Solidere rides the real estate wave

Q&A with Ziad Abou Jamra

Photo credit: Greg Demarque

With Solidere having registered positive stock performance since the beginning of the economic crisis in Lebanon, and with Lebanese rushing to buy real estate in order to hedge against the depreciation of the Lebanese currency, Executive sat with Ziad Abou Jamra, Secretary of the Board of Directors at Solidere and Deputy General Manager, to talk about Solidere’s performance and the current state of real estate in Lebanon.

1. With regards to the August 4th explosion, what is your assessment of the damages caused to Solidere properties? Have any of these been covered by insurance?  How much of it is being repaired by Solidere?

The explosion that occurred on August 4, 2020, caused severe damages to our facilities. The insurance policies that we have cover all possible causes but they nevertheless need to pinpoint a cause before initiating reimbursement in our favor. We are not waiting for that to occur but have started the process out of pocket. Rebuilding will occur in phases. The momentum of the rebuilding effort will be directly correlated to the overall situation of Lebanon but will nevertheless occur in stable steps. We are mindful of the interest of both the shareholders as well as the merchants and residents of Downtown Beirut. As for the assessment of the damages, these have already been discussed in our board meetings but discussions are ongoing and the results will not be made public for the time being.

2. The share price of Solidere has gone up 140 percent between January 2017 and January 2021 (currently at USD 24 per A common share). What are for you the main drivers of this demand?

The following improved company fundamentals are the main drivers of demand for our stock:

Cash reserves in banks witnessed a substantial increase during the year 2020, enhancing the liquidity of the company and its ability to face its urgent and future challenges. Effectively speaking, and in case the dire economic situation persists for the long term, Solidere’s current liquidity can carry the company for the next four years if not more. This liquidity will be more than sufficient to cover salaries, taxes, maintenance expenses, and other potential unforeseen costs.

The company settled all outstanding bank loans and overdraft facilities during 2020, thereby bringing its interest expense down to zero. Moreover, the remaining non-interest bearing liabilities have dropped significantly.

A major cost cutting effort initiated in late 2018 successfully brought down the general and administrative expenses by almost 26 percent from around USD 30 million (income statement 2018) to around USD 22 million (income statement 2019).

Sales picked up dramatically in the years 2019 and 2020. This helped the company record a sizable profit in both years.

Devaluation of the national currency definitely gave a boost to sales, but a big chunk of the total sales were realized before the onset of the devaluation of the local currency and its aftermaths.

3. With regards to the current situation in Lebanon, should capital controls last, how would Solidere deal with this situation?

Capital controls have no effect on our operations, as they do not affect checks that are drawn locally or transfers that are conducted internally as such. Therefore the future of such controls, whether they become regulated or not, or whether stay in place or not, will have a minimal impact on Solidere.

4. How has Solidere readjusted to the current monetary paradigm in 2020? In what form and currencies have transactions been undertaken?

Our modus operandi has remained unchanged as we have sold plots before and after the crisis. All of these transactions occurred in local dollars. Now, as our situation has dramatically improved, we may opt to require a certain percentage of future transactions to be paid in fresh dollars but we have not yet reached a decision in this regard.

5. Overall, is it correct to say that Solidere’s share price has been a result of transactions in Lollars? How do you describe the share price in comparison to January 2019?

I have covered a part of this question in answers provided above. Suffice it to say that while the local dollar has aided the share price it was by no means the only factor in the significant improvement witnessed over the recent period.

6. Solidere is a company involved in high-end real estate. Would factors such as the currency depreciation that we have been seeing result in Solidere or other developers being interested in investing in high-end real estate?

Uncertainty about the future has driven ultra-high net worth investors with significant deposits in Lebanese banks to migrate losses by buying prime real estate. As Solidere has the best of the crop in this regard, it has stood to benefit the most from this demand.

7.  With regards to properties being sold by Solidere, can you tell us more what kind of real estate has seen the greatest demand in the past year? Offices? Apartments? Other?

We estimate that more than 90 percent of the value of the transactions were land-related, with Solidere having the lion’s share of total real estate transactions in the Beirut City Center.

8. What trends are you expecting for real estate? Will there be local or foreign buyers?

As long as the political situation remains dire, demand will predominantly remain local. Actually, demand may increase as the fear factor increases. Eventually, should a regional political settlement be reached, hopefully a long-lasting one, foreign buyers will return to Lebanon, consequently improving the inflow of fresh dollars and the value of real estate.

9. How much of the increase in overall real estate transactions do you attribute to transactions in the Beirut Central District? How do you explain the attractiveness of these areas despite the damages caused there due to the Beirut blast, protests and the economic downturn?

All the recent purchases can be described as long-term in nature. These are not investors looking to flip their newly acquired assets for a quick profit. Rather, these are investors whose primary aim is to park their funds in an asset class that will most probably provide the best alternative to protect the value of their money. They possibly aim to hold on to their real estate for at least five years until the situation witnesses a significant improvement, at which point they could possibly sell for fresh dollars. These investors are looking beyond the Beirut explosion, which, no matter how atrocious that was, remains a one-off event, the repercussions of which on the real estate market will dissipate over time. They are also looking beyond the protests. That is the main reason I believe that they are focusing on Beirut as it is the area most likely to recover first and fastest.

10. Overall, it is my impression that 2020 has been a good year for Solidere in terms of repairing your balance sheet and gaining traction for your stocks. Do you see this trend continuing in the near future? Taking into account Lebanon’s situation.

The positive trend should continue in the coming few years as our stock is still undervalued relative to its net asset value (NAV). In addition, should the situation at the macro and political level improve, Solidere would be one of the first companies that would directly benefit as life returns to normal to the downtown area. Ironically however, should the situation continue to deteriorate, this would translate into a rise in both the value of Solidere’s stake in Solidere International (assets outside Lebanon) as well as a rise in the value of its real estate portfolio as a whole as local dollars would rapidly lose their worth.

As can be seen from above, Solidere has positioned itself through recent actions on its part to benefit no matter what future developments may lay in store for Lebanon.

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