Arabian Centres’ adoption of fair value model for real estate significantly strengthens financial position: CFO

Walead Al-Rebdi, CFO of Arabian Centres Co. (ACC)

Walead Al-Rebdi, Chief Financial Officer (CFO) at Arabian Centres Co. (ACC), said adoption of the fair value model (FMV) to measure the company’s real estate and investment properties will significantly strengthen its financial position.

Moreover, the book value per share will rise to nearly SAR 34 from SAR 12.

The implementation of this accounting standard will also improve leverage ratios, triggering an increase in shareholder equity and retained earnings balance, Al-Rebdi told Argaam in an exclusive interview.

This will, in turn, provide ACC with an additional ability to maximize shareholders’ returns, and a higher flexibility in coping with the sector’s future developments and mitigating its associated risks.

The FVM adoption will enhance ACC’s ability to expand in its operations in a faster and more efficient way and embrace new investment opportunities, which will be positively reflected in terms of sustainable growth in revenue and profit going forward.

Al-Rebdi explained the importance of adopting the FVM to measure real estate, referring to its impact on ACC’s statements and shareholders. Following is the full interview with Al-Rebdi:

Q: What is the importance of the fair value model adoption to measure the company’s real estate? And why did ACC adopt it?

A: There are many positive impacts on the adoption of this accounting standard, mainly enhancing transparency levels through showing the fair value of ACC’s investment properties in financial statements, based on the standards issued by the Royal Institution of Chartered Surveyors (RICS), in line with the international valuation standards. We decided to adopt this model, given that it is widely-used by major global real estate developers, as the Capital Market Authority (CMA) recently allowed listed companies to use it.

Q: Can you explain the fair value model for real estate measurement?

A: In brief, it is to register the value of investment properties at fair value, based on the net cash flows of each mall in line with a certified and independent valuation report instead of recognizing these properties at historical cost.

Q: When will the FVM implementation impact ACC’s financial statements? Which statements will be affected by the new model?

A: The expected financial impact of the FVM will show in the third quarter of 2023, ending on Dec. 31, 2022. The total asset value will increase, thanks to recognition of investment properties at fair value. Accordingly, the balance of retained earnings will almost increase by the same value.

The profit & loss statement is expected to be positively impacted on two levels. On one hand, the asset depreciation item will be canceled on the FVM adoption. On the other, when a new mall, or any new investment property, is added in the future, the differential between its development cost and fair value will be recognized.

ACC will periodically disclose the positive or negative impact of revaluation of investment properties in the profit & loss statement. However, the cash flows statement will see no impact.

Q: What about the increase in the value of ACC’s investment properties after applying the fair value model?

A: The value of the company's total assets (investment properties) is expected to increase by approximately SAR 10 billion. Its malls are currently recognized at a historical cost of nearly SAR 16 billion, although their fair value is around SAR 26 billion.

Q: Are there any risks associated with this accounting change for the company?

A: As mentioned, the profit & loss statement will be affected – after implementing the FVM – by the value of change in the fair value of real estate investments. However, we do not expect – at worst– that the valuation of investment properties will be negatively impacted by more than 10% – as happened recently during the COVID-19 pandemic, which reflects the company’s strong financial position.

Q: Will there be any impact on the Zakat expenses?

A: We do not predict any change in the value of the Zakat base or Zakat expenses after adopting the fair value model.

Q: What is the method of valuating investment properties?

A: Investment properties will be valuated by two independent certified real estate appraisers.

Q: What is the benefit of using this model for the company's shareholders?

A: Using this model will greatly enhance the company's financial position. For example, the leverage ratios will improve, and net shareholders' equity and retained earnings will rise by nearly SAR 10 billion. Accordingly, the book value per share will rise to around SAR 34 from SAR 12.

This will, in turn, provide ACC with an additional ability to maximize shareholders’ returns, and a higher flexibility in coping with the sector’s future developments and mitigating its associated risks.

The FVM adoption will enhance ACC’s ability to expand in its operations in a faster and more efficient way and embrace new investment opportunities, which will be positively reflected in terms of sustainable growth in revenue and profit going forward.