Turkish Reits: Top Plays: Sinpas and Is Reit

Turkish Equities / Transfer of coverage
24 October 2013
Turkish REITs
Top Plays: Sinpas and IS REIT
Is and Sinpas REIT - offer upside coupled with catalysts
Is REIT has taken steps to enhance the efficiency of its portfolio and is on course to deliver a sustainable 10% RoE from 2015 vs. an historic 6-7%. Our forecasts do not include the 3 upcoming projects, which should add 8% to the NAV; (i) the 150,000sqm residential Kartal project (1Q14 launch), (ii) the 15,000sqm residential Altunizade project (2014 launch) and the (iii) 26,000sqm leasable area office-retail Atasehir Finance Center project (expected completion date of 2016). Furthermore, the recently acquired 130,000sqm Pasabahce plot is likely to increase total GLA / GSA under construction by c.40%. We expect a CAGR of 16% in rental revenues and 15% in net income until 2016; 3Q13 net earnings should triple YoY to TRY50mn thanks to the TRY22mn gain from the hotel sale and TRY20mn from the delivery of 374 units in the Cinarli Bahce project. While its latest project launch had been in 1H12, Sinpas is to initiate five new projects over the next six months. Pre-sales of three of them started in September; the highend project in Istanbul - Bomonti Time (50,983 sqm saleable area) and two in Ankara - The First and Ankara Incek Life Residence (115,701 sqm saleable area) with a 12% pre-sales ratio in one month. Bomonti Time and The First projects, which should add 14% to the target value, are expected to generate respective solid IRRs of 17% and 22%. Sinpas will start the pre-sales of additional two projects (Istanbul Halkal Park and Ankara Buyukesat) on 145,674sqm saleable areas in 1H14. Following a 48% underperformance since 2010-beginning (among the worst 15 performers of BIST100), the stock trades at a 76% discount to its NAV vs. the historic average of 57%. We believe the stock is on its way for an imminent reversal.
Is REIT Bloomberg / Reuters Target Price (TRY/share) 12m expected total return Mcap (TRYm) EV (TRYmn) 3m avg daily trading vol. BIST relative performance 3m 12m Sinpas REIT Bloomberg / Reuters Target Price (TRY/share) 12m expected total return Mcap (TRYm) EV (TRYmn) 3m avg daily trading vol. BIST relative performance 3m 12m Emlak Konut REIT Bloomberg / Reuters Target Price (TRY/share) 12m expected total return Mcap (TRYm) EV (TRYmn) 3m avg daily trading vol. BIST relative performance 3m 12m Torunlar REIT Bloomberg / Reuters Target Price (TRY/share) 12m expected total return Mcap (TRYm) EV (TRYmn) 3m avg daily trading vol. BIST relative performance 3m 12m OUTPERFORM ISGYO TI / ISGYO.IS 1.98 37% 907 1,004 1.2 -5.0% -1.6% OUTPERFORM SNGYO TI / SNGYO.IS 1.55 45% 642 958 2.0 -4.4% -21.2% MARKET PERFORM EKGYO TI / EKGYO.IS 3.58 27% 7,025 5,471 9.9 2.1% 1.0% MARKET PERFORM TRGYO TI / TRGYO.IS 4.10 11% 1,850 2,360 1.2 0.0% 19.0%
Emlak, a residential proxy, offers lower upside and few catalysts

Emlak generates strong cash returns thanks to its safe revenue sharing model (RSM) and privileged access to TOKIs land bank. Our valuation is conservative since (i) we attach a 1.3x multiplier to the appraisal value of vacant land vs. the historic of 1.6x and (ii) assume no increase in revenue targets of tendered land plots vs. the historic escalation of 1.5x. We expect the launch of five RSM projects in 4Q13 and at least five more in FY14. Among the upcoming ten projects, a centrally located 127,920 sqm plot with an appraisal value of TRY637mn is to be tendered by December, a likely trigger for the stock. Emlaks value creation will eventually stem from new undeveloped settlement zones in the north of Istanbul. While expansion in these zones may support sales for the low middle income, it may hamper solid returns in RSM projects since the upper middle would be less willing to move to these regions. SPO overhang on the share performance may continue for the time being.
Growth prospects of Torunlar priced-in

