ISE Towers REIT Management Company Limited

CREDIT RATING REPORT | Jan-25

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Rating History
Dissemination Date Long-Term Rating Short-Term Rating Outlook Action Rating Watch
03-Jan-25 A A1 Stable Maintain -
05-Jan-24 A A1 Stable Maintain -
06-Jan-23 A A1 Stable Maintain -
07-Jan-22 A A1 Stable Maintain -
07-Jan-21 A A1 Stable Initial -
About the Entity

ISE Towers REIT Management Company Limited was incorporated initially as Islamabad Stock Exchange (Guarantee) Limited. On January 11, 2016, ISE changed its name and scope of business and got converted from ISE to a REIT Management Company under the repealed Companies Ordinance, 1984, as a consequence of Securities and Exchange Commission of Pakistan's approval of scheme of integration under the Companies Act, 2017. Consequently, the name and scope of the Company have been changed. The principal activities of the Company are to form, launch and manage Real Estate Investment Trust (REIT) under REIT Regulations, 2022. The overall control of the Company vests with an eleven members Board. Board's Chairperson, Mr. Zahid Latif Khan has a diversified experience in the capital market spanning over twenty-five years. He is accompanied by a team of experienced management professionals. Mr. Sagheer Mushtaq is the Chief Executive Officer of the Company. He is a member of the Institute of Cost and Management Accountants of Pakistan and a commerce graduate and has over fifteen years of diversified experience in the field of finance, operation, and regulatory compliance.

Rating Rationale

The assigned rating emanates from ISE Towers REIT Management Company Limited's (or the "Company") sound corporate governance, an experienced management team, an adequate control environment, and the Company's pioneer status in the capital markets. The assigned rating of the Company incorporates its business profile characterized by stable operating revenue and strong customer base. The diversified shareholding pattern of the Company comprises 215 shareholders (Corporates, Banks, DFIs, Insurance Companies, Modarabas, pension funds, and others). The compliance function ensures adherence to all applicable internal and external rules and regulations. The Company is deriving its core income from its dominating asset "ISE Towers" which is enjoying an almost 100% occupancy level. The Company is planning to convert the ISE Towers into REIT Fund. The project has achieved significant progress and obtained requisite approvals under REIT Regulation, 2022. According to management's representation, the property transfer to the REIT scheme is expected to be completed by the end of June 2025 after the issuance of NOC from the Capital Development Authority (CDA), with the REIT Fund anticipated to be launched by the end of September 2025. The initial REIT fund size would be PKR ~2.8bln as per management representation. As of FY24, the operating income of the Company shows an improvement of 6% and stood at PKR 378mln (FY23: PKR 355mln) primarily due to rental income from investment property. Whereas, it stood at PKR 98mln at the end of 1QFY25 (1QFY24: PKR 93mln). The profitability of the Company declined to PKR ~645mln as of FY24 (FY23: PKR 1,333mln) on account of the decrease in fair value gain on investment property. Whereas, it stood at PKR 111mln at the end of 1QFY25 (1QFY24: PKR 122mln). The Company's business risk is supported by high-profile tenants. The Company has zero leveraging and its liquidity position remains comfortable. The equity stood at ~PKR 7,740mln at the end of FY24 (FY23: PKR 7,534mln). Whereas, it stood at PKR 7,852mln at the end of 1QFY25.

Key Rating Drivers

The ratings are dependent upon the Company’s ability to sustain its healthy business profile amidst strong competition, herein, effective and prudent management of financial risk indicators remain important. Meanwhile, retention of key management, sound governance practices, and consistent performance of funds is critical. Any significant loss in market share will impact the rating.

REPORT CONTENTS
  1. Rating Analysis
  2. Financial Summary
  3. Rating Scale
  4. Regulatory Disclosure

ISE Towers REIT Management Company Limited

rating analysis

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Profile
Structure

ISE Towers REIT Management Company ( "ISE Towers" or the "Company") is licensed as a Non-Banking Finance Company (NBFC) under Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 by Securities and Exchange Commission of Pakistan in 2016 to form and launch Real Estate Investment Trust (REIT) under Real Estate Investment Trust Regulations, 2022.

