for Saudi REITs continue to be higher than global peers. Furthermore, expected higher growth in Saudi economy compared to its global counterparts is likely to help Saudi REITs to deliver higher dividend yields.

Additionally, pick up in non-oil economy and long term initiatives to support its development bode well for growth opportunities for REITs, which is expected in to translate into healthy dividends.

TASI REITs Index has the maximum concentration of assets in the Retail sector at 36.9% of total assets, followed by Hotels (16.8%), Apartments (14.0%) and Offices (12.8%). Meanwhile, MSCI US REITs Index has the highest contribution from Specialized REITs at 25%, followed by the Residential (19%) and Industrial (16%) sectors.

Fig. 6: REITs portfolio distribution

Source: MSCI, Argaam, Aljazira Capital

Fig. 5: Global REIT Indices - Dividend yield

Source: MSCI, S&P, FTSE Russell, Argaam, Aljazira Capital Data as of August 31, 2022, for global REIT indices

3.27% 3.61% 3.90% 4.17% 4.60%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

MSCI World REIT MSCI US REIT S&P Global REIT FTSE EPRA Nareit

Europe Index TASI REITs

36.9%

16.8%

14.0%

12.8%

10.4% 7.8%

1.4%

TASI REITs Index

Retail Hotels Apparments Offices Eductional Warehouse Other

25.3%

19.0%

15.6%

14.9%

10.5%

7.4%

3.5% 3.8%

MSCI US REITs Index

Specialized Residential Industrial Retail Health Care Offices Diversified

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KSA REITs Landscape

September 2022

Improved financial performance in H1-22; sector continues to underperform broader markets since YTD

In H1-22, KSA’s REIT funds aggregated a total rental income of SAR 898.5mn, an increase of 15.2% Y/Y – supported by increased economic activities. Google’s mobility data tracked a 16% increase over pre-COVID levels for visits to workplaces as the economy is well out of the woods in regard to the after-effects of the pandemic. Residential property and Hotels (two of the top three segments for KSA’s REITs) benefited from increasing rents (and occupancy) and rise in visitors to the Kingdom. Total 12 out of 17 listed REITs recorded increase in rental income in H1-22. As a results, the sector registered net profit of SAR 373.5mn as against net loss of SAR 90.5mn in H1-21. The bottom-line also got a boost from net reversal of impairments on real estate investments, which stood at SAR 21.6mn in H1-22 compared to impairments of SAR 373.6mn in H1-21. The reversal impairments by most of the REITs is a positive sign indicating improving conditions that will help in terms of improved profitability.

Fig. 8: TASI and REITs Sector Index – YTD Performance

Source: Bloomberg, Tadawul, Aljazira Capital

Fig. 7: REITs improved financial performance H1-22 vs. H1-21

Source: Tadawul, Argaam, Aljazira Capital

TASI 70

80 90 100 110 120 130

Jan-22 Jan-22 Feb-22 Mar-22 Apr-22 May-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22

REITs

TASI REITs index fell 15.2% Y/Y from 5,060 points in September 2021 to 4,289 points in early September 2022, and down 7.0% YTD. It underperformed TASI by 18.6% on Y/Y basis and 11.9% on YTD basis. The constituents that saw the largest YTD drawdowns were Alinma REIT, AlJazira REIT, and MEFIC at a negative 20.7%, 19.7% and 17.8% YTD declines respectively (adjusted for dividend payouts).

Rental income (SAR mn) Net income/loss (SAR mn) Impairment (SAR mn) 779.7

-90.5

-373.6 898.5

373.5

21.6

-600 -400 -200 0 200 400 600 800 1000

H1-21 H1-22

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KSA REITs Landscape

September 2022

REITs Market Data

REITs Market

Price Book

value/Unit Market value/Unit

Expected dividend

yield Debt value

(SAR mn) Borrowings/

Total Assets

Units

(mn) Properties mkt. value (SAR mn)

Average 3M turnover

(,000)

Cash(mn)