Torunlar will expand its 223,643sqm rent generating retail portfolio in stake adjusted terms by 22% in 2013-16. The major contribution will come from Mall of Istanbul (MoI154,000sqm) by 1Q14 and Torun Tower (45,000sqm) by 1H14. Rental income and EBITDA should expand at CAGRs of 31% and 23% in 2013-16. We expect TRY608mn in residential profits upon deliveries in 2013-16 with more upcoming projects including Pasabahce and KIPTAS by 1Q14, Kemankes by 2Q14, the 2nd stage of MoI and Maltepe by 4Q14. Torunlar offers the lowest upside among the four REITs under our coverage. The net debt / EBITDA is set to peak at 4.7x in 2014, from an actual level of 4.3x at the end of 2012. Other risks are (i) potential overhang of share sale of shareholders (i.e. 36% of FF) and (ii) an oversupply risk in the Istanbul retail market.
Gaye Abidin
+90 212 336 7283 gaye.abidin@finansinvest.com
Table of Contents
Summary Table for REITs coverage Turkish Residential Market Outlook Companies Section Is REIT Investment Theme Valuation & Assumptions Financials Sinpas REIT Investment Theme Valuation & Assumptions Financials Emlak Konut REIT Investment Theme Valuation & Assumptions Financials Torunlar REIT Investment Theme Valuation & Assumptions Financials
3 5
10
16
25
32
REIT Sector, 24 October 2013
Figure 1 Summary table for REIT companies in our coverage

EKGYO Rating Ratings 12m TP MCap Upside Potential Revenues Key Figures EBITDA Net Income EV/EBITDA Multiples P/E P/BV FCF FCF yield Net Cash/(Debt) Leverage % MCap for EKGYO and SNGYO, Net Debt/EBITDA for TRGYO and ISGYO Sales* EBITDA* EPS* Shareholders' Equity 1 month 3 months 1 year YTD TRY TRY % 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 Market Perform 3.58 7,150 27% 2,539 1,410 1,192 565 1,274 569 4.6 10.0 5.6 12.6 1.4 1.2 1,492 485 21% 7% 1,679 1,516 23% 21% n.m. n.m. n.m. 15% 1% 2% 1% -7% TRGYO Market Perform 4.10 1,825 11% 687 350 234 169 109 157 10.1 14.8 16.7 11.7 0.6 0.6 23 223 1% 12% -1,053 -787 4.5 4.7 27% 23% -8% 5% 4% 0% 19% 20% ISGYO Outperform 1.98 907 37% 278 148 116 99 101 69 8.7 11.2 9.0 13.2 0.8 0.8 -4 31 0% 3% -97 -201 0.8 2.0 14% 16% 15% 6% 6% -5% -2% 3% SNGYO Outperform 1.55 642 45% 607 820 112 139 73 146 8.4 6.8 8.8 4.4 0.6 0.5 206 -31 32% -5% -338 -402 -53% -63% n.m. n.m. n.m. 13% -1% -4% -21% -23%
* Sales, EBITDA and EPS CAGRs are not relevant for pure residential companies since IFRS financials indicate the deliveries and not the cash flows.
Relative Performance
CAGRs (2012-16)
Cash Flow
Figure 1 Summary table for REIT companies in our coverage (continued)

