Solidere “in the red”: Real estate giant exceeds its allowed debt ceiling

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Al-Akhbar Management

A massive billboard reading "Stop Solidere" in reference to the construction giant owned by the family of slain former Lebanese premier Rafik Hariri hangs at the Saint Georges Hotel and Yacht Club in Beirut on June 15, 2011. (Photo: AFP-Joseph Eid)

By: Mouhamad Wehbe

Published Monday, July 7, 2014

When Solidere’s board, which controls the majority of votes in the company’s general assembly, decided not to distribute dividends in 2013, it was aware that the company was drowning in short-term debt. To conceal this, Solidere resorted to a number of measures, such as securitization and limited spending cuts in its administration. But in the end, figures do not lie.

Bad news for shareholders: Solidere will not distribute dividends for 2013. This will be the second year in a row that this has happened, exposing the extent of the financial crisis engulfing the mega real estate developer. Though the company often boasts of its $7 billion real estate portfolio, it is in fact hiding its real financial position, which has forced it to sell debt securities to banks, and accrue debts and accumulating interest costs through overdrafts and credit facilities. In effect, these debts peaked at the end of 2013, forcing Solidere to close down several tourist enterprises that it owned after they posted consistent losses.

In short, Solidere is in deep trouble. Its financial results for 2013 reveal a bleak picture. At the end of 2013, Solidere’s net profits were about $39.68 million, compared to $16 million in 2012, but $162 million in 2011. In other words, earnings in 2013 were no more than a quarter of the earnings in 2011.

Yet, these figures are not enough by themselves to clarify the actual situation, because the company’s debts in 2013 reached the maximum allowable limits set in its articles of association. This means that its ability to continue its real estate development activities in current market conditions is questionable.

Indeed, according to the financial results contained in Solidere’s annual report dispatched to the general assembly, Solidere resorted to short-term credit facilities and debts worth up to $673 million, which is significantly higher than its $165 million cash hoard, and the value of its bonds that have maturity dates in the coming years ($450 million).

What is clear from the audited financial results is that Solidere had exhausted its own debt limits using bank overdrafts, where debt levels have reached $227.1 million, with a servicing cost of $10 million.

Solidere also resorted to short-term credit lines worth $275 million for one year, at a cost of $20 million; and medium-term credit facilities worth $48 million with maturity periods that extend to three years, at a cost of $58 million. The total value of these debt burdens is $585.1 million. If we add to them direct debts, we get the total we mentioned earlier of $673 million, a 21 percent increase relative to the debts in 2012. In addition to these, Solidere has contractual obligations worth $132 million, an amount that is almost equal to its cash holdings as per the budget.

The depletion of the wiggle room in Solidere’s budget is taking place amid two other major issues: the first regarding tough market conditions, and the second with the high level of administrative spending relative to annual earnings.

In fact, Solidere’s management has avoided informing shareholders on the reality of the situation. In its annual report, the board has stated [translation]: “Despite unfavorable conditions for investments in Lebanon, especially in real estate, the company continued to enjoy solid financial foundations based on the size and value of its assets including lands intended for development, leased built-up properties, various financial investments, and relatively high cash holdings.”

But the above is not only trying to hide the truth about the company’s real position; it is also trying to portray itself as a “remote island” that is unaffected by what is happening around it. Solidere has claimed that revenues from real estate sales in 2013 were to the tune of $95 million, the result of selling 30,000 square meters of net built-up areas. The report adds [translation], “Despite the decline in business activity in the country generally, the company’s net profits reached approx. $39.7 million, the result of several real estate sales deals and steady revenues from leases, as well as the sustained reductions in the budget’s expenditures.”

Solidere’s claims seem to have a “promotional” purpose among the shareholders. For one thing, the company is trying to suggest that Lebanon remains attractive for real estate speculators looking for quick and easy profits that can be made in trading lands and built-up properties.

