Jabal Omar CEO says financial transformation plan to enhance capital sustainability

Khalid Al-Amoudi, CEO of Jabal Omar Development Co.

Jabal Omar Development Co.’s financial transformation plan seeks to ensure the stability and sustainability of capital structure by reducing leverage and raising liquidity levels, Chief Executive Officer (CEO) Khaled Al Amoudi told Argaam in an exclusive interview.

The transformation strategy will help the company fulfill its outstanding obligations, while providing the finance required for the completion of Jabal Omar project’s phases.

He added that if the deal of Alinma Makkah Real Estate Fund was successful, it would have a positive and immediate impact on the company’s financial position.

The potential deal will immediately cut nearly SAR 5.3 billion worth of due liabilities in Jabal Omar’s balance sheet. It will also reduce the company’s debt-to-equity ratio, enhancing the sustainability of its capital structure.

Al-Amoudi also clarified a number of key points about Jabal Omar’s financial transformation strategy and planned land sale, adding that the real estate developer plans to sell several land plots in the next 12 months.

Here’s the full interview with Khalid Al-Amoudi:

Q: What are the reasons for the financial transformation plan?

A: The real estate development business requires enormous capital expenditures and more finance to complete the ongoing projects, especially in the preliminary phases of development. Therefore, many real estate developers seek to finance development projects through a mix of equity and debt. As part of the lifecycle of real estate projects, when assets become operational, income from the sale of assets or the management of such assets (i.e., hotels, commercial centers, residential units etc.) help fund other phases of the project.

Jabal Omar project is a primary development that first requires investment in infrastructure and later in the establishment of income-generating properties. This requires a large amount of funds to complete the construction works.

Despite some difficulties and movement restrictions in the central region of Makkah, the company finalized the project’s groundworks and supplying the necessary infrastructure services. It also completed the development of the first phase and a large part of the development works in the second, third and fourth phases.

In 2020, the company’s business was hard hit by the COVID-19 restrictions, as the Hajj and Umrah rituals and international flights were impacted, leading to a sharp decline in hotel occupancy rates for a long time. Moreover, the COVID-19 curfew and other movement restrictions hindered Jabal Omar from pushing ahead with the completion of phases under construction.

Due to these reasons, the company had to develop a plan to maintain the sustainability of capital structure by reducing leverage and raising liquidity levels. The transformation strategy will help the company fulfill its outstanding obligations, while providing the finance required to completing Jabal Omar project’s phases.

Q: Why does Jabal Omar sell land plots in the project?

A: As part of our comprehensive plan for financial transformation, the company capitalizes on its land bank through selling some plots to strategic partners. This aims to enable us to restructure our financial obligations, complete the existing phases, and accelerate the development of Jabal Omar project. However, the total space of land sold or offered for sale represents a small portion of the project's total space. The project has high-value land supported by integrated infrastructure.

We are satisfied with the results of the land sale. During the last 12 months, we received SAR 517 million from selling a land plot spanning 2.6 million square meters (sqm), as well as SAR 830 million from selling a 2.572 sqm land plot.

We were also pleased with the great turnout and fierce competition that our auction witnessed, as this shows investors' confidence in the economic feasibility of Jabal Omar project's master plan. This also indicates that they have a strong desire to invest in the project, which is a step away from the Grand Mosque.

Q: Do you plan to sell other land plots over the next 12 months?

A: Yes, the company plans to sell other plots, in line with its comprehensive plan to improve capital structure. Jabal Omar aims to use the land sale proceeds to restructure some financial obligations and complete the existing phases.

Q: Why did Jabal Omar submit an offer to Alinma Makkah Real Estate Fund unitholders to convert their units to shares in the company?

A: The capital structure enhancement program will contribute to providing solutions for the obligations owed by the company, including SAR 5.3 billion liabilities due to the fund.

Under the agreement concluded between Jabal Omar and the fund in 2017, the company is currently committed to paying an annual rent of SAR 540 million to the fund. As these assets are unable to generate a sufficient income to pay the due annual rent, in addition to the COVID-19 restrictions, it has been difficult for the company to continue paying the annual rent.

Therefore, the optimum solution for all parties was allowing the fund’s unitholders to become shareholders in Jabal Omar through issuing new shares in consideration of the liabilities owed to the fund. This solution will be positively reflected on the unitholders and Jabal Omar’s shareholders.

Q: If Alinma Makkah Real Estate Fund approves the proposed deal, how will this affect the company's financial statements?

A: The fund owns income-generating assets in Jabal Omar project. The income generated from these assets, along with other assets owned by the company, is allocated to pay the due rentals amounting to SAR 540 million annually to Alinma Makkah Real Estate Fund.

If the proposed deal succeeds, it will reflect positively and instantly on the company's financial position.

The deal will directly lead to offsetting nearly SAR 5.3 billion from the developer's outstanding liabilities, as well as reducing the debt-to-equity ratio and adding more sustainability to the company’s capital structure.

Further, cash flows worth SAR 540 million will be released annually, which will help improve the company's liquidity. With the exclusion of the Jabal Omar's 16.42% stake in the fund, the deal will have a direct impact on the firm's income statement, represented in offsetting financing burdens worth SAR 451 million annually.

This liquidity may also be allocated for other purposes, such as boosting productivity and value, which will contribute to enhancing shareholders' equity.

Q: How will the deal impact the fund’s unitholders?

A: They will become shareholders of the company. They will be able to benefit from not only the positive impact of the deal and other income-generating assets in Jabal Omar project, but also from the company’s valuable land bank. As the construction will go on and the project is finalized in the next two years, this will add more value going forward.