Union Properties EGYPTUAE Real Estate Sector

Initiation of Coverage March 28, 2007

Capitalizing on a Strong Development Portfolio

• Union Properties serves as one of the most prominent private sector players in STRONG BUY the real estate industry in Dubai. Traditionally focusing on rental properties, the company entered the sales market with the launch of the Green Commu- Target Price AED4.45 nity development in 2003. The company currently has an exciting development portfolio that is expected to add ca. AED11 billion to the company’s top Recent Price AED3.13 line between 2007 and 2010. Upside Potential 42% • Union Properties’ ongoing projects can be classified into three categories, namely the villa-focused Green Community West, DIFC-based projects and the Investment Grade Growth MotorCity development. The latter ‘destination development’ is focused around automobiles and racing and is divided into three components, namely Previous Target Price N/A residential developments, the Business Park and motor sports related facilities. The residential developments within MotorCity consist of the villa-based Green Share Data Community MotorCity and the UPTOWN MotorCity development featuring low- rise apartments. The company’s property portfolio thus lays strong emphasis Exchange Rate UAE AED3.67/1US$ on villa-focused and DIFC-based developments, with four of the five residen- Reuters Code UPRO.DU tial developments belonging to these segments. This composition stems from Most Recent Shares (mn) 2,226 the management’s view that the high-rise luxury apartment segment in Dubai is headed for saturation and that the DIFC district benefits from demand and Par Value/share AED 1 supply dynamics distinct from those characterizing the residential market in Financial Year Ending December the rest of Dubai. Mkt. Cap (AED million) 6,967 • The company has also pursued a strategy of forward and backward vertical integration to control its cost structure and to add value to its developments. Free Float 51.1% Mechanical, Engineering and Plumbing contractor Thermo serves as the most notable subsidiary in this regard, accounting for an average of ca. 69% of the 52 Wk. Low – High (AED) 2.83-5.03 cumulative revenues earned by Union Properties in the 2002-2006 period.

• In accordance with international accounting rules, Union Properties utilizes the complete contract method to report revenues, as a result of which proceeds Shareholders from the sale of its projects are reported upon the handover of associated Emirates Bank 48.9% developments in 2009 and 2010. Resultantly, we expect the net income for FY07 to remain inline with that witnessed in FY06, with revenues from Thermo Free Float (Estimate) 51.1% expected to continue to form the bulk Union Properties’ top line in 2007 and 2008. Recognition of revenues in 2009 from sale of the ongoing developments, on the other hand, is expected to significantly boost the company’s top Stock Performance (AED) line and bottom line by ca. 332% and ca. 297% over corresponding figures for 2008 to AED10.6 billion and AED1.87 billion respectively. • We have concluded a DCF value for Union Properties of AED4.45/share. With 5.00 the company currently trading at AED3.13/share, this affords investors 42% upside potential. We accordingly initiate coverage with a Strong Buy recommendation. 4.00 FY Ending December 2005a 2006e 2007f 2008f 2009f Revenues (AED mn) 1,388 2,525 2,769 2,467 10,648 Growth 143.6% 81.9% 9.7% -10.9% 331.7% 3.00 EBITDA margin 18.9% 14.9% 21.0% 11.1% 17.3%

Net Income (AED mn) 585 614 615 472 1,874

EPS (AED) 0.26 0.28 0.28 0.21 0.84 2.00 EPS Growth 293.9% 5.0% 0.1% -23.2% 296.9% Mar-06 Jul-06 Nov-06 Mar-07 DPS (AED) 0.00 0.00 0.00 0.00 0.00 BVPS (AED) 1.75 2.05 2.32 2.54 3.38 Prime Group Research Department P/E x 11.92 11.35 11.33 14.76 3.72 Dividend Yield 0.00% 0.00% 0.00% 0.00% 0.00% [email protected] P/BV x 1.79 1.53 1.35 1.23 0.93 Tel +971-2-6910800 EV/Sales x 4.71 3.29 3.31 4.14 0.64 Fax +971-2-6670907 EV/EBITDA x 21.59 22.01 15.78 37.22 3.70

PRIME EGYPT SALES TEAM PRIME UAE SALES TEAM Yasmine Guindy +202-300-5611 [email protected] Chahir Hosni +971-2-6910707 [email protected] Mohamed Fouad +202-300-5615 [email protected] Ahmad Hamdy +971-2-6910701 [email protected] Tarek Khayyat +202-300-5613 [email protected] Union Properties UAE

OPERATIONAL ANALYSIS

Evolving with the Real Estate Sector

A part of the Emirates Banking Group, Union Properties serves as one of the most prominent private sector players in the real estate industry in Dubai. Originally setup as a division of Emirates Bank, Un- Established in 1987 ion Properties was established as a separate company in 1987 and was eventually floated as a public

company in 1993. With a ca. 49% stake, the bank continues to act as the single largest shareholder of

the property developer.

In line with the trend witnessed in the sector, Union Properties has witnessed tremendous growth over

the years, with its net asset base increasing from AED1 million in 1987 to AED4.56 billion in 2006. The Current development company has traditionally focused on the development of properties for rent, with income from this portfolio expected to add portfolio accounting for ca. 45% of the cumulative gross profit earned by Union Properties during the AED11 billion to the com- 2002-2006 period. However, the makeup of the revenue stream is set to change dramatically in the pany’s top line between coming years with the company’s current development portfolio expected to add ca. AED11 billion to 2007 and 2010 the top line between 2007 and 2010, accounting for ca. 47% of cumulative revenues and ca. 63% of

the gross profit expected to be earned during the said period.

The company has also pursued a strategy of forward and backward vertical integration to control its

cost structure and to add value to its developments. The acquisition of a majority stake in mechanical, Forward and backward electrical and plumbing contracting company Thermo L.L.C. in 1996 acts as the most prominent exam- integration pursued to ple of the former. Wholly owned by Union Properties now, Thermo has also served as the largest con- control costs and add tributor to the property developer’s top line, constituting an average of ca. 69% of the cumulative value revenues earned by Union Properties in the 2002-2006 period. Notable examples of forward integra-

tion, on the other hand, include establishment of an interior design and fitout branch (The Fitout), and

a health and fitness services company titled Nautilus. Given that Union Properties’ ongoing projects are

expected to generate healthy cash flows for the company over the coming years, we expect the com-

pany to continue value addition and diversification through further vertical integration.