AlMa'athar REIT 9.39 8.28 9.69 6.6% 209 28.5% 61 768 873 21.0

Mulkia - REIT 9.03 8.88 9.35 5.5% 576 43.2% 68 1,303 821 11.6

Musharaka REIT 9.43 9.61 10.83 6.4% 655 38.8% 88 1,184 2,003 71.1

ALINMA RETAIL REIT 5.48 7.87 7.87 3.6% 7 0.7% 118 891 3,649 14.6

AlAhli REIT 1 11.50 9.4 10.61 6.1% 559 28.6% 138 1,805 1,693 16.6

SICO Saudi REIT 6.97 9.01 9.01 5.7% 150 22.4% 57 571 1,586 14.7

Derayah REIT 11.44 8.36 8.36 6.1% 748 44.3% 108 1,561 3,150 20.9

Bonyan REITS 10.08 8.64 10.76 6.9% 389 20.2% 163 1,991 1,870 36.9

MEFIC REIT 5.85 7.23 7.19 2.6% 351 33.7% 73 964 1,006 4.5

SEDCO CAPITAL 10.72 8.73 8.85 6.5% 793 43.1% 118 1,553 1,994 27.6

Al Rajhi REIT 10.10 7.83 8.3 6.2% 896 40.9% 162 2,124 3,139 1.0

Jadwa REIT Saudi 13.58 9.77 11.15 5.5% 600 34.4% 187 1,824 1,980 18.7

Jadwa AlHaramain 7.46 7.36 7.85 0.0% 253 24.6% 66 417 1,105 31.1

Alkhabeer REIT 7.78 7.79 8.35 5.8% 747 39.2% 141 1,941 5,221 19.9

Riyad REIT* 11.40 9.2 11.29 6.9%* 1,361 44.6% 172 2,503 3,520 73.1

Taleem REIT 12.28 10.71 11.2 5.9% 296 34.9% 51 1,412 1,466 21.5

AlJazira REIT 18.28 7.22 7.22 2.1% 0 0.0% 12 44 3,326 1.5

Source: Argaam, Tadawul, Company Reports. * Including additional net profit of SAR 0.12 per unit from the sale of a Real Estate Asset in the USA. Dividend Yields as of 15th September, 2022.

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KSA REITs Landscape

September 2022

REIT Apartments Offices Hotels Industrial Educational Warehouse Retail

Riyad REIT √ √ √ √ √ √

Jadwa REIT AlHaramain √ √

AlMa'ather REIT √ √ √ √ √

Musharaka REIT √ √ √

Mulkia - Gulf Real

Estate REIT √ √ √ √

SICO REIT √ √

AlAhli REIT 1 √ √ √

Derayah REIT √ √ √ √ √ √

Alinma Retail REIT √

Jadwa REIT Saudi √ √ √ √ √

AlJazira REIT √

Taleem REIT √

SEDCO CAPITAL REIT √ √ √ √

Al Rajhi REIT √ √ √ √

MEFIC REIT √ √ √ √

Bonyan REITS √ √ √ √

Alkhabeer REIT √ √ √ √ √

Real Estate Portfolio: sector and geographic distribution

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KSA REITs Landscape

September 2022

REIT Riyadh Jeddah Khobar Dammam Mecca Jubail Other

Riyad REIT ¹¹ ² ¹ ¹ Washington (1), Escolinas (1), Brussels-Belg

ium(1),Texas(2),Pennsylvania,California(1) , South Carolina(1) , Alabama(1) , Missouri(1)

Jadwa REIT AlHaramain 4

AlMa'ather REIT ¹³ ¹ Unaizah (1) , Sharjah

Musharaka REIT ⁴ ⁴ ¹ ¹ Al Kharj (1), Dubai (1)

Mulkia - Gulf Real Estate REIT ⁵ ³ ¹ Khamis Mushayt (1)

SICO REIT ¹ ³

AlAhli REIT 1 ¹ ³

Derayah REIT ¹¹ ³ ³ ⁷ ² Al-Hasa (1)

Alinma Retail REIT ¹ Hafr Al-Batin (1) Tabuk (1), Dawadmi (1)

Jadwa REIT Saudi ⁷ ¹ ¹

AlJazira REIT ¹

Taleem REIT ⁶ ¹

SEDCO REIT ⁸ ⁵ ¹ ⁶

Al Rajhi REIT ¹¹ ⁴ ¹ ¹ Al Kharj (1), Khamis Mushayt (1)

MEFIC REIT ³ ¹ ² ^{Dubai (1)}

Bonyan REITS ⁵ Dubai (1), Abha (1), Medina (2), Jazan (3)

Alkhabeer REIT ⁶ ⁵ ^{Tabuk (1)}

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KSA REITs Landscape

September 2022

KSA REITs continue to acquire new assets; commercial real estate prices fall

Driven by improved business prospects amid recovery from the pandemic and healthy economic growth, REITs continue to expand their portfolio. In the past two quarters, REITs have invested in multiple assets across different sectors. The total amount of investment done by KSA REITs to acquire new properties stood at SAR 2.3bn in H1-22. Given below are acquisitions done by Saudi REITs in H1-22.