EKGYO Best residential proxy Rather secured cash flows Investment Positives High cash returns (i.e. 40% in 2013 YTD) 90% YoY rise in GLA by 2014 and supply of 345K saleable area until 2015 TRGYO ISGYO Safe rental income focused in resilient office assets 46% YoY rise in GLA and supply of total 420K GSA by 2016 Upside risk to our valuation not including 4 upcoming projects Decent upside potential and multiples Single digit ROE until 2015 FCF under pressure due to construction activity at five on-going projects SNGYO Attractive upside potential and multiples Upcoming 5 projects over the next 6 months; the pre-sales of two with high IRRs already started Net debt of position of TRY338mn (13YE) to turn into net cash of TRY366mn (15YE) Strong residential outlook in 2013 & 14 In-house payment plan widely used since 4Q13
Strong cash position Strong residential outlook in 2013 & 14 SPO overhang Depletion of attractive land plots in central locations Change in mix of land-bank in favour of under-developped zone in north of Istanbul Lower upside potential and higher multiples
Starts to generate meaningful operational cash flows starting with 2014 (i.e. 13% of MCap)
Oversupply risk in Istanbul retail market High debt position Potential stake sale of shareholders
Investment Negatives
2014 FCF under pressure due to construction activity of five upcoming projects Fragile business model in high interest & low growth environment
Lower upside potential
Source: The Companies, BIST, FinansInvest Estimates * Sales, EBITDA and EPS CAGRs are not relevant for pure residential companies since IFRS financials indicate the deliveries and not the cash flows.
Relative stock performances (rebased Dec10)

190 170 150 130 110 90 70 2-Feb-11 2-Feb-12 2-Feb-13 2-Aug-11 2-Aug-12 2-Aug-13 2-Apr-11 2-Oct-11 2-Apr-12 2-Oct-12 2-Apr-13 2-Jun-11 2-Jun-12 2-Dec-10 2-Dec-11 2-Dec-12 2-Jun-13 2-Oct-13 50
Relative stock performances (rebased Dec10)

140 120 100 80 60 2-Feb-11 2-Apr-11 2-Jun-11 2-Aug-11 2-Oct-11 2-Dec-11 2-Feb-12 2-Apr-12 2-Jun-12 2-Aug-12 2-Oct-12 2-Dec-12 BIST100 2-Feb-13 2-Apr-13 2-Jun-13 2-Aug-13 2-Oct-13 XMGYO 2-Dec-10 40
EKGYO
SNGYO
ISGYO
TRGYO
SNGYO
Source: BIST
Source: BIST
The Turkish Residential Market