Strong Emphasis on Villa-focused and DIFC-based Developments

The composition of Union Properties’ current development portfolio is dictated by its management’s Management expects the view that the high-rise luxury apartment segment in Dubai is headed for saturation. Moreover, the high-rise luxury apartment management feels that the DIFC district benefits from demand and supply dynamics distinct from segment in Dubai is those characterizing the residential market in the rest of Dubai. This assertion is based on the fact that headed for saturation increasing acceptance of DIFC as a regional base by international players has made it one of the most sought after destinations in the Emirate. Resultantly, the only high-rise luxury apartment offerings by the company are located in the in the financial district. Furthermore, out of the total projected revenues of ca. AED11 billion from ongoing developments, ca. 48% are expected to be generated from the sale of a villa-focused development (Green Community MotorCity) and two DIFC-based projects (Index Tower and Limestone House).

It would be pertinent to mention here that UPTOWN MotorCity, the only apartments focused development in the company’s current portfolio, is designed as a community of low-rise apartments. This is expected to differentiate it from the majority of other ongoing developments in Dubai.

Branding

Our discussion with the management indicates that Union Properties is pursuing a strategy of branding Branding expected to help its developments. For example, the company has launched three projects under the ‘Green Community’ reduce costs and establish brand to date, with all three developments designed as villa-focused communities. Two key benefits positive expectations on expected to be generated from this policy are (1) a reduction in cost in the planning/design phase of part of buyers subsequent projects and (2) establishment of positive expectations on the part of buyer to facilitate the sales process. The Green Community West development serves as a good example in this regard, with the success of the adjacent Green Community aiding the company in achieving a rapid sale of the project, despite its location some distance away from the city center. Moreover, our discussion with the management indicates that feedback from the original Green Community allowed Union Properties to improve on the design of the residential units in Green Community West. The addition of bungalows in the latter development serves as a notable example in this regard.

Branding also expected to The branding of its developments is likely to aid Union Properties in expanding its portfolio, both within help in expansion within and outside the UAE. In fact, our discussion with the management suggested that the company has and outside UAE already started receiving interest from some foreign authorities concerning the establishment of projects similar to the company’s automobile focused MotorCity development.

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Rental Portfolio

As mentioned earlier, Union Properties has traditionally focused on leasing properties, with income from its rental portfolio constituting an average of ca. 14% of cumulative revenues earned by the company over the 2002-2006 period. The high margin yielded by the leasing process has translated into a Rental income constituted significantly higher contribution to the company’s bottom line, with rental income comprising an aver- ca. 45% of cumulative age of ca. 45% of the cumulative gross profit earned during the 2002-2006 period. However, as indi- gross profits between cated in the chart below, the contribution of rental income to gross profit has declined significantly 2002 and 2006 from 2005 as a result of a significant boost in the top line from alternative sources, particularly property sales and contracting revenues from Thermo. We expect this trend to continue in the foreseeable future, especially in view of the fact that the company’s current development portfolio is scheduled for deliver over the next few years.

Contribution of Rental Income to Union Properties’ Gross Profit

10 0 %

80%

60%

40%

20%

0% 2002a 2003a 2004a 2005a 2006a 2007f

Rental P o rtfo lio Other

Graph 1 Source: Union Properties, Prime Estimates

Residential Properties

Residential units form the bulk of Union Properties’ rental portfolio, with apartments forming the larg- Residential properties est component within the segment. Our discussion with management has indicated that the company form bulk of rental portfo- is following a policy of building a long-term relationship with its tenants. Resultantly, while the com- lio pany has enjoyed a healthy rise in rental income from its portfolio over the past few years, the

Residential Rental Portfolio Description

Apartments

Creekside Residence 11 floors of terraced apartments with 10,000 sq. ft. retail area

Musalla Tower 50 luxury apartments in the residential tower of the development

Net.Community 180 luxury studio, 1 bedroom and 2 bedroom apartments

Opal Building Luxury apartment building located in Bur Dubai

The Tower Located along Sh. Zayed Road with 372 apartments

Union Tower 29 storey tower located along Sh. Zayed Road

Villas

Al Loze Villas Compound of 25 double storey villas

Al Satwa Villas 20 villas located off Dhiyafa street

Al Wasl Villas Compound of 12 3 and 4 bedroom villas

Jumeirah Park Villas 10 Spanish styled villas

Nadd Rashid Villas Two compounds of 8 villas each

Radio Tower Villas Compound of 10 3 bedroom villas

Table 1 Source: Union Properties

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increase has not been as significant as that seen in the industry as a whole (see “Healthy Growth in Rental Income Expected to Continue” below). Given the goodwill generated among tenants by the adoption of the abovementioned strategy, coupled with the prevailing shortage of residential supply in Dubai, we expect Union Properties’ residential portfolio to continue to witness 100% occupancy over the foreseeable future.

Commercial Properties

In addition to the abovementioned residential portfolio, Union Properties owns a commercial property portfolio comprised of office space, retail space and warehousing units. Office space being offered by Commercial property port- the company for rent includes the commercial tower in the Musalla Towers & Mall development, featur- folio includes office space, ing a lettable area of over 130,000 square feet, and ca. 100,000 square feet of commercial space in retail space and ware- Union House. Notable retail offerings, on the other hand, include 400,000 square feet of net lettable housing units space in the UPTOWN Mirdiff shopping center and ’The Market’ Shopping Center in the Green Commu-

nity, consisting of 86 retail units occupied by 54 retailers. The Musalla Tower & Mall development also

includes a 60,000 square foot shopping mall built over three floors. Lastly, the Union Properties Cold-

store & Warehousing facility offers 7,000 metric tons of refrigerated space and a further 15,000 square

meters of dry warehousing units.

One notable product offered by Union Properties within the office space sector is that of serviced of-

fices. Tenants are provided fully equipped office offices and meeting rooms for as short a term as a

single day as a convenient and cost effective alternative to traditional long term contracts. This service

is provided by the company in collaboration with the Regus Group, the world’s largest provider of out-

sourced workplaces.