Table 3: Expansion activities by KSA REITs

Additionally, REITs aim to continue to add more assets to their portfolio and have raised capital to support future acquisitions. For e.g. 1) SEDCO capital plans to add assets worth SAR 700mn in Riyadh and Jeddah funded by recently increased capital. 2) Riyad REIT signed an agreement with Riyad Bank to increase financing to SAR 665mn. 3) Jadwa Saudi REIT raised limit of existing facility with Banque Saudi Fransi by SAR 170mn to SAR 1.2bn.

Weaker commercial property prices provide scope for expansion: Saudi Arabia’s real estate price index increased 0.7% Y/Y in Q2-22. Whereas the prices of commercial real estates continued to fall (down 1.7% Y/Y in Q2-22). Thus, we believe that there remains scope for REITs with strong balance sheet and sufficient capital or ability to raise the capital are likely to take advantage of subdued prices of commercial real estate and expand their asset portfolios. However, higher interest rates may hamper expansion plans for REITs with heavy debt.

REIT Activity Amount Invested

Jadwa REIT Saudi Bought a leased land in Jeddah with an average acquisition yield of 7.18% SAR 500mn

SICO Saudi REIT Bought a commercial property in Riyadh. SAR 448mn

Mulkia REIT Signed an agreement to acquire Al Jadah mixed-use complex SAR 335mn Musharaka REIT Inked a binding MoU to acquire Verdun Tower in Riyadh, a commercial and administrative

building. SAR 235mn

Riyad REIT Fund A US-based logistics portfolio consisting of five class A, high-quality, income-generating, newly built properties. Expected average annual yield of 7.5% to Riyad REIT over a four-year

investment period. SAR 233mn

SEDCO Capital REIT Approved acquisition of Ajdan Entertainment Complex in Al-Khobar SAR 165mn Taleem REIT Fund Acquired a portfolio of four educational properties, reflecting an average yield of 8.4%. SAR 149mn Al Maather REIT Completed purchase Burjeel Hospital building in Sharjah, UAE. SAR 105mn

Al Rajhi REIT Acquired Oasis Mall in Al Kharj SAR 93mn

Bonyan REIT Purchased an office building in Riyadh SAR 75mn

Source: Argaam, Tadawul

Fig. 9: Real estate prices (Y/Y change)

Source: GASTAT, Aljazira Capital

Real estate price index

Commercial real estate prices Residential real estate prices 0.5%

-0.3%

0.2% 0.4% 0.5%

0.9% 0.4% 0.7%

-2.5%

-1.9%

-0.4% -0.5% -0.7% -0.7%

-1.7%

-1.5%

2.1%

0.5% 0.6% 0.8% 1.1%

1.7% 1.5% 1.9%

-3.0%

-1.5%

0.0%

1.5%

3.0%

Q3-20 Q4-20 Q1-21 Q2-21 Q3-21 Q4-21 Q1-22 Q2-22

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KSA REITs Landscape

September 2022

Increase in trade receivables outpaced growth in rental income; average receivable days increased

In H1-22, average trade receivable days (based on TTM rental income and trade receivable as of June 2022) for listed REITs in KSA increased to 137 from 131 in H1-21. Total receivables in the sector increased 25.5% Y/Y compared to a 15.4% Y/Y growth in rental income. The increase in receivable days was led by Jadwa Saudi REIT (123 receivable days in H1-22 vs. 47 in H1-21), while receivable days declined the most for MEFIC REIT (166 in H1-22 vs. 264 in H1-21). Taleem REIT (362 receivable days in H1-22 vs. 347 in H1-21) and Bonyan REIT (236 receivable days in H1-22 vs. 233 in H1-21) recorded highest receivable days.