A total of 7.6mn new homes needed between 2012-23- The latest official census recorded a total of 16.2mn dwellings in Turkey in 2000, of which 13.6mn were in urban areas and 2.6mn were rural. Unfortunately, the official statistics regarding the real estate market are inadequate, although the number of construction permits granted for new homes are published quarterly and the Association of Real Estate Investment Companies (GYODER) estimate that the number of urban dwellings had risen to 18.1mn by the end of 2011. GYODER conducted the following analysis in May 2012, in an effort to project housing demand in Turkey between the years of 2012 and 2023. Housing Demand Estimates 2012 23 (thousand units)
Population Growth & Urbanization 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Total 353 352 358 401 406 412 413 419 426 430 440 430 4,840 Urban Transformation 30 90 200 200 200 200 200 200 200 200 200 200 2,120 Renewal of Older Than 50 Year Units 50 50 50 50 50 50 50 50 50 50 50 50 600
Total 433 492 608 651 656 662 663 669 676 680 690 680 7,560
YoY Change n.a. 14% 24% 7% 1% 1% 0% 1% 1% 1% 1% -1%
Source: The Association of Real Estate Investment Companies, May 2012
5.1mn out of the 18.1mn homes in urban areas are unlicensed A deficit of safe and quality housing stock has accumulated due to the population explosion in big cities over the past 60 years. The population of Istanbul, Turkeys largest metropolis, has multiplied from 1.5mn in the 1950s to a current 14mn. The breakdown of urban and rural population in the country now stands at 78%/22%, compared to a vice versa breakdown in the 1920s, a shift spurred by internal migration coupled with the nations 2% p.a. population growth over the same period. For these reasons, the majority of urban dwellings are in poor condition. Moreover, 5.1mn out of the 18.1mn dwellings do not have any construction permits at all. Relatively high ratio of 81% owner-occupied urban dwellings in Turkey The Housing Finance Information Network (HOFINET) conducted a survey of the proportion of owner occupied urban dwellings in 60 countries combined with the percentage of their urban population in their total population. Turkey ranks 10 in the list, with 81% of dwellings in urban areas being owner-occupied, after Armenia, Hungary, China, India, Singapore, Spain, Venezuela, Sri Lanka and Russia. Most of these countries are not comparable to Turkey, in our view; for example, mortgage loans account for 70% of GDP in Singapore vs. 6% in Turkey, and urbanisation rates in India and Sri Lanka stand at 30% and 15%, vs. 70% in Turkey. Hungary, China Venezuela and Russia may have gained a comparative advantage over Turkey thanks to the socialist economic policies implemented in these countries. The mortgage system has a relatively short history in Turkey, being implemented only in May 2007, when compared to the Western countries. Thus, the high percentage of urban dwellings which are owner-occupied may be explained by the social behaviour of Turkish people in preference of owning their homes rather than leasing.
th
Owner-Occupied Urban Dwellings (blue) and Total Urban Population (grey)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%
Source: HOFINET
600,000 homes built by TOKI since 2003, re-shaping the market - The residential market remained stagnant in Turkey until the 2000s with the ownership of dwellings growing at a CAGR of 1.9% between 1968-97 years, falling short of the 4.5% average GDP growth in the same period. The limited supply of homes concentrated in mature traditional districts of Istanbul and the hyperinflationary environment undermined the affordability of households. The Housing Development Administration of Turkey (TOKI) was established in 1990 to tackle the shortage of urban housing for the low and middle income segments, and to cut unemployment, but became more active after the governing AKP came to power in 2002. The political strategy was to improve accessibility of the general population to housing by increasing supply. TOKI has developed 600,000 homes over the past ten years in the form of residential projects in underdeveloped and previously less popular districts of Istanbul. TOKI developed a modest 10% of the total supply after 2003, yet paved the way for private developers by enhancing the value of new districts in the city. Private developers followed TOKI launching projects for the upper-middle income segments. The chart above compares the construction permits issued, starting from 2002, with the number of occupancy permits issued, starting with 2004 to assume an average 2yr construction period. The number of construction permits granted expanded at a CAGR of 39% between 2002 and 2006, until pausing on the back of the weakness in consumer demand, before gaining momentum again in 2010 after the economic downturn. Occupancy Permits vs. Construction Permits (with 2 year lag)
440
300
160
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
Construction Permits (# of units)
Occupancy Permits (# of units)
Source: TURKSTAT
1Q13
20
Residential market further boosted by mortgage market - The enactment of the mortgage Law in 2007 to improve the primary market for mortgage finance, and the decline in interest rates since the beginning of 2009 have further supported the launch of new residential projects for the upper-middle income segment. While the number of new borrowers is highly correlated to the level of interest rates, the average size of the loans extended is less sensitive. In periods of rising interest rates, such as in 2H11, project developers have offered their own payment schemes as an alternative to banking loans with more flexible and longer term maturities in a bid to attract consumer demand. Volume of Outstanding Mortgage Loans vs. Annual Weighted Average Rate on Fresh Openings
120,000 100,000 80,000 60,000 40,000 20,000 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 0 50 45 40 35 30 25 20 15 10 5 0
Mortgage Loans (mn TRY) - LHS

Source: CBT, BRSA
Mortgage Rates (%) - RHS
Median sales price in Istanbul follows the cost index Having collapsed during the economic downturn, price indices for aggregate and new homes in Turkey have increased by 26% and 35% over the past three years. The construction cost index has increased by 24% over the same period. Hence, we could argue that housing prices have mainly followed the increase in construction costs with limited real appreciation. The median sales price in Istanbul in TRY per unit area terms has also followed the same trend. Unfortunately, we do not have further historic data which would enable us to judge whether the residential market is overpriced or not. Istanbul Median Sales Price vs. Construction Cost Index
150 140 130 120 110 100 90 80
Median Sales Price in Istanbul (TRY/sqm)

Source: REIDIN, TURKSTAT
Construction Cost Index
Housing still in the unaffordable zone, yet in a better off place - The median transaction price in Turkey over the past month stands at US$94,596 (i.e.US$808/sqm) based on figures published by REIDIN, a real estate data provider focused on emerging markets. With a standard 75% loan-to-value ratio and weighted average of 11.0% annual mortgage rate applied for fresh openings, the annual loan repayment stands at TRY23,000. Based on the assumption that around 30% of a households disposable income is spent on housing, this transaction is attainable for all first time buyers in the 10 decile and some of the first time buyers in the 9 decile, thus amounting to roughly 10-15% of the households. REIDIN has been publishing an affordability index since July 2007 covering seven large cities in Turkey, with values above 100 indicating affordable levels. The index value in Istanbul stood at 57.71 as of July 2013, significantly lower than the threshold of 100, yet much better than the 29.18 figure recorded in July 2007.
Potential First Time Buyers
th th
FY13E Median Disposable Income of Urban Households (mn TRY)