Healthy Growth in Rental Income Expected to Continue

As mentioned earlier, the company’s rental income has witnessed healthy growth over the past few Future growth in rental years, albeit at a slower pace than that witnessed in the industry as a whole. We expect this trend to income to be driven pri- continue and forecast modest growth for 2007 and 2008, followed by a boost in rental income in 2009 marily by additions in due to a sizable increase in the commercial portfolio of the company upon completion of various pro- portfolio jects currently underway. The most notable addition in this regard is expected from the retail component within the MotorCity development. Thus, future growth in rental income is expected to be driven primarily by an increase in the portfolio size rather than hikes in rent. That said, our expectation of sustained residential undersupply in 2007 and near balancing in 2008 should ensure continuation of healthy returns from the company’s current portfolio as well.

Percentage Change in Rental Income

2003 2004 2005 2006

Rental Income (AED ‘000) 82,791 92,439 109,691 140,641

Annual Increase in Rental Income 13.06% 11.65% 18.66% 28.22%

Table 2 Source: Union Properties

Forecasted Increase in Rental Income (AED ‘000)

250,000

200,000

150,000

100,000

50,000

- 2006a 2007f 2008f 2009f

Graph 2 Source: Union Properties, Prime Estimates

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Development Portfolio

Union Properties entered the property sales market with the development of its now complete Green Community and UPTOWN Mirdiff projects. The company currently has a strong pipeline of projects Development portfolio scheduled for delivery over the 2008 to 2010 period. The ongoing projects can be classified into three estimated at a value of categories, namely Green Community West, DIFC-based projects and the MotorCity development. With AED10 billion an estimated value of AED10 billion, the ongoing development portfolio is forecasted to sizably expand

the company’s balance sheet over the next few years. The following sections provide an overview of

the completed, as well as ongoing, developments by Union Properties:

Green Community

Located in the Dubai Investments Park, the Green Community represents the first development to be

completed within Union Properties’ portfolio. The project was developed through Properties Invest- The first development to ments LLC, a joint venture company between Union Properties and Dubai Investments. The latter is be completed within com- responsible for the development of the AED1.5 billion Dubai Investments Park. Spread over a total pany’s portfolio area of 3,200 hectares, the Park is designed as a mixed use business, industrial, residential and recrea-

tional project. Development of the Green Community through Properties Investments LLC thus facili-

tated access to the land upon which the project was eventually built.

It would be pertinent to mention here that despite holding a 50% stake in Properties Investments,

Union Properties continues to recognize income from the joint venture under the equity method. Thus,

all income from the subsidiary is reported as a single line item on Union Properties’ Income Statement.

Designed to offer a “life outside the city”, the Green Community is spread over an area of 67 hectares Contributed AED62.7 and features 395 villas and 272 apartments. The units were offered on a 90-year lease basis and were million to Union Proper- handed over to residents over the 2004-2005 period. Union Properties’ half of net income from the sale ties’ bottom line over of the residential units was thus reported during the associated period, adding a cumulative AED62.7 2004 and 2005 million to the company’s bottom line over 2004 and 2005.

The Green Community also features a 165 room, 4-star hotel. Titled Courtyard by Marriott Dubai Green

Community, the hotel also offers facilities for meeting, conference and banqueting events with a ca- Development consists of a pacity to cater for 500 guests. The hotel is also connected to the Marriott Executive Apartments, com- 4-star hotel and a shop- prised of 43 fully furnished 1 & 2 bedroom services apartments. Additionally, as mentioned earlier, the ping center Green Community consists of a shopping center titled ’The Market’. Lastly, the development includes a

small office space component, with Union Properties recently having shifted its head quarters from

Union House in Deira to the Green Community.

Union Properties made a final residential offering at the Green Community in the form of Lake Apart-

ments in 2005. The 52-unit block was quickly sold after being offered to investors and was completed Final residential offering early this year. Resultantly, Union Properties’ share of net income from the sale of the residential units made in 2005 will be reported in the current year. Our discussion with the management indicates that that sale of

apartments generated total revenues of AED45 million. Union Properties’ share of income from the sale

of Lake Apartments is anticipated to be AED10 million.

UPTOWN Mirdiff

UPTOWN Mirdiff was the second development completed by Union Properties and the first wholly First wholly owned project owned project of the company. Built at a total cost of AED700 million, the development features low- of Union Properties rise apartment buildings, housing 396 studios, 1 and 2 bedroom units, and 147 townhouses. The phased delivery of residential units in the community was primarily spread over the 2005-2006 period, with a limited number of units scheduled for handover in the first quarter of 2007. The proceeds from the sale of the project added cumulative revenues of AED740 million over the 2005-2006 period, with another ca. AED100 million expected to be added in the current year.

As indicated earlier UPTOWN Mirdiff also includes one of the largest retail offering by Union Properties, with the shopping center in the development encompassing 400,000 square feet of retail space.

Green Community West

All residential units al- The success of the Green Community spurred Union Properties to launch the Green Community West ready sold development in 2005. Located adjacent to the original Green Community, Green Community West is also being development through Properties Investments. Expected to be built at a cost of ca. AED1.4 billion, the development features 281 villas, 299 bungalows and 256 1 & 2 bedroom apartments. All residential units in Green Community West have already been sold and are scheduled for delivery in

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2008. Our discussion with the management suggests an average selling price of AED2.6 million for villas and bungalows and AED893,000 for the apartments. Resultantly, we expect sales of the residen- Sale proceeds expected to tial units in the development to translate into total revenues of AED1.74 billion, with ca. 87% of the translate into revenues of total to be generated through the sale of villas. Our discussion with the management also indicates AED1.74 billion that 40% of the proceeds associated with the sale of the development have already been collected, while the remaining 60% is due in the form of a final installment upon delivery of the units, translating into a hefty cash inflow in 2008.

Average Prices of Residential Units in Green Community West

Unit Type Average Price (AED ‘000)

Villas & Bungalows 2,607

Apartments 893

Table 3 Source: Prime Estimates

As mentioned earlier, the Green Community West development is an important example of the benefits yielded by the strategy of brand development adopted by Union Properties. In addition to reducing Green Community West costs in the design and planning phase, the commonalities between the original Green Community and highlights benefits of Green Community West are expected to have been instrumental in facilitating the sales process for the branding strategy adopted latter project. Moreover, our discussion with the management indicates that secondary market prices by the company for Green Community West have appreciated 40-60% over the launch prices. This increase can partly be attributed to the confidence generated among investors from the quality of development in the Green Community.