Fig. 11: Most leveraged REITS

Source: Argaam, Tadawul, Aljazira Capital

Fig. 10: REITs with highest trade receivables days H1-22 vs. H1-21

Source: Tadawul, Argaam, Aljazira Capital

46.8%

44.6 % 44.3% 43.4% 43.4% 43.2%

40.9% 40.0%

34.9% 34.0 %

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

MUSHARAKA

REIT RIYAD REIT DERAYAH REIT SEDCO

CAPITAL REITMEFIC REIT MULKIA REIT Al Rajhi REIT ALKHABEER

REIT TALEEM REIT JADWA REIT ALHARAMAIN Total Debt / Total Assets

H1-22 H1-21 362

236 210

175 173 166 158 139 123 112 98 97

347

233

168

123

162

264

151 128

47

150

0

53 0

50 100 150 200 250 300 350 400

Taleem REIT Bonyan REIT Mulkia REIT AlAhli REIT 1 Riyad REIT MEFIC REIT Musharaka

REIT Derayah REIT Jadwa REIT Saudi SEDCO

Capital REIT Jadwa Al-

Haramain SICO Saudi REIT Fund

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14

KSA REITs Landscape

September 2022

Liquidity as a parameter

We analyzed activity, width, and changes in the ease of entering and exiting a trade during periods of illiquidity in the Saudi Arabian REIT market. We ranked the 17 listed REITs by the average turnover over the last 6 months to gauge the ability of stocks to absorb a large buy or sell order. AlJazira REIT is at the top, indicating good liquidity. Downside deviation measures the extent of drop in a REIT’s trading activity when the REIT market is witnessing a decline in liquidity. The lower the downward deviation, the lower will be the drop in the liquidity of a REIT when the market is witnessing a decline in trading activity. JADWA REIT Saudi Fund and Taleem REIT registered maximum deviation when trading in the REITs contracting market. Spread cost indicates how much one would pay to get in and out of a trade instantly. A lower spread percentage implies consensus in the market on price of a REIT. A higher spread price indicates an illiquid asset, as lower participation leads to inefficient price discovery and, therefore, trading costs will increase if a participant wants to exit or enter a trade quickly. This is because the market price would be farther from the closest price the counterparty would be willing to buy or sell at. Alahli REIT Fund and Taleem REIT recorded the highest spread cost, calculated as the ratio of spread cost (bid-ask) to price.

Most Active by Daily Turnover

REITs Average 6

M Turnover (SAR mn)

AL-JAZIRA RIET 6.60

RIYAD REIT 4.42

AL RAJHI REIT 3.30

ALINMA RETAIL REIT 3.28

DERAYAH REIT 3.26

ALKHABEER REIT 3.16

MUSHARAKA REIT 2.69

JADWA REIT SAUDI 2.64

SICO SAUDI REIT 2.61

SEDCO CAPITAL REIT 2.46

BONYAN REIT 2.22

TALEEM REIT 1.93

MULKIA GULF REIT 1.91

AL MAATHER REIT 1.67

MEFIC REIT 1.57

JADWA REIT ALHARAMAIN 1.52

ALAHLI REIT 1.51

Source: Bloomberg, Aljazira Capital

Source: Argaam, Aljazira Capital Research Source: Argaam, Aljazira Capital Research Source: Argaam, Aljazira Capital Research

Spread Cost

REITs Bid-Ask

Spread to Price

MUSHARAKA REIT 0.15

ALKHABEER REIT 0.17

MEFIC REIT 0.19

ALINMA RETAIL REIT 0.19

BONYAN REIT 0.19

AL RAJHI REIT 0.20

AL-JAZIRA RIET 0.21

DERAYAH REIT 0.21

SEDCO REIT 0.23

RIYAD REIT 0.25

ALAHLI REIT FUND 0.27

TALEEM REIT 0.30

Downside Turnover Deviation

REITs Downside

Deviation

AL RAJHI REIT 1.54

ALKHABEER REIT 1.73

ALINMA FUND 1.81

MEFIC REIT 1.82

SEDCO CAPITAL REIT FUND 1.83

BONYAN REIT 1.84

MUSHARAKA REIT FUND 1.85

AL-JAZIRA RIET 1.96

ALAHLI REIT FUND 1.99

DERAYAH REIT 2.05

RIYAD REIT FUND 2.13

TALEEM REIT 2.53

Fig. 12: Traded Value Averages (6M-22 vs. 6M-21) Table 4: Liquidity parameters

0.0 10.0 20.0 30.0 40.0 50.0 60.0

AL-JAZIRA RIET F RIYAD REITFUND ALKHABEER REIT DERAYAH REIT ALINMA REIT JADWA REIT SAUDI AL RAJHI REIT SEDCO CAPITAL RE MUSHARAKA REIT BONYAN REIT SICO SAUDI REIT TALEEM REIT JADWA REIT ALHAR ALAHLI REIT FUND AL MAATHER REIT MEFIC REIT MULKIA GULF REAL