1st Decile 9,068 2nd Decile 13,057 3rd Decile 15,972 4th Decile 18,837 5th Decile 22,395 6th Decile 26,145 7th Decile 30,814 8th Decile 37,077 9th Decile 46,902 10th Decile 74,814
Source: TURSTAT * 2011actual figures are adjusted by 2012 and 2013 average CPI increases.
We expect housing sales to grow by 24% YoY in 2H13 - In 2013, TURSTAT re-stated historic house sales figures in 2013 by adding mortgage sales, which alleviated our concerns of oversupply in the residential market. The past data had indicated that housing sales were 16% lower in 2010-12 than in 2008-09. Including mortgage sales, which amounted to 829,000 units in 2008-12, the number of dwellings sold in Turkey registered a 13% CAGR between 2008-12 to reach 702,000. Thanks to the historically low mortgage rates in 1H13, housing sales increased by 65% YoY. Growth in housing sales looks set to continue in 2H13, albeit with somewhat less momentum due to the slightly higher mortgage rates. We calculate 24% YoY growth in 2H13, resulting in 49% YoY growth for FY13.
Mortgage Rates vs. House Sales

350,000 300,000 250,000 200,000 150,000 100,000 50,000 22.0 20.0 18.0 16.0 14.0 12.0 10.0 8.0
Construction Permits vs. House Sales

2Q13 1Q13 2012 2011 2010 2009 2008 0 200 400 600 800 1000
Total Home Sales
Mortgage Rates (%)
House Sales
Construction Permits
Source: TURKSTAT, CBT, Finansinvest Estimates
Source: TURSTAT, CBT
2014 to be more favourable for the residential real estate market After a slowdown in 2012, annual growth in the market reached 3.7% YoY in 1H13, driven by the 4.2% YoY consumption growth. We anticipate 4.1% YoY consumption growth for FY13 in the belief that the risks are on the upside given that Julys YoY industrial production came in at 5.8%, significantly better than our estimate, and the consumer confidence index component, which
reflects the tendency to buy a home over the next year, had not displayed any material weakness as of September. Moreover, we believe the weak base year effect from FY13 will support raw YoY comparisons for FY14. Our growth forecast for 2014 stands at 4.5%, on the assumption that volatility in the financial markets will gradually diminish in the coming months. We believe the fallout of the recent domestic tightening on economic activity in 2014 may in fact prove quite limited, unless the risk reversal continues and economic agents shift into crisis mode. We expect mortgage rates to remain at their current level of 11.0% throughout the remainder of 2013, and anticipate only a modest 30 basis point increase throughout 2014.
YE mortgage rates vs. private consumption growth

45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0%
29.5% 25.2% 21.5% 15.1% 16.2% 12.2% 9.5% 21.8% 14.4% 9.9% 43.4%
12.0% 10.0% 8.0% 6.0% 4.0% 2.0%

10.7% 11.3%
0.0% -2.0% -4.0%
Mortgage rates (lhs)

Source: CBT, Finansinvest Estimates
Seasonally adj. growth of private consumption (rhs)
Favourable macro environment to overcome negative impact of VAT hike in 2014 The VAT increase on new homes from 1% to either 8% or 18%, depending on the location, will only be effective for new construction permits next year. The VAT increase will probably have front loaded some demand into 2013, and would either imply an average 10% price increase for new homes or 10% decrease in profits for developers from 2014. Our understanding here is that the effective VAT hike should be the sectors biggest challenge in 2014, yet its impact is unlikely to be destructive amid a positive macro environment.
Is REIT
REIT
Market Outperform
(Maintained)
Prospects being realised with solid delivery

