Lower rate environment continues to support home sales
Home sales continue to perform strongly thanks to the lower mortgage rates parallel to the CBRT’s rate cut cycle. According to CBRT data, monthly mortgage rates came down to 0.89% in 2Q20, lower than the 1Q20 rates of 0.96% (2Q19: 1.67%), whereas state banks offer rates as low as 0.64% per month. Furthermore, developers announced generous campaigns with small down payments and 2Y grace periods, which led to a boom in home sales in June, following a sharp slowdown in sales during the April-May period. We forecast c.300,000-unit home sales in June, the highest ever recorded monthly data. We expect the strong trend would continue for the rest of the 2020, albeit at a slower pace. Nevertheless, we expect home sales to exceed 1.65mn in 2020, up by 24% y/y, despite 2% contraction in 5M20.
30% increase in 2020E sales revenue in Buyukyali Project
Given the strong demand in the market, we expect that sales in Buyukyali Project (c. 45% of the current NAV) would accelerate starting from June. We also believe that the demand may remain elevated as new residents move in and the commercial areas of the project start operation. Thus, we revise our 2020E sales revenue in Buyukyali Project to TL1.1bn from TL842mn, corresponding to 320-unit sale (previously 280 units).
Preliminary sales for Gokturk Project has started
The company brought forward the launch date of Gokturk Project (18% of our Target NAV) thanks to high demand in the market. As a relatively small project with c. 300 units and 49K sellable area, Gokturk may capture the increasing demand for open green space in view of the pandemic. The ongoing construction of the new airport subway line may also support sales. Ozak REIT already started preliminary sales for the project and sold a couple of units, which suggest that the company may complete this project without any need of external funding. Hence the downward trend in leverage may be sustained despite upcoming construction costs related to this project. We forecast pre-sales to reach 140 units in 2020, with a total proceeds of c. TL400mn.
Pandemic related pressure on Ela Hotel revenues
In Ela Quality Resort Hotel, 2020E revenues would remain weaker comparing the previous years due to the pandemic related travel restrictions. Although domestic demand would support the Hotel’s profitability, we estimate Hotel revenue to shrink by 60% y/y to TL49mn due to lower foreign tourist demand.
Downward trend in NAV discount
Since our last report on 17th of June, OZKGY increased by 13% to TL4.2/sh, outperforming XU100 index by 9% and BIST REIT index by 3%. In the meantime, the NAV discount of the company narrowed to 39% from 46%. Despite the rapid revaluation, the stock’s NAV discount is still wider than listed REIT’s average, which stands at 24% (previously 30%).
Revising our TP to TL5.50/shr, while maintaining Outperform rating
Based on higher cash-flow estimates thanks to the sales in Buyukyali and Gokturk Projects, we calculate an NAV of TL2.9bn (previously TL2.7bn). We also lower the discount to our target NAV to 30% (previously 40%) on back of faster than expected growth. Although many REITs with similar sizes trade at a discount to NAV range of 40-50%, we believe Ozak REIT deserves a premium to its peers, given its growth prospects and less levered balance sheet. We calculate target price of TL5.50 (previously TL4.50), implying 30% upside potential. We think distribution of dividends at a healthy and sustainable pay-out ratio (2021E dividend yield 14%) would help Ozak to further narrow its discount to its NAV.
EVREN GEZER, YF Invest RESEARCH
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