6M-22 6M-21 2022 6M Average

4.3 3.7 3.4 3.3 3.2 2.8 2.8 2.3 2.2 2.2 2.1 1.7 1.3 1.3 1.2 1.1 1.1

51.9

6.7 3.2 4.5

32.2

4.7 6.9 5.9 5.9 3.9

26.9

6.8 18.1

3.9 7.1

25.0

2.2

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15

KSA REITs Landscape

September 2022

Dividend yields to improve but capped by higher interest rates; Bonyan, Riyad, AlMa’ather and SEDCO Capital REITs to generate high yields

The improvement in Tadawul-listed REITs earnings during H1-22 is expected to reflect in higher dividend yields.

Five REITs are expected to fetch lower dividend yield, while all other REITs are expected to deliver higher or same dividend yield in FY22 when compared with FY21. Bonyan and Riyad REIT are expected to deliver highest yield of 6.9% each. FY22 dividend yields for Al Maather and SEDCO REITs are estimated at 6.6% and 6.5%, respectively. On an average the sector’s dividend yield is expected at 5.2%% (at current market prices) in FY22 vis-à-vis 4.6% in FY21. However, average dividend yield would be around 100bps lower than pre-COVID level (FY19), as we believe impact of higher finance costs due to rising interest rates would limit the growth in dividend payments, in addition to lack full recovery until now.

Fig. 13: KSA REITs average dividend yield

Source: Tadawul, Aljazira Capital

Source: Aljazira Capital * Including additional net profit of SAR 0.12 per unit from the sale of a Real Estate Asset in the USA *As of 15/Sep/22

Below are expected dividend yields for REITs in FY22 in comparison with FY21. Bonyan, Riyad, AlMa’ather, and SEDCO REITs are expected to deliver dividend yield of more than or equal to 6.5%. Jadwa Al Harmain, AlJazira and MEFIC would be only REITs with dividend yields below 3.0%.

Out of the REITs observed, it is anticipated that 5 REITs out of 17 will yield less as of dividends by the end of 2022.

While AlInma REIT and Jadwa AlHaramain did not distribute in 2021, we anticipate that Jadwa AlHaramain will also not distribute while AlInma REIT yields 3.6% by end of 2022.

Table 5: REITs estimated dividend yield

REIT Name Dividend yield*

FY21 FY22E

Bonyan REIT 6.4% 6.9%

RIYAD REIT* 6.6% 6.9%*

AL Maather REIT 6.1% 6.6%

SEDCO CAPITAL REIT 6.1% 6.5%

MUSHARAKA REIT 6.4% 6.4%

Al Rajhi REIT 5.5% 6.2%

DERAYAH REIT 6.3% 6.1%

AlAhli REIT 1 6.2% 6.1%

TALEEM REIT 3.9% 5.9%

REIT Name Dividend yield*

FY21 FY22E

ALKHABEER REIT 6.5% 5.8%

SICO SAUDI REIT 2.1% 5.7%

MULKIA REIT 6.2% 5.5%

Jadwa REIT Saudi 5.2% 5.5%

ALINMA RETAIL REIT 0.0% 3.6%

MEFIC REIT 2.6% 2.6%

ALJAZIRA REIT 1.9% 2.1%

JADWA REIT ALHARAMAIN 0.0% 0.0%

6.3 %

3.9% 4.6%

5.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

FY19 FY20 FY21 FY22E

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16

KSA REITs Landscape

September 2022

Scoring mechanism

As of December 2021, total 17 REITs were listed on the Tadawul Index. Each REIT was tested on nine quantitative parameters, each parameter carrying a distinguished weight. The parameters were chosen based on two factors:

valuation attractiveness and operational efficiency.