Developments in the DIFC

Union Properties launched two developments in the prestigious DIFC district in 2006, titled Index Combined value estimated Tower and Limestone House. The combined value of the projects is estimated at ca. US$1 billion, with at ca. US$1 billion both projects slated for handover in 2009.

The 328 meter Index Tower is designed as a mixed-use development by world renowned architects Foster & Partners. Upon completion, the tower will be composed of offices on 25 floors, luxury apart- Index Tower consists of ments and penthouses on 47 floors and exclusive retail outlets on three levels. In terms of residential residential, commercial offering, the building will consist of a total of 520 apartments, including duplex and triplex penthouses and retail space on seven floors. The commercial space, on the other hand, will feature “large, column free, connect- able floors” enabling customization of interiors to match the requirements of individual companies. The Index Tower is forecasted to add ca. 538,000 sq. ft. to the office space supply in Dubai, with Un- ion Properties expecting multinational corporations to serve as the primary target market for the offering. Union Properties is currently offering residential apartments in the Index Tower for sale, with commercial and retail sales expected to commence later this year.

The Limestone House, on the other hand, is composed of 323 residential units spanning over 14 floors. Limestone House develop- Being designed by award-winning architects, Gensler, the Limestone House offers larger apartment ment includes a 5-star sizes than the Index Tower, while simultaneously benefiting from higher per square foot prices. The hotel Limestone House development is also scheduled to include a 5-star Ritz Carlton Hotel, expected to be built at a cost of AED900 million.

Price Summary (Index Tower)

Unit Size Starting from (AED per sq. ft.)

One Bed 797-1,033 1,700

Two Bed 1,496-2,551 1,579

Three Bed 2,702-3,100 1,744

Duplex & Triplex 7,266-11065 1,840

Table 4 Source: Union Properties

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Price Summary (Limestone House)

Unit Size Starting from (AED per sq. ft.)

One Bed 1,119-1,561 1,800

Two Bed 1,356-2,368 1,721

Three Bed 1,894-4,715 1,669

Four Bed 4,004-5,705 1,664 Table 5 Source: Union Properties

Sales and Payment Schedule

We expect Union Properties to successfully sell all residential and commercial units in the Index Tower All residential and com- and Limestone House prior to handover in 2009. This assertion is supported by the management’s mercial space expected to decision to lay stronger emphasis on the marketing of developments other than those based in the be sold prior to handover DIFC, given that it expects to face relatively few hurdles in the successful sale of the Index Tower and Limestone House.

Our discussion with management suggests an average selling price of AED2.7 million for the residential units in the Index Tower and AED3.6 million for apartments in the Limestone House (details for individ- Total revenues from two ual unit types is provided in the tables below). Additionally, we anticipate the sale of commercial space projects estimated at in the Index Tower to register an average price of AED2,000 per square foot. Resultantly, the two AED3.8 billion projects are expected to generate combined revenues of ca. AED3.8 billion, to be recorded on Union Properties’ income statement in 2009 upon handover of the two projects.

Average Prices of Residential Units in Index Tower

Unit Average Price (AED ‘000)

One Bed 1,500

Two Bed 3,000

Three Bed 5,000

Duplex & Triplex 15,700

Table 6 Source: Prime Estimates

Average Prices of Residential Units in Limestone House

Unit Average Price (AED ‘000)

One Bed 2,400

Two Bed 3,000

Three Bed 4,700

Four Bed 7,500

Table 7 Source: Prime Estimates

It would be pertinent to mention here that in addition to generating strong sales, the two DIFC-based projects also offer the benefit of a more favorable payment schedule than that of other developments. Favorable payment sched- While the installment plans for Green Community West and developments within the MotorCity project ules for DIFC-based pro- require a payment of 40% of the sales proceeds prior to handover of the development (see ‘Green jects in comparison to Community West’ on page 5 and ‘MotorCity’ on page 8) , the DIFC-based projects require the payment other developments of a much higher 65% of the total, with only 35% due as the final installment. The stricter terms can be explained by the reduced likelihood of delays in delivery of the projects due to harsh penalties im- posed by the DIFC in such a scenario, as well as the strong demand for developments within the district. Our discussion with the management also revealed that ca. 70% of the total construction cost of the two projects is expected to have been incurred by the end of the current year.

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Payment Schedules for Index Tower and Limestone House

Installment 1 (on Booking) 15%

1st March 2007 5%

1st June 2007 5%

1st Sept 2007 5%

1st Dec 2007 10%

1st March 2008 10% 1st June 2008 15%

On Handover 35%

Table 8 Source: Union Properties

MotorCity

A ‘destination development’ focused around automobiles and racing, the MotorCity can broadly be Expected to be single divided into three components: residential developments, the Business Park and motor sports related largest contributor to the facilities. The latter includes the region’s first fully integrated motor sports facility, the Dubai Auto- top line between 2007 drome, completed in 2004 at a cost of AED380 million. Given the large size of the MotorCity develop- and 2010 ment, we expect it to remain a key focus of the management’s attention and to serve as the single largest contributor to the company’s top-line over the 2007-2010 period.

Percentage of 2007-2010 Cumulative Revenues Formed by MotorCity

MotorCity Other

Graph 3 Source: Prime Estimates

Green Community MotorCity

The residential development within MotorCity is further divided into two components, namely Green Expected to yield the Community MotorCity and UPTOWN MotorCity. As the name indicates, the former is based on the pat- highest margin among all tern of the existing Green Community and will feature 127 bungalows and villas, 159 townhouses and current developments 160 terraced apartments. The development will also include 21,528 square feet of commercial space, expected to be utilized primarily for retail purposes. Scheduled for handover in two years, we expect Green Community MotorCity to add ca. AED1.4 billion to Union Properties’ revenues in 2009. Revenues from the sale of villas, bungalows and townhouses are anticipated to account for ca. 70% of this total. Moreover, our discussion with the management suggests that the Green Community MotorCity is expected to yield the highest margins among all of the company’s ongoing projects.

