Akfen REIT, closing the year with a profit of TL 39 million, caught attention early this year with the issuance of bonds convertible to shares, a first in Turkey. On one hand, Bulvar Loft which is a new asset in its portfolio and the World Cup to be organized between 14th June-15th July in Russia on the other, already leveraged the company’s businesses. “All rooms of our 4 hotels in Russia are full throughout the World Cup until October 2017” Akfen REIT General Manager Sertac F.Karaağaoğlu told.

THE REVIVAL

of tourism industry in 2017 and the recovery of the Turkish economy increased the occupancy rates of hotels. However unfortunately, this positive atmosphere didn’t manifest itself in room prices.

Akfen Real Estate Investment Trust, reviewing all its expenditures during this period and decreasing its costs by 25 per cent after negotiating again with its suppliers, saw ‘historical occupancy’ figures in its hotels in the third quarter of the year. Thanks to the execution of right strategies, the company turned to ‘profit’ 4 years later in the balance sheet of the year 2017. Akfen REIT, with an asset of 1.8 billion liras, announced a profit of TL 39 million by the end of 2017. Akfen REIT, adding Bulvar Loft anticipated to be finished by the end of this year, to its portfolio consisting of 20 hotels and 1 office building, issued bonds convertible to shares early this year, which is a first in Turkey.

The company, thus generating a financial resource of 170 million liras, plans to finish Bulvar Loft project by the end of this year. We talked with Akfen REIT General Manager Sertac F.Karaağaoğlu about these recent developments, the evaluation of the year 2017 and the anticipations for the year 2018. Karaağaoğlu told that the hotels are already 100 per cent fully occupied for the World Cup to be organized this year in Russia and explained their draft projects to Strategy:

We are working on 2 different projects, to be a first in Turkey

Will you have new projects in 2018?

We have plans, we conduct some works but we are a publicly traded company, so we cannot unveil them without the decision of the board. Currently, they are in draft form.

Well, what are the categories of these projects; will you have other partners?

As you know, Akfen gets generally involved in projects in partnership with the experts qualified in their respective fields or the best ones and several of its investments are a first in Turkey. We are working on the preliminary steps of the long term potential investments relying on these principles. We develop the first and new projects with the foreign partners in the fields of healthcare, accommodation etc…where Akfen Group has a broad know-how.

When looking at the figures for the year 2017, we see a year better than 2016. What was the impact of these developments on your business?

The year 2017 was a challenging one until mid-March of that year. The first quarter was actually a lost one. As of mid-March, first Iranians and then, Arabs began to arrive in great numbers. Thus, the occupancy rates after the first quarter speeded up to such an extent that we caught historical occupancy rates in our hotels in the third quarter. Some of our hotels were 100 per cent occupied throughout three months. The number of visitors coming to Turkey surged from 25 million to 32 million in 2017. Compared to the year 2016, the occupancy rates of hotels recovered in 2017.

However, unfortunately, the room prices didn’t rise. Since the coastal area sells in euro, these hotels didn’t have trouble. However, the same cannot be said for the hotels bound to the domestic market. When talking about Istanbul in terms of euro, the average room price being 121 euros in 2015 decreased to 89 euros in 2016 and to 76 euros in 2017. As for the other REITs, the number is over 30 and these REITs produce mostly residences and shopping malls. Currently, REITs are merely satisfied with cherishing hope. But I think that there are many reasons and indicators in order to be hopeful.

What challenged you mostly during this time?

Our company leases the hotels and the rents collected are the source of revenue; therefore, the performances of hotels affect directly our financial results. As terror and the global economic recession in 2015 and 2016 had disastrous effects on the hotel performances, we anticipated that the rise will begin again and fortunately, this recovery began in 2017. Nevertheless, this good beginning didn’t eventually remove completely the negative effects of the past. During this course, the sharp rise of foreign exchanges weighed on the revenue and cost management.

How did you start to this year?

What are your expectations from 2018?

We are highly optimistic for the year 2018. At the beginning of the past year, the room price of our hotel in Karaköy was 40 euros whereas it’s around 70 euros, this year. The hotel occupancy rates will also have impact on the prices. The prices will apparently rise over 100 euros during the season. As Akfen REIT, we have four hotels in Russia too. Since there was economic stagnancy until 2016 in that country too, the hotel performances were quite parallel to Turkey’s. However, Russia will host the World Cup this year between 14th June- 15th July. Our hotels are already full in June and July. FIFA’s Official Accommodation Supplier (for FIFA’s own managers, football teams, sponsors, media and fans), the Spanish National Radio, the Japanese Tour Operators, Russia’s largest corporation providing support to sports (for Chinese customers), FIFA’s broadcast corporation, the Russian News Agency and several other media corporations reserved all our rooms throughout the tournament and even before.