Ranking Methodology:

• Price-to-FFO: The pricing attractiveness of a REIT was tested based on the ratio of its CMP to the funds it has generated for a given period (FFO). FFO is a measure of the cash generated by a REIT; companies engaged in real estate use FFO as an operating benchmark. A REIT trading at a lesser market price for a given FFO per share is preferred. Riyad REIT Fund is the most attractive fund in the sector from this perspective as it is trading at the lowest P/FFO of 11.0x.

• Implied Cap Rate: The implied cap rate indicates the yield of net operating income (NOI) produced at a certain share price. It is used as a benchmark for an investment decision, and also as a hurdle rate by a REIT manager to constitute a property portfolio. The REIT that generates the highest yield of NOI at its current market price is preferred. Bonyan REIT is the most attractive fund in the sector from this perspective due to its implied cap rate of 10.0%.

Valuation

Attractiveness Operational

Efficiency

Price/FFO Ranking:

Implied cap rate Ranking:

Expected Dividend yield Ranking:

Investor would prefer more liquid stocks as they provide flexibility to investors to get in and out of the stock at their will.

FFO payout ratio Ranking:

Asset growth Ranking:

Debt parameter Ranking:

Quality of contract Ranking:

This will test the pricing attractiveness of the REIT. It is an indication as to how many years it will take for REIT to earn enough to pay back what one pays as a price.

The REIT with lower ratio will be given the better ranking

This ratio represents the cap rate that would result in an NAV equal to REIT’s stock price.

Higher the ratio better the ranking

Investors will be enticed to deploy funds wherein higher dividend is expected on every riyal invested. Hence, higher expected dividend yield, better ranking

REIT with higher and consistent FFO payout ratio attracts higher investments.

Higher the ratio better the ranking

Higer ratio better ranking. Higher asset growth suggests better net operating income over the coming years

Lower the borrowing ratio and higher the coverage ratio better the ranking

Longer lease tenure suggest stable inflows through the years. Higher the tenure, better the ranking.

There are few funds which have executive bonds for most lease periods and these executive bonds raise the quality of contracts.

Liquidity Ranking:

Lease contract strength Ranking:

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KSA REITs Landscape

September 2022

• FFO pay-out ratio: The FFO payout ratio is calculated by taking a REIT’s current annual dividend rate and dividing it by its FFO per share. It is a useful metric for analyzing a REIT’s ability to cover its dividend payments. A payout ratio above 100% indicates that the REIT’s current dividend is higher than its cash income from operations, and the REIT may need to pull from its cash reserve to help cover the dividend. Although a payout ratio above 100% in the short term is not necessarily a concern, it is not sustainable in the long term; therefore, the REIT’s dividend payment plan may require adjustments. However, we preferred a REIT that tends to have a high and consistent payout ratio.

Thus, Alkhabeer REIT with a payout ratio of 164% has been given the highest ranking under this parameter.

• Expected Dividend Yield: REITs is an asset class that distributes almost all of its earnings in the form of dividends.

It is therefore imperative to evaluate the dividend yields of different REITs. The dividend yield is an estimate of the dividend-only return of a stock investment. Preference was given to the fund with the highest expected dividend yield.

In the current scenario, Bonyan and Riyad REITs scored the highest both with the highest expected yields of 6.9%.

• Asset Growth (Y/Y%): The funds invested in portfolios registering the highest asset growth on a Y/Y basis were preferred. Increase in asset size implies rise in net operating income, which eventually helps in generating better valuation. SEDCO REIT has been rated highest in this parameter due to its asset growth of 80.3% Y/Y.

• Debt parameter: As per regulations, REITs cannot borrow funds valuing more than 50% of its total assets. Hence, while determining the ranking, preference was given to funds that had not borrowed large sums and thus had scope for future expansion on the basis of available leverage. Additionally, a REIT’s historic ability to serve debt based on FY21 FFO coverage (FFO/finance cost) was also taken into account with a preference to REITs with higher coverage ratio, to give an edge to REITs that are able to service their debt better. Aljazira REIT with a debt-free balance sheet has been ranked the highest on this parameter. The larger the number scored, the more favorable a REIT’s debt profile is.

• Lease Contract Length: In an economy such as KSA, investors seek continued and sustainable returns from REIT asset classes. To offer such sustainability, it is important for REIT portfolios to include properties that have long lease impending contracts and where inflows are not an issue. Taleem and SICO Saudi are the REITs having longest outstanding lease tenure, hence given the highest rank in this bracket. We display the REITs with longer than average contract lengths with a “1” under its “Lease Contract Length” criteria.