Net income to triple (in YoY terms) to TRY50mn in 3Q13 Is REIT has taken steps to enhance the efficiency of its portfolio with (i) the sale of two Antalya hotels (on 88,000sqm with a 622 bed capacity) for TRY138mn, implying TRY22mn of gains to 2012YE appraisals and (ii) the development of the residential Cinarli Bahce (476 dwellings on a 58,000sqm area) and mixed use Tuzla projects (208,000sqm leasable area) on Istanbuls Anatolian side, as well as the mixed Izmir Ege Perla project (30,000sqm of sellable and 25,000sqm of leasable area). The capitalization rate of Kemer Hotel stood at 9.2% compared vs. an aggregate 7.4% for the remaining building portfolio, explaining the sale premium. Thanks to the expected TRY22mn and TRY20mn gains from hotel sale and delivery of 374 units in the Cinarli Bahce project, we forecast a YoY tripling in 3Q13 net earnings to TRY50mn. Proactivity rewarded: sustainable ROE to double While the Cinarli Bahce and Ege Perla projects are set to deliver IRRs of c.15%, the Ege Perla and Tuzla projects are on course to deliver rental yields of around 9%. Is REIT is on course to record a sustainable 10% ROE from 2015 vs. historic 6-7% levels. Our forecasts do not include the 3 upcoming projects, which should contribute further; (i) the 150,000sqm residential Kartal project, with a 1Q14 launch date, (ii) the 15,000sqm residential Altunizade project, to be launched in 2014 and (iii) the 26,000 sqm leasable office-retail Atasehir Finance Center (AFC) project, scheduled to be completed in 2016. We expect these projects to add 8% to the NAV. New partnership to create synergies Is REIT partnered with Timur Real Estate, a well-known project developer (with the NEF brand) in September 2013 to create synergies in terms of sales and engineering forces. Two companies are planning to develop projects in and outside of Istanbul. On October 9, Is REIT and NEF decided to buy the 130,000sqm Pasabahce plot from the Sise Group for TRY320mn (+VAT) with respective 75% and 25% stakes. According to an independent appraisal report, a 225,000sqm residential project, at prices of US$2,500/sqm, may be developed on this plot. This project is likely to increase Is REITs total GLA / GSA under construction by around 40%. Outperform with 12month TP of TRY1.98 and a bag of catalysts Is REITs exposure to the premium office and retail segments, with an aggregate 100% occupancy rate, provides safe returns. Is REIT has also been developing highend projects since 2010 with strong pre-sales record. We maintain our Outperform rating for the stock, which has outperformed the market by 11% since our re-initiation at the end of March, yet trades at a 52% discount to its NAV vs. an historic 49% discount. Strong earnings momentum from deliveries in both existing projects and expansion of the rental portfolio, as well as concrete news-flow on profitable project launches (i.e. Kartal in the short term) would be strong catalysts. We expect a CAGR of 16% in rental revenues and 15% in net income until 2016 with a 57% YoY jump in net income in FY13. Is REIT distributes dividends at 5% of its paid-in capital, but the management aims to double this rate as it eases its CAPEX cycle from 2016.
Financials Revenues (TRYmn) EBITDA (TRYmn) Net profit (TRYmn) BV (TRYmn) EPS (TRY) DPS (TRY) Key metrics EV/Revenues (x) P/E (x) EV/EBITDA (x) P/BV (x) Rental Yield (%) Dividend yield (%)
Source: Company financials, FinansInvest estimates.
Price: TRY1.44 12m Target Price: TRY1.98