Average Prices of Residential Units in Green Community MotorCity

Unit Average Price (AED ‘000)

Villas and Bungalows 3,800

Townhouses 3,200

Terraced Apartments 2,500

Table 9 Source: Prime Estimates

Union Properties recently commenced the sales process of residential units within Green Community Development expected to MotorCity. Given the reputation of existing Green Community development, coupled with the high be sold off quickly demand for villas and townhouses in Dubai, we feel the company is unlikely to face difficulties in

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successfully selling the project. In fact, while the official launch of the development was planned for 27 March 2007, strong response from buyers has led the company to cancel it. Investors will now be re- quired to directly submit registration forms by 29 March, with successful applicants to be informed by the company accordingly. Thus, this project is also expected to be completely sold well before completion in 2009.

Bulk of construction cost In order to estimate cash flows from the development, we have utilized the payment scheduled re- to be incurred in 2007 and cently revealed by the company. We also anticipate that the bulk of the construction cost will be in- 2008 curred in 2007 and 2008.

Payment Schedules for Green Community MotorCity 1st Installment (Due on Booking) 10%

2nd Installment (1st July 2007) 10%

3rd Installment (2nd January 2008) 10%

4th Installment (1st July 2008) 10%

Balance (Due on Handover) 60%

Table 10 Source: Union Properties

UPTOWN MotorCity

Mimicking the UPTOWN Mirdiff development, UPTOWN MotorCity is designed as community of low rise Largest residential compo- apartments. With ca. 3,000 residential units scheduled for delivery, the development represents the nent of Union Properties’ single largest residential component within Union Properties’ portfolio. Given the size of UPTOWN Mo- portfolio torCity, we assume that the delivery of the residential units will be split over 2009 and 2010. Moreover, we also expect the size of the development to lead to a relatively slow pace of sales in the initial period, with the process gathering momentum as the project nears handover. That said, it is important to emphasize that we anticipate 100% occupancy by the completion of the project. This assertion is supported by the management’s indication that the investor response has been stronger than anticipated for the units recently released for sale within the development.

Average Prices and Sizes of Residential Units in UPTOWN MotorCity

Unit Average Price (AED ‘000) Average Size (Sq. Ft.)

Studio Apartments 525,000 675 1 BR Apartments 880,000 1,134

2 BR Apartments 1,300 1,697

3 BR Apartments 1,800 2,350 Townhouses 3,400 4,600

Table 11 Source: Prime Estimates, Union Properties

The management of Union Properties terms the UPTOWN brand as a ‘4-star’ development, an asser- Studios and 1 bedroom tion supported by the data presented in the table above. The UPTOWN MotorCity development also apartments constitute benefits from relatively large apartment sizes, further lowering the per square foot price of the residen- 53% of total residential tial units. Moreover, studios and 1 bedroom apartments, which together form the most sought after offering segment within the market for apartments in Dubai, constitute 53% of the residential offering in the development.

Studios & 1 BR Apartments as Percentage of Total Apartments

Studios & 1 BR Apartments Ot he rs

Graph 4 Source: Union Properties

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We anticipate that sales proceeds from UPTOWN MotorCity will add ca. AED3.6 billion to Union Proper- Cumulative revenues of ties’ cumulative revenues over the 2009-2010 period. This estimate includes an anticipated revenue of AED3.6 billion expected AED192 million from the sale of ca. 128,000 square feet of retail space in the development. The cur- over the 2009-2010 pe- rent installment schedule for UPTOWN MotorCity is similar to that of Green Community MotorCity, with riod 20% of the sales proceeds collected in the first year, 20% in the second year and the remaining 60% upon completion. Since we assume a staggered delivery of the project over 2009-2010, we utilize the same payment structure for both phases to estimate cash flows in our financial model.

Payment Schedules for UPTOWN MotorCity

Installments Due in First Year 20% Installments Due in Second Year) 20%

Balance (Due on Handover) 60%

Table 12 Source: Union Properties

Business Park MotorCity

Business Park MotorCity is designed to cater to the requirements of the automotive industry and will Expected to generate total feature showrooms, retail outlets and office space. Our discussion with the management indicates that revenues of AED1.6 billion leading names in the industry have already expressed interest in establishing a base in the Park. In addition to built-up areas, Union Properties will offer plots of land within the Business Park for the development of purpose-built offices. To be constructed at an estimated cost of AED1.3 billion, the sale of commercial space in the development is expected to generate ca. AED1.6 billion for the company. An AED600 million hotel will also be built as part of the development.

Formula 1 Theme Park

The MotorCity development is scheduled to include the world’s first Formula One theme park, which is expected to be the central attraction of the MotorCity development upon completion in the first quarter Union Properties to build of 2009. Initial press releases related to the development indicate that the park will cover an area of 5 the world’s first Formula million square feet and will be built at a cost of US$360 million. It will feature a hotel, simulator rides, One Theme Park live demonstrations, interactive museum, retail outlets, restaurants, and memorabilia stores among other entertainment facilities. Union Properties has also acquired exclusive rights in 2006 for the development of Formula One theme parks around the world. While the theme park in Dubai and the exclusive rights to theme parks around the world are expected to generate strong revenues for Union Prop- erties in the long run, relatively limited information is currently available in this regard as a result of the early stages of development of the projects. Resultantly we have excluded them from our projec- tions at this stage.

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SUBSIDIARIES

Achieving Vertical Integration Through Subsidiaries

Various subsidiaries com- Union Properties wholly owns or has acquired strategic stakes in a number of subsidiaries that comple- plementing Union Proper- ment its core business of property development. While Thermo continues to be the only company con- ties’ core business of tributing substantial value to Union Properties’ top line, smaller subsidiaries continue to benefit the property development company by providing value added services. As noted earlier, entities such as The Fitout and Nautilus increase the appeal of the company’s developments, thus facilitating the rental as well as sales process. An overview of Union Properties’ key subsidiaries is presented below. It is worth noting that the following analyses excludes Properties Investments as it has already been covered in a previous section.