• Quality of Contract: A few funds hold executive bonds for most lease periods; such bonds raise the quality of contracts. Musharaka, Alkhabeer, SICO Saudi, and Jadwa AlHarmain hold such executed contracts.

• Liquidity: We ranked the listed REITs by the average turnover over the last 6 months to gauge the ability of stocks to absorb a large buy or sell order. Aljazira REIT stood at the top of the table with highest average 6M turnover. We also took downside deviation and spread cost into account while ranking REITs on liquidity.

To evaluate the qualitative aspect of REITs, individual real estate REIT portfolios need to be understood. The REITs are judged on the basis of their concentration risk. Thus, it is imperative to identify and analyze the diversification of each REIT in terms of sectors as well as geography. In an ideal scenario, REITs with the most diverse portfolios are given the highest ranking, and those with extreme concentration in a particular sector or geography may not receive a high ranking.

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KSA REITs Landscape

September 2022

REITs Performance Scorecard and the Top 5

We evaluated REITs on 9 parameters as per the scoring mechanism mentioned earlier. Based on weighted ranking, Bonyan REIT, AlMa’ather REIT, Musharaka REIT, Taleem REIT, and Riyad REIT are our top 5 picks from the sector.

Weighted

Rank REITs Price/FFO Implied

Cap Rate

Expected dividend

yield

Payout FFO ratio

Asset growth (Y/Y %) Debt

parameter

Lease Contract

Length

Quality of

contract Liquidity

Weights ^10.0% ^15.0% ^30.0% ^5.0% ^5.0% ^10.0% ^10.0% ^5.0% ^10.0%

1 Bonyan REIT 13.6x 10.0% 6.9% 87.4% 0.4% 13.00 1 0 0

2 AlMa'ather REIT 13.8x 7.1% 6.6% 83.6% 11.1% 14.00 1 0 0

3 Musharaka REIT 17.8x 7.0% 6.4% 113.3% 25.3% 7.00 0 1 1

4 Taleem REIT 13.6x 7.0% 5.9% 66.8% 32.3% 15.25 0 0 0

5 Riyad REIT* 12.4x 6.5% 6.9%* 99.2% 19.8% 3.00 1 0 0

6 SEDCO REIT 20.2x 6.1% 6.5% 126.6% 80.3% 5.50 1 0 0

7 SICO SAUDI REIT 21.1x 6.4% 5.7% 45.5% 22.4% 9.75 1 1 1

8 Derayah REITS 20.1x 6.1% 6.1% 127.1% -1.4% 3.00 0 0 1

9 Al Rajhi REIT 16.6x 5.9% 6.2% 100.3% 3.3% 5.00 0 0 1

10 AlAhli REIT 1 15.5x 6.2% 6.1% 94.2% -0.1% 9.75 0 0 0

11 Mulkia REIT 17.4x 5.8% 5.5% 109.3% 31.6% 5.75 1 0 0

12 Alkhabeer REIT 25.9x 5.2% 5.8% 164.4% -4.3% 2.75 1 1 1

13 Jadwa Saudi REIT 22.3x 5.8% 5.5% 131.1% 11.6% 12.50 1 0 0

14 MEFIC REIT 41.8x 7.6% 2.6% 110.3% -1.7% 5.50 0 0 0

15 ALINMA RETAIL REIT NEG 4.3% 3.6% NM -2.9% 15.75 1 0 1

16 AlJazira REIT 59.0x 2.4% 2.1% 110.0% -0.6% 17.00 0 0 1

17 Jadwa AlHaramain NEG 0.7% 0.0% 0.0% -5.0% 7.00 1 1 0

Note: P/FFO, implied Cap on FY21 financials, expected dividend yield on closing price of September 15th * Including additional net profit of SAR 0.12 per unit from the sale of a Real Estate Asset in the USA

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KSA REITs Landscape

September 2022

REIT’s statistics

CMP (15^th Sep, 2022) SAR 10.08

Fund Size SAR 1,628.8mn

NAV/unit SAR 8.64

Management Fee 0.50 %

3M Average Turnover 1,721,696.61

FFO/unit 0.74

Dividend/Capital (%) 3.30 %

Price/FFO 13.6x

P/E 14.96

Total Revenue (FY21) SAR 78,149,618 Net Profit (FY21) SAR 70,588,037

Debt (FY21) SAR 389,414,424

Occupancy Rate (%) 90.3%

P/B 1.17

Market Value of Assets/Unit 10.76

• Closed ended - Shariah compliant

• Listing date: 25^th Jul 2018

• Dividend: Semi-Annual

• Fund Manager: Saudi Fransi Capital

• Major shareholder: Abdul Rahman Saad Al Rashid and sons Co.

