Fitch affirms Qatar Real Estate Investment Company at 'BBB+'; outlook stable

The Outlook for the Long-term IDR is Stable. The rating action affects Qatar Alaqaria Sukuk Company's (QREIC) $300m of outstanding Trust Certificates (Sukuk) due 2012.

The rating affirmation reflects Alaqaria's strong business model, robust lessor profile and above-average lease duration for the region. Finance leases provide stable, long-term rental income for Alaqaria which are underpinned by off take arrangements by Qatar Petroleum (QP) and government related entities (typically between 10 to 15 years duration), and operational leases agreements that are between 5 and 25 years with QP-related companies. These arrangements have provided Alaqaria with sound defensive qualities during the region's property downturn, as has been proven by the stable financial performance of the company to date.

The affirmation also reflects Alaqaria's low counterparty risk, as the majority of its projected income is due to come from strong credits, and the benefits from a guaranteed rate of return on its contracts with QP or QP-related entities. However, despite these benefits, Fitch notes that with most of its contracts relating to QP, Alaqaria does suffer from a high level of customer concentration. Mitigating factors include the quasi-monopoly status and 100% occupancy rates on QP and QP-related projects, which help enhance cash flow stability, the relatively low technical complexity of construction, and the company's ability to pass costs on to sub-contractors.

Fitch notes that Alaqaria's ratings continue to be constrained by its undercapitalised balance sheet, high leverage (Loan-to-value (%) LTV of 65%) and low interest cover (Fitch adjusted interest cover ratio (Net Interest Cover- NIC) was 2.2x FYE08) - especially for the large projects it has under construction and also in its forward order book. Furthermore, the agency expects the company's significant capex to continue into 2010, with the resulting negative free cash flow (FCF) expected to be funded by additional borrowings in H209. Consequently, Fitch projects the company's leverage to increase and peak in 2009, in line with ongoing development activities, at approximately 75% LTV and will then tail off as development projects enter the rental phase.

As previously noted by Fitch, Alaqaria's ratings also take into account its strong operational and strategic ties with the State of Qatar and the direct involvement of the State in the company through its 27% equity ownership and board representation. These ties are further strengthened by Alaqaria's position as a leading developer with long-term rental housing projects for both state and corporate entities in the State of Qatar.

Alaqaria's close business ties with QP and the importance of QP's projects, and thus Alaqaria's activities to the State of Qatar are factored into its ratings and act as a credit enhancement to Alaqaria's standalone credit profile (in line with Fitch's "Parent and Subsidiary Rating Linkage" criteria report.

As of H109, the company's cash position was QR932.15m. However, Alaqaria's liquidity will continue to be limited by negative forecast FCF, which results in a liquidity score around 1x (sources of liquidity/uses of liquidity over the next 12 months). Nevertheless, Fitch expects that this risk should be mitigated by Alaqaria's continued access to local bank financing.

In 2009, and following an announcement by the Qatari Ministry of Trade, a merger of Alaqaria and Barwa Real Estate Company Q.S.C could occur. Qatari Diar, an entity that is 100%-owned by the government of Qatar, holds substantial stakes in both Alaqaria (27%) and Barwa (45%). The two corporates are currently studying the proposal and have released no information regarding the likelihood or potential structure of any transaction. Fitch will continue to closely monitor events and evaluate the impact of any possible changes to Alaqaria's business and financial profile. Rating actions could occur as and when more definitive plans are announced.