In a major turnaround in fortunes, Sorouh Real Estate, Abu Dhabi's second-largest developer, reported a fivefold increase in profits in the second quarter yesterday.
The results were in large part due to the first handovers of the company's apartments on Reem Island.
Sorouh's net profit jumped to Dh125 million (US$34m) in the quarter, compared with Dh20m in the same quarter last year, when most major projects in Abu Dhabi were delayed and Sorouh was primarily selling land to generate revenue.
The company started turning over units in May in the Sun and Sky Towers, the first project to open to owners on Reem Island, the master-planned development that will eventually cover more than 1,000 hectares and house 200,000 people. Sorouh, one of three master developers on Reem, reported a total of Dh1.22 billion in revenue for the second quarter compared with Dh190m in the same period last year.
But the market was unimpressed as margins were lower than expected, and the shares fell 1.6 per cent yesterday.
Analysts expected profit closer to Dh155m for the quarter, according to a Bloomberg News poll. Chet Riley, a Nomura Securities analyst, described the results as "lacklustre" based on "lower than expected margins".
Sorouh produced margins of about 12 per cent on sales, instead of the expected 18 per cent, Mr Riley said.
But margins will improve as more expensive units on higher floors in the Sun and Sky Towers handover later this year, said Richard Amos, the company's chief financial officer.
Sorouh expects to deliver projects worth Dh5bn in the next year, including Sorouh's Tower at the Danet Abu Dhabi and more apartments and commercial space in Sun and Sky, Mr Amos said.
Another Dh8bn worth of projects is due in the next 24 months, including the three buildings that make up the Gate Towers on Reem and alrayyanna, a 33-building apartment development.
Sorouh has sold about 30 per cent of the 3,500 apartments in the Gate Towers and may ultimately decide to lease more than originally planned, said Gurjit Singh, the company's chief operating officer. About 400 of the apartments originally sold in the Gates have been consolidated into other purchases, he said.
Sorouh has been able to avoid the widespread defaults plaguing other developments by implementing an aggressive "default avoidance" strategy, Mr Singh said. Troubled buyers have been offered the chance to consolidate their units or refinance earlier rather than later.
There have been no defaults in the 275 apartments handed over this year in Sun and Sky so far, Mr Singh said.
With sales slow and prices down an estimated 45 per cent from the peak in 2008, Sorouh is likely to increase the number of apartments and villas it keeps in its portfolio to lease. The company's existing rental revenue of Dh170m a year should triple in the next two years, Mr Amos said.
"It's a sign of maturity," he said. "We will keep more in the investment portfolio and generate more income from that."
The company is also planning to expand its rent-to-own plan launched in Sun and Sky Towers last month, the first of its kind in Abu Dhabi. Fourteen of the 160 units Sorouh still owns in the towers have been leased under the programme, which offers tenants a purchase option after three years of leasing, Mr Singh said.
Sorouh handed over a total of 448 units in Sun and Sky Towers and the Abu Dhabi Aviation complex in the first half of the year, it reported.
The company's bottom line was aided by a 20 per cent decline in costs, including a 17 per cent reduction in staff from a year ago.
The company now has more than Dh1.3bn in cash, Mr Amos said. He would not say if the company was actively pursuing any outside financing.
"Our cash position is very strong," he said. "For the rest of the year we have sufficient cash to meet our capital expenditure requirements."