Background

ISE Towers REIT Management Company Ltd was initially incorporated as Islamabad Stock Exchange (Guarantee) Limited (ISE). Later on, after the integration of Karachi Stock Exchange (KSE) and Lahore Stock Exchange (LSE), on January 11'2016, the Company got converted from ISE to a REIT Management Company under the repealed Companies Ordinance, 1984. As a consequence of this approval of integration, the name and scope of the Company has been changed. The new name of the Company is “ISE Towers REIT Management Company Limited”. The Company owns a multistory building “ISE Towers” situated in Blue Area Islamabad. The Company is in process to launch its Rental REIT Scheme. For this, the dominating asset owned by the Company "ISE Towers" has been earmarked for transferring to the scheme.

Operations

The principal activities of the Company is to form, launch and manage Real Estate Investment Trust (REIT) under REIT Regulations, 2022. The Company owns a multistory building “ISE Towers” situated in Blue Area Islamabad. The Company is in the process to launch its Rental REIT Scheme. For this, the dominating asset owned by the Company "ISE Towers" has been earmarked for transferring to the scheme.

Ownership
Ownership Structure

The shareholding pattern of the Company is well diversified comprising of 215 shareholders. Institutions and corporate bodies hold the majority of the shares.

Stability

Building on years of experience in capital market, equity brokerage, financial and banking services etc.

Business Acumen

Majority of the shareholders of the Company have well diversified experience in capital market, equity brokerage, financial services, portfolio management, investment advisory and financial services, banking and technical analysis.

Financial Strength

The financial strength of the sponsors remains strong due to their diversified investment portfolios.

Governance
Board Structure

The Board comprises eleven members, which include four independent directors, six non-executive directors and one executive director.

Members’ Profile

All the directors are seasoned professionals and possess manifold experiences in the relevant fields. Mr. Zahid Latif Khan is the Chairperson of ISE Towers. He is a graduate of National Security Workshop (NSW) and is a certified director by ICMA. Mr. Zahid has a diversified experience of the capital Market business spanning over a period of twenty-five years. During his association with the securities industry, Mr. Zahid has achieved extensive hands on familiarity with multifaceted operational aspects.

Board Effectiveness

The Board of the Company has the overall responsibility for establishment and oversight of risk management framework. There are four Board committees: i) Audit Committee, and ii) Human Resource and Remuneration Committee iii) Nomination Committee iv) Risk Management Committee.

Financial Transparency

BDO Ebrahim & Co. Chartered Accountants is the external auditor of the Company. The firm is QCR rated by ICAP and are in the A Category of SBP’s panel of auditors.

Management
Organizational Structure

The Company’s operations are grouped under six departments. These include (i) Internal Audit/Compliance (ii) Operations and Management (iii) Accounts & Finance (iv) Security Management (v) Administration/HR (vi) Information Technology. Each Department Head reports directly to the CEO and the head of internal audit reports to the Audit Committee.

Management Team

The Company has a mix of diverse experienced and skilled management. Mr. Sagheer Mushtaq is the Chief Executive Officer of the Company. He is a commerce graduate and has over fifteen years of diversified experience in the field of finance, operation and regulatory compliance. Mr. Zeeshan Shafiq, CFO , has more than a decade experience and associated with the group since 2017.

Effectiveness

The matters are discussed and settled at the individual levels with discussion with the top management.

MIS

Due to current nature of operations, the Company is using different Management Information Systems to manage day to day operations and management reporting, which are Sidat Hyder Financial Information System (FIS), Billing Control & Management System (BCMS) and Building Management System for HVAC system.

Risk Management framework

Risk management policy is well documented and approved by the Board. It covers operational risk, credit risk, financial risk, reporting and regulatory compliance. The policy framework enables the management to achieve operational efficiency and proper monitoring.