Contribution of Subsidiaries Ex-Thermo to Total Revenues

2003 2004 2005 2006

Percentage of Total Revenues 3.44% 4.77% 5.05% 6.52% formed by Subsidiaries

Table 13 Source: Union Properties

Thermo

Thermo L.L.C. is a leading Mechanical, Engineering and Plumbing (MEP) contractor in the UAE. Wholly A leading Mechanical, owned by Union Properties, the company offers a complete spectrum of services in its industry, rang- Engineering and Plumbing ing from designing and planning of projects to their successful implementation. The company has contractor worked on a number of prestigious projects in recent years, the most notable of which is the AED1.7 billion contract for complete MEP works for the expansion of the Dubai International Airport (Phase II). The company has also provided complete mechanical, electrical, plumbing, BMS and control systems for seven towers in the Jumeirah Beach Residence.

Thermo continues to be the most important subsidiary of Union Properties in terms of contribution to Most important subsidiary the top line of the property developer. Revenues from Thermo constituted an average of ca. 69% of in terms of contribution to the cumulative revenues earned by Union Properties in the 2002-2006 period. However, as a result of revenues low margins, Thermo’s contribution to Union Properties’ gross profit has been limited to ca. 30% during the same period. While the subsidiary is expected to continue to maintain its position as a key revenue generator for Union Properties, the recognition of high-margin property sales over the next few years is expected to further reduce the significance of Thermo’s contribution to the property developer’s bottom line. Going forward, we forecast a steady 5% increase in Thermo’s revenues over our forecast period, along with an associated margin of 3%, against a margin of 5.5% witnessed in 2006.

Contribution of Thermo to Union Properties’ Revenues

90%

60%

30%

0% 2002a 2003a 2004a 2005a 2006a 2007f

Thermo's Revenues Other

Graph 5 Source: Union Properties, Prime Estimates

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Emicool

Joint Venture with Dubai Emirates District Cooling (Emicool) is a district cooling service provider involved in the supply of chilled Investments water for air conditioning purposes. 50% owned by Union Properties, the company is a joint venture between the property developer and M’Sharie, a subsidiary of Dubai Investments. Located in Dubai Investments Park, Emicool is presently serving the Green Community development.

The management of Emicool recently unveiled an AED2.5 billion expansion plan, whereby the capacity AED2.5 billion expansion of the company will be increased to provide 100,000 tons of refrigeration to the MotorCity project and planned over a period of 3 250,000 tons of refrigeration to various other projects in the Dubai Investments Park, including Dubai to 5 years Lagoon. The expansion is expected to be carried out over a period of 3 to 5 years. Although the increase in capacity will eventually lead to a boost in revenues being earned by the company, we do not expect Emicool to make a substantial contribution to the revenues of Union Properties during our forecast period.

Project Management and Facilities Management Services

Project management and Union Properties’ subsidiary Edara L.L.C is a project management services firm that offers a range of facilities management services from pre-feasibility to completion and handover of developments. While the project list of the services provided through company is primarily comprised of Union Properties’ developments, other notable projects Edara has Edara and ServeU worked on include Commercial Bank of Dubai’s new headquarters and 500 villas for the Private Hous- ing Finance Scheme.

Union Properties also offers facilities management services through its wholly owned subsidiary ServeU. Operating throughout the region, ServeU provides services such as building automation and maintenance, cleaning and security.

Vertical Integration Expected to Continue

The completion of Union Properties’ development projects in the next few years is expected to be ac- Diversification and vertical companied by a sizable expansion of its balance sheet. This in turn is likely to significantly increase expansion expected to opportunities available to the company for achieving further diversification and vertical integration. The continue on the back of a industry has already witnessed investments by property developers aimed at controlling their cost sizable expansion in the structures, with Emaar Properties’ joint venture with The Turner Corporation and Aldar Properties’ balance sheet recent joint venture with Laing O’Rourke serving as good examples in this regard. Thus, Union Proper- ties could be expected to embark on a similar path as its projects reach completion.

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FINANCIAL ASSESMENT & GROWTH DRIVERS

Revenues

Recognition of revenues In accordance with international accounting standards, Union Properties utilizes the complete contract from sales of current de- method to report revenues, as a result of which proceeds from the sale of its projects are reported velopments expected to upon the handover of associated developments. Given that both the MotorCity development and the boost top line in 2009 DIFC-based projects are not expected to be handed over prior to 2009, revenues from Thermo will continue to form the bulk Union Properties’ top line in 2007 and 2008.

It would be pertinent to mention here that our discussion with the management indicated that revenues of ca. AED400 million are expected to be recognized over the 2007 and 2008 period from the sale of plots of land in the MotorCity development. We anticipate the company will benefit from very high margins of 75% on this sale.

Revenues (AED ‘000)

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

2006a 2007f 2008f 2009f

Graph 6 Source: Union Properties, Prime Estimates

Income From Joint Venture

As mentioned earlier, Union Properties records its stake in Properties Investments under the equity Properties Investments method, thus reporting its share of the joint venture’s net profit as a single line item on its income expected to contribute statement. We anticipate that the company will report an income of AED20 million in 2007 and AED200 AED20 million in 2007 and million in 2008 from the joint venture, with the former resulting primarily from the recognition of reve- AED200 million in 2008 nues related to the sale of Lake Apartments in the Green Community, while the latter is associated with the sale of the Green Community West development.

Net Income

FY07 net income expected The net income of the company for FY07 is expected to remain inline with the level witnessed in FY06, to be inline with that wit- followed by a decline in 2008. The decline in 2008, in spite of a forecasted rise in revenues, results nessed in 2006 Net Income (AED ‘000)

2,000,000

1,600,000

1,200,000

800,000

400,000

- 2006a 2007f 2008f 2009f

Graph 7 Source: Union Properties, Prime Estimates

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primarily from the expectation of a smaller contribution to revenues from the sale of high margin plots of land. FY09 however is expected to witness a ca. 300% rise in profits due to the recognition of revenues from the sale of developments currently under construction.

Estimating Cash Flow

As highlighted in our initiation of coverage report on RAK Properties (Is it Time for a Closer Look? - Installment plans and November 2006), unlike traditional companies, the reported income statements within the real estate anticipated cost schedules sector are not a true reflection of the underlying cash flow being generated from the sale of property utilized to estimate cash developments. Resultantly, we utilize the installment plan and the anticipated cost schedule for each flow individual development to forecast cash flows for valuation purposes (details of our assumptions for the payment plans and cost schedules are provided in the associated section for each development on pages 5-10 ).