Stock data Bloomberg / Reuters 12m expected total return 52-week price range (TRY/share) Outstanding shares (m) Mcap (TRYmn) Mcap (US$mn) EV (TRYmn) Trading data ISE relative performance 3m 12m 3m avg daily trading vol. (US$mn) Weight in ISE100 Beta (5y, weekly returns) Free float (%) Foreign ownership (% free float) Current 12m ago Shareholder structure Is Bank Free Float Others ISGYO TI / ISGYO.IS 37% 1.13-1.64 630.00 907 458 1,004
-5.0% -1.6% 1.2 0.3% 0.85 48% 27.3% 38.2% 42% 42% 16%
Company in brief Is REIT is currently the third largest REIT in terms of market value with a TRY1.9bn portfolio size (based on December 2012 appraisal). While 79% of the asset portfolio is made up of land and rental income yielding buildings, the remaining 21% portion is comprised of on-going residential and mixed-use projects. Is REIT generated TRY107mn of rental income in FY12, a figure that is set to expand at a CAGR of 16% until 2016.
2012 132 89 65 1,070 0.11 0.05 2012 6.0 11.4 8.8 0.7 13.5% 4.0%
2013E 278 116 101 1,141 0.16 0.05 2013E 3.6 9.0 8.7 0.8 11.7% 3.3%
2014E 148 99 69 1,178 0.11 0.05 2014E 7.5 13.2 11.2 0.8 11.7% 3.5%
2015E 369 174 133 1,279 0.21 0.05 2015E 3.2 6.8 6.8 0.7 13.6% 3.5%
2016E 226 163 115 1,328 0.18 0.10 2016E 5.0 7.9 6.9 0.7 17.4% 6.9%
Price performance
150 8% 4% 0% 100 -4% -8% -12% 50 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 -16%
Outperformance (rhs) ISE100 (rebased, lhs)

Source: FinansInvest
isgyo (rebased, lhs)
Gaye Abidin
10
Figure 2 Revenues-EBITDA-Net earnings estimates

Key estimates (TRYmn) Revenues EBITDA Net profit Old 292 121 86 2013E New 278 116 101 Chg. -5% -4% 18% Old 157 102 69 2014E New 148 99 69 Chg. -6% -3% -1% Notes The Company sold its two hotels in August and a TRY22mn transaction gain will be booked in 3Q13. We also estimate the Company to have booked TRY20mn gains from the delivery of 374 units in Cinarli Bahce project.
Source: FinansInvest estimates
Figure 3 FinansInvest vs. Consensus

Key estimates (TRYmn) Revenues EBITDA Net profit Est. 278 116 101 2013E Cons. 235 117 87 Diff. 18% -1% 16% Est. 148 99 69 2014E Cons. 152 100 72 Diff. -3% -1% -5% Notes The deviation in our and market estimates is attributable to the shift in assumptions over the timing of deliveries in the Cinarli Bahce project as well as revenue and profit forecasts. We expect TRY139mn of revenues and a TRY22mn profit from this project in FY13.
Source: Bloomberg, FinansInvest estimates
Figure 4 Is REITs Discount to Estimated NAV

Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Jun-11 Jun-12 Dec-10 Dec-11 Dec-12 Feb-11 Feb-12 Aug-11 Aug-12 Feb-13 Jun-13 Aug-13 Oct-13 0% -20% -40% -60% -80% Premium / (Discount) to Estimated NAV Based on Appraisal Values Average Premium / (Discount) to Estimated NAV Based on Appraisal Values
Rental yields to bounce back to their record high 20% levels. The current market value of Is REIT implies an 11.9% rental yield (FY13E rental income/EV), marking a 4pps premium over the benchmark bond yield of 7.63% in line with the average premium over the past three years. The rental yield should bounce back to its record high 20% level by 2016 thanks to a projected 16% CAGR for rental revenues. Our forecasts do not include the upcoming Kartal, Altunizade, AFC and Pasabahce projects, although these should all be launched from 2014. Excluding project sales to be booked in 2013 and 2015, Is REITs rental income is on course to expand bat a CAGR of 16% until 2016 thanks to four upcoming projects. Based on appraisal reports, retail and office rents in the AFC project are expected to stand at US$75/sqm and US$30/sqm, implying an aggregate rent of US$485/sqm vs. the actual US$330/sqm at IS Towers, which houses A Class office space on the European side of Istanbul. Strategy of 100% equity financing for project development to change; we expect external financing to reach 21% of the balance sheet by 2015. We project that Is REITs net debt position (TRY42mn at the end of 2012) will peak at TRY281mn (1.6x net debt/EBITDA) in 2015. Is REIT had US$75mn of bank loans as of December 2012, and we expect an increase of US$120mn by 2015. We expect Is REIT to maintain its dividend policy until 2015 (5% of paid-in capital, with a 4% yield), before a doubling in the ratio from 2016.
Figure 5 Investment debates
Figure 6 Potential catalysts