TITLE DEEDS WILL BE DISTRIBUTED AT BULVAR LOFT IN SPRING 2018 As REIT,

You don’t have any real estate other than hotel in your portfolio. The last modification put also a residence project under your umbrella. How did this course evolve, can you talk about it?

We were essentially a thematic REIT. Our portfolio was consisting of hotels and an office building in Russia. We included Bulvar Loft Project in a state of one third completed, consisting of 822 residences and a commercial space of 7 thousand sqm. over a land of 37.000 sqm owned by Iller Bank and began to be constructed by Akfen Construction, into our partnership forged with Akfen Construction in November. The construction is planned to be completed in a year. Well, why did we overtake it? What do we expect from this project? Because of our limited revenue and appreciating foreign currency exchange, our main shareholder Akfen Holding decided to give considerable financial support. Instead of borrowing, Akfen Holding preferred to do it in a way to benefit REIT and the shareholders. The goal is not to save the day but to make the company more sustainable in the long term. If the main shareholder had preferred to land money to this huge project, the company’s debts would pile up further.

Thus, instead of such an approach, the holding handed over the project to the partnership with 99 per cent owned by REIT in order reinforce the financial structure of the company and to share the whole revenue of a profitable construction project with the whole investors. Such an investor vision taking care about the company’s and all shareholders’ future and rights, is rarely seen. Akfen is one of the minority groups on the stock exchange, protecting the interest of its shareholders. Another move by the company is the issuance of bonds convertible to shares in early 2018, a first in Turkey. These bonds worth 170 million liras, have a 3-year term and the interest rate is 12 per cent. Thus, the capital and the accumulated interest of the bonds, in which the accumulated interest is added to the capital at the end of the terms, will be convertible to the company’s stock by the end of 3 years with the capital increase through rights issues depending on the choice of Akfen REIT. The resource obtained will be used to complete Bulvar Loft project and to finance other short-term needs of REIT. Thu, we provided a financial lifeline not bringing an additional burden to the cash flow. We owe this comfort to our main shareholder.

Our hotels in Moscow, Trabzon, Girne and Karaköy are our main power

Among 20 hotels, which are the main power, pleasing you the most with their financial results?

Is there any which you regret to have invested in?

Girne Merit Park Hotel in the Northern Cyprus, Moscow Ibis, Novotel Karaköy, Novotel Trabzon can be evaluated as the main power at least for the year 2017. I hope that the other will come to add with the improvement of the trade and tourism atmosphere. On the other hand, there are also hotels in Turkey and Russia showing a performance falling behind our plans because of happenings in 2015 and 2016. However, it wouldn’t be wise to expect that each of these 22 projects will be very profitable.

Could you please tell about the performance of your company?

We invested some 300 million euros between 2005 and 2017. During this period, we made investment for 20 hotels and one office building and we got a foreign financing of 200 million euros. Since the beginning of these investments, we witnessed several ups and downs regarding the number of hotels, bed supply, currency exchange rate anticipations, the growth speed of the economy, security etc…Especially the fast appreciation of foreign currency exchange rates and terror attacks deviated a lot the entire industry from the projections of the companies. The hotels remained first empty, then cut prices amid fierce competition and the rooms were half filled at very low room prices in Turkish lira significantly depreciated against the foreign currency. This situation weighed eventually on the financial results of the period 2014-2016. Since the valuation of the hotels is made according to the revenue projection of the upcoming period and in bad times, the valuation methods are based on the projection that the pessimistic scenarios will persist, the values of our hotels dropped dramatically on paper. In 2017, we managed to reverse this gloomy outlook and we reported a good profit by improving our revenue performance.

When evaluating our performance in a more realistic perspective, we see that our company has a sustainable structure for years with EBITDA margin higher than 70 per cent. Our investors too see it. We have more than 2 thousand investors and this number is very important. Between February 2017-February 2018, the Istanbul Stock Exchange 100 Index rose over 28 per cent whereas Akfen REIT shares surged higher than 68 per cent. The main factor for this performance is the profitable sales made by Akfen Group in 2017 and the positive perception about the new investments. Our investors is aware of the power behind our company and therefore, they keep their interest in the unique publicly traded company of our group. As of the end of the year 2017, we are a company with an asset of 1.8 billion liras. The net asset value is 600 million liras. We are very happy that we report profit four years later, in 2017. Our profit by the end of 2017 is TL 39 million. The improvement of the tourism industry, the good management of risks and costs played a positive role in this improvement.