Business Risk
Industry Dynamics

Real Estate sector is the most heavily invested segment of the economy in the Country, offering a huge potential for the nation’s development. The REIT Schemes provide a transparent and well-documented mechanism for investment in the real estate sector but due to range of limitations including absence of clean titles, restrictive building codes, problematic construction regulations, untold economic costs, imbalanced taxation regime, expensive financing, etc. growth of REIT Sector is not getting due momentum.

Relative Position

ISE Towers REIT Management Company is in the process of launching its REIT scheme. The initial size of REIT fund would be PKR 2.8bln as per management representation.

Revenues

During FY24, the Company’s operating income (rental income) clocked in at PKR~378mln (FY23: PKR~355mln) with an increase of 6% on Y-O-Y while at the end of 1QFY25, it stood at ~98mln. The operating expenses increased to PKR~96mln during the period ended FY24 (FY23: PKR~91mln) while it stood at ~26mln as of 1QFY25.

Performance

During FY24, total earning assets reflected ~83% of the total asset base (FY23: ~84%). Whereas, it remains stagnant at the end of 1QFY25. The other income increased from PKR~187mln to PKR~236mln during the period ended FY24 on YoY basis. Whereas, it stood at PKR 49mln at the end of 1QFY25. The share of profit from associated companies stood at PKR~127mln during FY24 (FY23: PKR~66mln). It comprises 20% of net profit during FY24. Whereas it stood at PKR 26mln at the end of 1QFY25. The profitability of the Company declined to PKR ~645mln as of FY24 (FY23: PKR 1,333mln) on account of the decrease in fair value gain on investment property. Whereas, it stood at PKR 111mln at the end of 1QFY25 (1QFY24: PKR 122mln).

Sustainability

The Company is also envisaging some other real estate projects under REIT umbrella. The Company is also planning to generate resources thereby on the forthcoming public issue of ISE REIT.

Financial Risk
Credit Risk

As a REIT Management company, the credit risk is posed from the tenants of the building. ISE Towers is a corporate building and tenants are multinational corporations and strong reputed banks and institutions. Hence the Company has low credit risk.

Market Risk

The primary source of market risk of the Company is interest rates. The Company’s exposure to market risk is low as Company’s investment in T-bills during 1QFY25 is PKR~724mln, yielding a return of 18.49%-21.26% (FY24: PKR~691mln from 18.49%-21.26%). The T-Bills will be matured between Nov 2024 - Jun 2025.

Liquidity and Funding

The Company is managing and investing its funds in the manner that ensure safety of principal and a high degree of liquidity while maximizing the yield. Liquidity and preservation of capital are the paramount considerations. The investment policy may be reviewed by the Board at any time as deemed appropriate.

Capitalization

The equity stood at ~PKR 7,740mln at the end of FY24 (FY23: PKR 7,534mln). Whereas, it stood at PKR 7,852mln at the end of 1QFY25, which is well above minimum regulatory requirements for REIT Management companies i.e. PKR~50mln. The Company has no long and short term borrowings.

 
 

Jan-25

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ISE Towers REIT Management Company Limited

financial summary

(PKR mln)

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Sep-24
3M		 Jun-24
12M		 Jun-23
12M		 Jun-22
12M
A. BALANCE SHEET
1. Earning Assets 6,796 6,715 6,539 5,393
2. Non-Earning Assets 1,386 1,373 1,291 1,276
3. Total Assets 8,182 8,089 7,830 6,669
4. Total Borrowing 0 0 0 0
5. Other Liabilities 330 348 296 257
6. Total Liabilities 330 348 296 257
7. Shareholders' Equity 7,852 7,740 7,534 6,412
B. INCOME STATEMENT
1. Investment Income 98 393 458 423
2. Operating Expenses (26) (97) (91) (146)
3. Net Investment Income 72 296 367 278
4. Other Income 75 486 1,093 219
5. Total Income 147 782 1,461 497
6. Other Expenses 0 0 0 0
7. Total Finance Cost (0) (0) (0) (1)
8. Profit Or (Loss) Before Taxation 146 782 1,461 496
9. Taxation (35) (136) (128) (114)
10 . Profit After Tax 111 646 1,333 382
C. RATIO ANALYSIS
1. Investment Performance
i.. Investment Income / Average AUMs N/A N/A N/A N/A
ii.. ROE 5.7% 8.5% 19.1% 6.0%
iii.. ROA 5.5% 8.1% 18.4% 5.8%
2. Financial Sustainability
i. Coverages
a. Total Borrowing / EBITDA N/A N/A N/A N/A
b. EBITDA / Finance Cost N/A N/A N/A N/A
ii. Capitalization
a. Total Borrowing / (Total Borrowing + Shareholders' Equity) 0.0% 0.0% 0.0% 0.0%