But financial data has consistently shown a decline in interest in Solidere. Sales dropped from $242 million in 2011 to $50 million in 2012, before rising slightly to $95 million in 2013. Some real estate developers in downtown Beirut “regret” having invested there, because a large proportion of apartments and commercial spaces do not attract any customers. Some of these investors are seeking to circulate that prices are high in downtown Beirut in the hope of this snowballing into something that pulls in speculators’ attention toward the central district.

Yet this is not the only crisis Solidere is facing. Its revenues from leases also declined from $54.3 million in 2012 to $51.7 million in 2013. Interestingly, the costs of maintenance, operation, electricity, management, tax, and depreciation represented around 46 percent of revenues from rents in 2012, and were still above 40 percent in 2013.

At any rate, administrative costs are one of the main sources of concern for shareholders in every general assembly. In 2013, the company spent around $28.3 million on these costs, compared to $34.1 million in 2012 and $34.7 million in 2011. This cost represents a large proportion of the profits; in 2013, they were equivalent to 71.3 percent of profits, and 213 percent in 2012.

The company’s performance, contrary to its claims to the shareholders, shows it hiding behind some indicators and current circumstances to concoct a fantastic tale about its success, where wastage and corruption do not exist. However, Solidere has resorted to further securitization, selling bonds it held in its portfolio, and which had maturity dates in the coming years. This has left some with the impression that the high level of Solidere’s short-term debts, having exceeded acceptable levels, has forced the company to pursue more securitization to cover its growing financial deficit.

One result of this financial engineering is the shrinking arsenal of debt securities in the company's portfolio, which would require additional measures to avoid liquidity problems in the future. In 2012, Solidere’s bond portfolio was worth $553 million, but this declined to $435 million in 2013, despite making additional sales.

The level of risk facing Solidere increases when we find out that its sales are concentrated in the high-value category. According to the audited report on financial results, nearly half of bonds Solidere holds involve three particular clients.

Ultimately, what the company owns is much larger than its debts and contractual obligations. This raises many questions about the economic viability of the company and its promises to the shareholders. Recall that Solidere was created pursuant to a political decision that appropriated the rights of many owners and tenants in the downtown area, and ended up profoundly altering the historical and cultural features and identity of this area of Beirut, once a meeting place for all people, social classes, and religious and ethnic communities.

In the previous general assembly session, the owner of the Saint Georges resort Fadi Khoury made an intervention, raising questions about Solidere’s promises to distribute profits as follows: 6.5 percent in the first five years; 41 percent in the next five years; 34.7 percent in the five-year period that follows; and 33 percent in the fourth five-year period.

But financial results over the past years revealed the limited ability of the company to deliver on its promises. In the first five years, 0 percent of the profits were distributed then 0.38 percent in the next five years. These low distribution figures continued, peaking at 4 percent – compared to 28 percent promised by Solidere for the period in question – before going back to 0 percent in 2013.

It is worth noting that Solidere’s consolidated balance sheet included a $650,000 item for advertising and marketing costs in 2013, compared to $6.5 million in 2012. The cost of maintenance and offices was $3.54 million compared to $4.22 million in 2012.

The financial report states that Solidere’s management had established a number of tourist enterprises a few years ago, but was forced to shut these companies down because of the losses they incurred. The company allocated $15 million to cover these losses.

Prices slowly slipping

Solidere owns 1.84 million square meters of net built-up areas intended for sale or development. According to estimates by the company, the value of these areas is $7 billion, meaning that the price per square meter on average is $3,805. But in 2011, the company had, according to official statements, 1.88 million square meters with an estimated value of $8 billion, which means that the price per square meter was $4,255. The price difference per meter in the last three years is thus $450.3, a decrease of 10.6 percent.

In addition, the company currently owns a portfolio of built properties, including the southern part of Beirut Souks, and leased buildings and developments with a market value totaling $1.65 billion.

This article is an edited translation from the Arabic Edition.

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