It is important to understand that irrespective of whether a Complete Contract method or Percentage Cash-flow same under of Completion method is utilized to report revenues, a cash flow based valuation should yield the same Complete Contract result in both cases. The following sections provides a reprint of the analysis from our report on RAK Method and Percentage of Properties on how revenues are recorded under the two methodologies. For the purpose of this illus- Completion Method tration, we assume that a property developer has only one source of cash inflow, i.e. payments from customers based on the installment schedule, and one source of cash outflow, i.e. the cost incurred on constructing the project.

Complete Contract Method

In the case of recognition of revenues upon completion of a project, the payment of an installment by All annual cash flow ad- a customer is recorded on the Balance Sheet through an increase in cash, along with an offsetting justments recorded on the increase in the liability of the company in the form of “Advances from Customers”. Expenditure on balance sheet construction, on the other hand, is represented by a decrease in the cash balance along with an associated increase in an asset account representing the value of the project under construction. In the case of Union Properties, such increases are recorded in “Development Properties”. During the year of completion of the project, the total value of the installments received from customers should equal the sales made to customers. The value of the project on the Balance Sheet should similarly equate the total cost incurred to complete the development. Upon recognition of revenues from the project, the associated advances from customers, which equal the revenue recognized, and the value of the project, which equals the expenditure reported on the Income Statement, are removed from the Balance Sheet. Consequently, no further change takes place in the cash-flow of the company despite the recognition of revenue during the year of completion.

Percentage of Completion Method

On the other hand, in the case of the “percentage of completion” method, revenues are recognized as construction work progresses. However, the introduction of an associated receivables account under Introduction of an asset this methodology ensures that the cash-flow is determined solely from changes in advances from cus- account on Balance Sheet tomers and construction expenditure in this methodology as well. For example, Emaar Properties, to counter impact of in- which utilizes a “percentage of completion” method for revenue recognition, consists of a crease in income due to “Development Properties” asset account in its Balance Sheet. This account equals the sum of the cost recognition of revenue incurred on a project and the profit attributable to it less progress billings (or advances) collected from customers. Any profit reported during a given year due to revenue recognition will be associated with an equal increase in the “Development Properties” account through a rise in profit attributed to the project. Consequently, any positive impact on the cash-flow through the recognition of revenues is negated by an equivalent rise in the reported assets of the company. Thus, the net annual cash flow remains the same in both instances, with advances from customers and construction expenditure representing the only source of cash inflow and outflow respectively.

Debt

Union Properties has historically proven relatively underleveraged, with the company’s debt to equity ratio standing at only ca. 30% in 2006. However, with a large development portfolio currently under- Company expected to way, this is set to change from the current year. Our discussion with the management indicated that it acquire total debt of intends to finance 30-35% of the projects through debt financing, with an initial targeted debt to eq- AED3.5 billion uity ratio of 1:1. The company has already acquired financing worth AED1 billion for its DIFC-based projects and is expected to secure another AED2.5 billion worth for the MotorCity development. Keep- ing this in view, we expect the company’s debt to equity ratio to jump to ca. 90% in 2007. However,

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this increase is not expected to be associated with an immediate rise in interest expense as the financing cost will be capitalized during the construction of the projects.

Debt to Equity Ratio

2004 2005 2006 2007f

Debt to Equity Ratio (%) 61.47% 20.32% 30.35% 89.79%

Table 14 Source: Union Properties

Shorter Forecast Period and Forecast for Terminal Year

Given that all of Union Properties’ current developments are expected to be handed over by 2010, we Revenues from property utilized a shorter forecast horizon of 4 years, spanning the 2007-2010 period, as opposed to our nor- sales estimated at AED3 mal 5 year forecast horizon for valuation purposes. Moreover, while adequate information on projects billion in the terminal year likely to be carried out beyond 2010 is not yet available. However, based on our discussion with the

management, we have opted to assume revenues of AED3 billion, yielding a margin of 20%, in the

terminal year to estimate a reasonable ongoing value for the company. In addition, we assume that

the company’s rental portfolio and subsidiaries will continue to contribute to Union Properties’ top line

in the terminal year.

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Valuation

We used the discounted cash flow model as our preferred valuation technique for Union Properties,

and from which we have derived our fair value for the company.

In short the net present value of Union Properties’ future cash flows have been determined through

informed assumption building, and subsequently discounted by a WACC of 11.64%.

The cost of equity has been calculated by utilizing the capital asset pricing model, and based on a risk

free rate of 5.80%, which is the current yield on the 10 year US Treasury benchmark bonds, inclusive WACC of 11.64% and of a UAE country risk premium of 125 bps, in line with the premium present on the 30 year Qatar sov- terminal growth rate of ereign bond over its US equivalent. In the absence of UAE denominated sovereign bonds as a bench- 4.5% mark, and the popularity of US sovereign debt as a haven investment in times of uncertainty across the GCC as a whole, we believe this to be a fair proxy for a UAE risk free investment alternative. We have assigned an equity risk premium of 7% and utilized a beta of 1 to estimate the cost of equity.

We have concluded a DCF value for Union Properties of AED4.45/share. With the company currently trading at AED3.13/share, this affords investors 42% upside potential. We accordingly initiate coverage with a Strong Buy recommendation.