Jan-25

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ISE Towers REIT Management Company Limited

rating scale

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Jan-25

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ISE Towers REIT Management Company Limited

regulatory disclosure

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  1. Rating Team Statements
    1. Rating is just an opinion about the creditworthiness of the entity and does not constitute a recommendation to buy, hold, or sell any security of the entity rated or to buy, hold, or sell the security rated, as the case may be. (Chapter III; 14-3-(x))
    2. Conflict of Interest
      1. The Rating Team or any of their family members have no interest in this rating (Chapter III; 12-2-(j))
      2. PACRA, the analysts involved in the rating process, and members of its rating committee and their family members do not have any conflict of interest relating to the rating done by them (Chapter III; 12-2-(e) & (k))
      3. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)]
      4. Explanation: for the purpose of the above clause, the term "family members" shall include only those family members who are dependent on the analyst and members of the rating committee.
  2. Restrictions
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    2. PACRA does not disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge during a business relationship with the customer. (Chapter III; 10-7-(d))
    3. PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of the entity subject to rating. (Chapter III; 10-7-(k))
  3. Conduct of Business
    1. PACRA fulfills its obligations in a fair, efficient, transparent, and ethical manner and renders high standards of services in performing its functions and obligations. (Chapter III; 11-A-(a))
    2. PACRA uses due care in the preparation of this Rating Report. Our information has been obtained from sources we consider to be reliable, but its accuracy or completeness is not guaranteed. PACRA does not, in every instance, independently verify or validate information received in the rating process or in preparing this Rating Report. (Clause 11-(A)(p))
    3. PACRA prohibits its employees and analysts from soliciting money, gifts, or favors from anyone with whom PACRA conducts business. (Chapter III; 11-A-(q))
    4. PACRA ensures before the commencement of the rating process that an analyst or employee has not had a recent employment or other significant business or personal relationship with the rated entity that may cause or may be perceived as causing a conflict of interest. (Chapter III; 11-A-(r))
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    2. PACRA does not provide consultancy/advisory services or other services to any of its customers or their associated companies and associated undertakings that are being rated or have been rated by it during the preceding three years, unless it has an adequate mechanism in place ensuring that the provision of such services does not lead to a conflict of interest situation with its rating activities. (Chapter III; 12-2-(d))
    3. PACRA discloses that no shareholder directly or indirectly holding 10% or more of the share capital of PACRA also holds directly or indirectly 10% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to rating by PACRA. (Chapter III; 12-2-(f))
    4. PACRA ensures that the rating assigned to an entity or instrument is not affected by the existence of a business relationship between PACRA and the entity or any other party, or the non-existence of such a relationship. (Chapter III; 12-2-(i))
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  5. Monitoring and Review
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    3. PACRA initiates an immediate review of the outstanding rating upon becoming aware of any information that may reasonably be expected to result in downgrading of the rating. (Chapter III; 17-(c))
    4. PACRA engages with the issuer and the debt securities trustee to remain updated on all information pertaining to the rating of the entity/instrument. (Chapter III; 17-(d))
  6. Probability of Default
    1. PACRA’s Rating Scale reflects the expectation of credit risk. The highest rating has the lowest relative likelihood of default (i.e., probability). PACRA’s transition studies capture the historical performance behavior of a specific rating notch. Transition behavior of the assigned rating can be obtained from PACRA’s Transition Study available at our website. (www.pacra.com) However, the actual transition of rating may not follow the pattern observed in the past. (Chapter III; 14-3(f)(vii))
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