Published: March 23, 2015
The real estate company's CFO is keeping a careful eye on cash as the company takes its stock market listing from London back home to Dubai. By Tim Burke.
Damac Properties’ logo and its landmarks – imposing residential, retail and commercial buildings – are visible across much of Dubai. Nothing about them is run of the mill; the company’s website splits its portfolio into just two classes, premium and luxury. Akoya, for example, a project-in-progress about 15 minutes outside of the emirate, will include homes, a hotel, a golf course designed by Tiger Woods and “Dubai’s first rainforest”.
During the past 18 months international investors in the debt and equity markets have had the opportunity to buy into the potential of Damac’s work in Dubai and elsewhere (it has projects in several other Middle Eastern countries). In December 2013 the company listed global depositary receipts (GDRs) on the London Stock Exchange. The deal was the largest listing from a Middle Eastern company since that of DP World in 2007, raising about US$380mn and valuing Damac at US$2.65bn. A few months later the company made its debut in the Islamic capital markets, securing US$650mn with a sukuk that attracted orders of almost US$3bn.
Damac has now taken its stock and story back home. Last year it offered investors the chance to swap their GDRs for shares listed on the Dubai Financial Market. When the offer closed in January, holders of 96.8% of the receipts had accepted the offer. Damac has since delisted all GDRs from the London exchange through a compulsory squeeze-out purchase from the few investors who declined.
Such dealmaking has kept Adil Taqi, Damac’s chief financial officer, on his toes. Taqi joined the company as a general manager in late 2006, having started his career with Omani oil and gas company Petroleum Development Oman and then moved into banking. He left the group in 2011 to become chief executive of the Muriya Tourism Development Company in Oman before returning to Damac as CFO in 2013. He also now oversees business development for the company.
Speaking to EMEA Finance shortly after Damac joins the Dubai Financial Market, Taqi admits to a “virtual hangover” from celebrating the listing (“I don’t drink, that’s a metaphor”). But it will soon be back to the hard work, and the finance boss has his priorities in order.
“The most important job of a CFO of a property company is cash flow and managing the risk of the cash flow,” he says. “Quite frankly, with the sorts of margins we make, you can get a project or two wrong and it’s not going to break the bank. If you get the cash flow wrong – game over. Therefore managing the cash and the cash risk, optimising the capital structure and the cost of raising money, that’s where you impart a lot of value.”
Time to look beyond banks
Real estate in the UAE has seen ups, downs and ups again. When Taqi joined Damac he found a company riding high on the good times as real-estate prices rocketed. Holding on during that ride might sound like a breeze, but Taqi says it presented its own problems.
“The company was experiencing growth on a daily basis,” he says. “To manage the growth at that pace is quite challenging. You’re always playing catch-up on just about everything – on customer service, on construction, on finance and IT. The growth was just phenomenal, and the company kept investing in the infrastructure to be able to cope with that.”
The global financial crisis and bursting of Dubai’s property bubble put an end to that kind of growth. Rising real-estate prices could never have continued indefinitely, Taqi says today, but that knowledge didn’t make handling the crash any easier.
“Everybody knew that what was happening at the time in Dubai could not go on forever, but it was very difficult to bet when that was going to slow down or even stop,” he says. “When the crisis hit you have, in relative terms, all this over-capacity across the board, and you have to be very, very careful as to how you handle that downturn such that you don’t destroy the basic engine of the company – which was the brand, the sales, the external recognition, all of those great things.”
Taqi says it had been clear to him since joining Damac that the company needed to diversify its funding base. He’d come to the job from banking and was naturally conservative (“Banking isn’t the most adventurous industry in the world”), so wanted Damac to tap new sources of capital and to be more careful with its cash. The slump in 2008 and 2009 proved the urgency of that strategy.
“When we had the crisis, we had this fantastic story and a fantastic company but no one in the external world with any sizeable and sensible amount of capital either understood us or believed us – or maybe a combination,” Taqi says. “At that time we as a management team and my personal agenda was to diversify the investor base. We said we were too big to be dependent on the moods of a few corporate bankers that worked in a single economy that was exposed to real estate.
If you look at where we are today, we stuck to the course. From an investor and funding base point of view we’re quite a diversified company.”
Back out or stick with it
The debt market wasn’t developed enough for Damac’s needs then, Taqi says – to an extent, he adds, it still isn’t – and so the equity market was the preferred source of new capital. The Damac team planned to take the company public in 2008, but hardly had a chance to meet investors before the collapse of Lehman Brothers rocked financial markets. “I’ve never seen appointments getting cancelled as fast,” Taqi recalls. “The rest is history.”
The deal died, but the drive didn’t. “We never lost the desire, ambition or objective [to list the company],” Taqi adds. “After the crisis I think we were a more convincing story. When we had held meetings the one criticism for which we had no answer – other than ‘trust us, guys’ – was about our ability to deal with a down market.”
The London listing showed that Middle Eastern companies remained an attractive proposition in the global equity markets. But the offering priced at US$12.25 per GDR, bang at the bottom of the range. Had the listing priced at the top – US$17.25 – the company would have been valued at US$3.73bn rather than US$2.65bn.
Even before the final price was set, Taqi, by then CFO, was unhappy with the range. “We seriously contemplated pulling the deal,” he says. “US$2.7bn – seriously?” Selling GDRs instead of having a premium listing allowed the selling shareholders, companies controlled by Damac chairman Hussain Sajwani, to sell less than 15% of the company. GDRs are “not the best-liked instrument in the world”, Taqi says. “But we did it for a reason.”
Moving from the London Stock Exchange to the Dubai Financial Market is “an obvious development to the growth of the company”, Taqi says. “Our assets are here, our revenues are from Dubai, we’re a household name in Dubai – and most of our investors would invest in Dubai anyway,” he adds. “GDRs are a great solution for where people don’t want to go in [the issuer’s] jurisdiction, but virtually all our investors are investors in other [companies] in Dubai.”
Last year saw an upturn in regional listings, although stock exchanges in the Middle East have seen prices drop as worries mount over a slump in the price of oil. Damac’s shares listed in Dubai at AED2.79 (about US$0.76) each in January and have risen as high as AED3.38 since. “Over the long term, as we build, if you look at the next 12, 18, 24 months I think our shareholders should be very happy,” Taqi says.
The CFO’s focus on cash will remain a central part of the plan – institutional investors want to see a company that can manage cash properly, regardless of where it’s listed, Taqi believes. When he speaks with EMEA Finance Damac still has US$400mn of the US$650mn raised from its sukuk in cash. “I can be criticised for carrying a negative carry on that money, but I’d rather have that criticism than be unable to fund growing opportunities,” Taqi says.
Indeed, the company’s 2014 results showed that Damac had amassed a total cash pile of almost US$1.8bn. “We understand that from a narrow treasury point of view that’s going to cost us some money, but given the operating margins we generate I think that money is very well invested if you keep it on the balance sheet for a couple of years and then time your opportunities to buy land and go into deals,” Taqi argues.
“We know our business – the development side of real estate is cyclical anywhere in the world. Having a good amount of liquidity on the balance sheet gives you advantages as a company and a shareholder of a company that you cannot catch by running your treasury very tight.”
Damac has made it through tough times before. If Dubai real estate prices fall this year – analysts at real estate company JLL say residential prices increased at “an unsustainable level” in recent years but stabilised the second half of 2014 – shareholders could yet be thankful for the CFO’s conservative approach to running the company’s finances.