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Income Statement 2005a 2006e 2007f 2008f 2009f FINANCIAL SUMMARY Revenues 1,388.1 2,525.0 2,769.3 2,466.8 10,648.4 Growth 143.6% 81.9% 9.7% -10.9% 331.7% FY Ending December COGS 1,034.2 2,082.7 2,120.0 2,120.6 8,735.7 Figures in AED million S,G & Admin. Expenses 51.2 65.3 68.6 72.0 75.6 Other Provisions 40.0 0.0 0.0 0.0 0.0 EBITDA 262.7 377.0 580.7 274.2 1,837.1 Growth 210.5% 43.6% 54.0% -52.8% 570.0% EBITDA Margin 18.9% 14.9% 21.0% 11.1% 17.3% Depreciation & Amortization 29.2 33.6 35.5 39.6 87.3 Operating EBIT 233.5 343.5 545.2 234.6 1,749.8 Interest Income 32.4 35.3 36.1 57.5 172.4 Income from Joint Venture 20.3 48.8 20.0 200.0 0.0 Interest Expense 23.9 43.4 51.8 55.7 54.3 Non-Operating Revenues 4.0 5.0 5.3 5.5 5.8 Pre Tax Income 266.2 389.2 554.8 442.0 1,873.6 Pre Tax Income Growth 152% 46% 43% -20% 324% Income Tax 0.0 0.0 0.0 0.0 0.0 Effective Tax Rate 0.0% 0.0% 0.0% 0.0% 0.0% NPAT 266.2 389.2 554.8 442.0 1,873.6 Growth 152.2% 46.2% 42.6% -20.3% 323.9% Gain on Valuation of Properties & Capital Gain/Loss 318.3 224.8 60.0 30.0 - Net Income 584.5 614.0 614.8 472.0 1,873.6 Profit Share to Employees & Board 0.0 0.0 0.0 0.0 0.0 Net Attributable Income - NAI 584.5 614.0 614.8 472.0 1,873.6 Growth 293.9% 5.0% 0.1% -23.2% 296.9% ROS 42.1% 24.3% 22.2% 19.1% 17.6%

Balance Sheet 2005a 2006e 2007f 2008f 2009f Cash & Marketable Securities 1,256.0 112.3 2,507.3 1,604.5 5,169.3 Trade Receivables-Net 904.9 1,779.0 1,848.8 1,941.2 2,038.3 Inventory 35.1 55.4 60.7 51.8 69.2 Other Current Asset 194.8 520.7 494.1 518.8 544.8 Total Current Asset 2,390.7 2,467.3 4,910.9 4,116.4 7,821.6 Net Fixed Assets 366.6 366.9 376.8 385.3 1,781.6 Property Portfolio 3,373.1 4,403.7 7,119.5 10,798.1 5,557.5 Other Assets 263.9 312.3 207.1 403.4 399.7 Total Assets 6,394.3 7,550.2 12,614.3 15,703.1 15,560.4 Short Term Bank Debt 112.0 487.9 536.7 590.3 649.4 CPLTD 80.0 288.5 121.3 121.3 121.3 Accounts Payable 1,010.2 1,267.6 1,457.7 1,603.5 1,763.8 Dividend Payable 0.0 0.0 0.0 0.0 0.0 Accrued Expenses 311.1 202.7 1,218.1 3,559.0 1,230.6 Total Current Liabilities 1,513.3 2,246.6 3,333.8 5,874.2 3,765.1 Long-Term Debt 597.8 606.6 3,985.3 4,074.0 4,175.2 Accrued Expenses 370.7 102.2 81.8 65.4 52.3 Provisions 25.0 37.8 41.5 45.7 50.3 Total Shareholders' Equity 3,887.6 4,557.1 5,171.9 5,643.9 7,517.5 Total Liab.& Shareholders' Equity 6,394.3 7,550.2 12,614.3 15,703.1 15,560.4

Free Cash Flow Statement 2005a 2006e 2007f 2008f 2009f NOPLAT 233.5 343.5 545.2 234.6 1,749.8 Non-Cash Items 69.2 33.6 35.5 39.6 87.3 Gross Cash Flow 302.7 377.0 580.7 274.2 1,837.1 Gross Investments 1,157.2 2,256.7 1,577.4 1,351.7 -1,193.5 Operating Cash Flow -854.6 -1,879.6 -996.7 -1,077.5 3,030.6 Non -Operating Cash Flow 322.3 229.8 65.3 35.5 5.8 Free Cash Flow -532.2 -1,649.8 -931.4 -1,042.0 3,036.4 Financing Flow Interest Income After-Tax -32.4 -35.3 -36.1 -57.5 -172.4 Investment Income After-Tax -20.3 -48.8 -20.0 -200.0 0.0 Increase in Excess Cash & M. Sec. 1,087.2 -1,026.5 2,317.0 -893.7 3,319.4 Change in Subs. And L.T Inv. -12.7 78.8 20.0 200.0 0.0 After-Tax Interest Expense 23.9 43.4 51.8 55.7 54.3 Decrease in Debt & Bonds 154.7 -593.2 -3,260.3 -142.3 -160.3 Provisions Used 33.7 -12.8 -3.8 -4.2 -4.6 Dividends Paid 0.0 0.0 0.0 0.0 0.0 Non-Appropriation Items 0.0 0.0 0.0 0.0 0.0 Shareholders Equity -1,766.4 -55.5 0.0 0.0 0.0 Total Financing Flow -532.2 -1,649.8 -931.4 -1,042.0 3,036.4 Source: Union Properties & Prime projection

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Stock Recommendation Guidelines

Recommendation Target to Market price (x)

Strong Buy x > 25% Buy 15% < x <25%

Accumulate 5%< x <15%

Hold -5% < x < 5%

Reduce -15% < x < -5%

Sell -25% < x < -15%

Strong Sell x < -25%

Investment Grade Explanation

Growth 3 Yr. Earnings CAGR > 20% Value Company Positioned Within Maturity Stage of Cycle

Income Upcoming Dividend Yield > Average LCY IBOR

Speculative Quality Earnings Reflect Above Normal Risk Factor

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This document has been compiled by Prime Securities S.A.E. and obtained from information we believe to be fair and accurate at the time of publication. This report should not be construed as a solicitation to subscribe to or sell any investment. We accept no responsibility or liability to the accuracy of this document and our opinions are subject to change without notice. Investors should understand that statements regarding future prospects might not be realised and Prime Securities S.A.E. shall not bear any legal obligation as a result of direct or indirect losses arising from information herein. Foreign currency rates of exchange may also affect the value, price or income of any security or related investment referred to in this report. Prime Securities S.A.E, an affiliate of the full service firm Prime Group, may currently, or in the future have business relationships with companies covered in this report. Copyright 2007 Prime Securities S.A.E. All rights reserved. You are hereby notified that distribution and copying of this document is strictly prohibited without the prior approval of Prime Securities S.A.E.

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