• Foreign ownership: 0.31%

• 4^th largest fund by Market Cap

Bonyan REIT

Fund Outlook

BONYAN TASI

80 90 100 110 120 130

Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Sep-22

67%

21%

2% 9%

Retail Apartments Hotels Ofﬁces Medina Riyadh Jazan Dubai Abha

18%

19%

12 % 17%

35%

7.6%

4.5%

6.4% 6.9%

0.0%

2.0%

4.0%

6.0%

8.0%

FY19 FY20 FY21 FY22E

Fund performance (Rebased)

Real estate portfolio Geographic Distribution Dividend Yield (%)

Source: Bloomberg, Tadawul, Argaam, Aljazira Capital

Source: Bloomberg, Tadawul, Argaam, Aljazira Capital Source: Bloomberg, Tadawul, Argaam, Aljazira Capital Source: Bloomberg, Tadawul, Argaam, Aljazira Capital

Bonyan REIT has a diversified portfolio in terms of geography, while retail weighs higher in terms sectors with 67%

of the total assets from the sector. Resumption of commercial centers has helped the fund increase its rental income and reversal of impairments helped sharp net income growth in H1-22. It has the second lowest P/FFO of 13.6x in the sector. The implied cap rate of 10.0% generated by the fund is the best in the industry. Additionally, the fund is expected deliver the highest dividend yield of 6.9% in FY22.

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KSA REITs Landscape

September 2022

REIT’s statistics

CMP (15^th Sep, 2022) SAR 9.39

Fund Size SAR 613.7mn

NAV/unit SAR 8.28

Management Fee 0.5%

3M Average Turnover 841,487.79

FFO/unit 0.68

Dividend/Capital (%) 5.70%

Price/FFO 13.8x

P/E More than 50

Total Revenue (1H-22) SAR 31,166,885 Net Profit (1H-22) SAR 11,550,482

Debt (1H-22) SAR 209,664,178

Occupancy Rate (%) 99.3%

P/B 1.13

Market Value of Assets/Unit 9.57

• Closed ended - Shariah compliant

• Listing date: 22^nd Aug 2017

• Dividend: Annual

• Fund Manager: Osool & Bakheet Investment

• Major shareholder: Sahary Arabian Real Estate Co.

• Foreign ownership: 3%

• 13^th largest fund by Market Cap

AlMa’athar REIT

Fund Outlook

MAATHER TASI

80 90 100 110 120 130

Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Sep-22

7.1%

3.9%

6.1% 6.6%

0.0%

2.0%

4.0%

6.0%

8.0%

FY19 FY20 FY21 FY22E Fund performance (Rebased)

Real estate portfolio Geographic Distribution Dividend Yield (%)

Source: Bloomberg, Tadawul, Argaam, Aljazira Capital

Source: Bloomberg, Tadawul, Argaam, Aljazira Capital Source: Bloomberg, Tadawul, Argaam, Aljazira Capital Source: Bloomberg, Tadawul, Argaam, Aljazira Capital

AlMa’ather fund’s real estate assets are spread across different sectors mainly located in Riyadh. However, the fund recently expanded outside KSA with acquisition of a hospital asset in the UAE. AlMa’ather has 31% properties in office sector, the fund’s rental income is expected to improve gradually with economic activities picking up and foreign companies setting up offices in the Kingdom. The fund’s dividend yield is estimated to rise from 6.1% in FY21 to 6.6%

in FY22, third highest in the sector. Its P/FFO of 13.8x is one of the lowest in the sector. The fund’s implied cap rate of 7.1% is among the highest in the sector.

Ofﬁces Apartments

Warehouses Educational HotelsRetail

22%

16% 31%

10%

13%

8%

Riyadh Sharjah Unaizah Khobar

76%

16%

4% 5%