(i) The unveiling of details for three upcoming projects in 2014 The Kartal, Altunizade, and Atasehir Finance Center projects. The presales performance of the Kartal project in 1Q14 following the legal approvals in 2013 could work as a catalyst. While Altunizade is planned as a high-end residential project with 15,000sqm of sellable area at an average US$6,000/sqm price, Kartal is larger with 100,000sqm of sellable area at a price of US$2,000/sqm. The announcement of a project on the Pasabahce plot would also serve as a trigger. (ii) Potential land acquisitions from Is Group or third party companies and new project developments. (iii) The announcement of the 3Q13 results, with the net earnings on course to triple to TRY50mn in YoY terms, by the end of October.
Source: Company Data, BIST
11
Investment Theme
Is REIT has taken important steps since 2010; (i) the acquisition / development of several high rental yielding assets to the portfolio, (ii) the withdrawal of bank loans (10% of 2012YE asset size to increase to 21% by 2015) to develop high return residential and mixed projects vs. a conservative 100% equity financing beforehand and (iii) a higher frequency of transactions with non - Is Group third party companies. Accordingly, we expect Is REIT to deliver a sustainable 10% ROE over our investment horizon, climbing to above 11% by 2018, from historical levels (and also our FY13 forecast) of 6-7%. Our forecasts do not include three upcoming projects (Kartal, Altunizade and the Atasehir Finance Center), which should offer a further contribution. Among these, the Kartal project (on a saleable area of 150,000 sqm) is the first in the pipeline with the pre-sales expected to kick off in 1Q14 and the Altunizade project (on a saleable area of 15,000 sqm) set to follow later in 2014. Meanwhile, Is REIT and its new partner, Timur Real Estate (in conjunction with the NEF brand) acquired a centrally located plot of 130,024 sqm in Pasabahce (on the Anatolian side of Istanbul) in October with respective 75% and 25% stakes. In the independent appraisal report, based on nine on-going projects and the zoning plan in the neighbourhood, a residential project with a saleable area of 225,000 sqm, at a price tag of US$2,500/sqm, would be feasible. Is REITs residential saleable area, which is either under construction or in the pipeline, stands at an estimated 253,000 sqm with a leasable retail or office area to be constructed stands at an estimated 262,000 sqm. Hence, a new project with a 225,000 sqm saleable area would provide a meaningful contribution to the valuation.
Progression of GLA and GSA (000 sqm)

600 500 400 300 200 100 0 138 70 138 11 58 70 138 11 58 70 88 11 220 84 478
16
2013 Office (GLA)
2014 Retail (GLA)
2015 Hotel (GLA)
2016 Residential (GSA)
Source: The Company * Recently acquired Pasabahce land is tentatively included as 225K residential space in 2016.
Is REIT provides a stable rental income, generated from a diversified asset portfolio with an occupancy ratio of almost 100%; we also expect strong growth in this rental income, with a CAGR of 16% until 2016. Furthermore, the Company has gained selective exposure to the housing market over the last two years. Is REIT has so far developed two medium sized boutique projects; Cinarli Bahce in Istanbul and Ege Perla in Izmir, which are both expected to offer an IRR of 15%. Is REIT pre-sold 35% of the Ege Perla units (to be delivered by 2015) in the space of just two months in 4Q12, at a time when consumer confidence was at the lowest levels seen in either 2011 or 2012. As of today, 50% of the 176 total units in Ege Perla have been pre-sold. We attribute the successful pre-sales performances to the hardnosed scrutiny applied in the project selection undertaken by Is REIT.
12
Valuation & Assumptions

We add the value of Is REITs existing rent generating asset portfolio, which we calculate by applying a 9% capitalization rate and a 1% perpetuity growth rate, to the land portfolio based on 2012YE appraisal values as well as on-going projects, each of which we have valued by NPV analysis. We calculate the net operating income of operations based on our 2013 projections from the existing asset portfolio. We assume a maintenance CAPEX amounting to 15% of sales for the existing rent yielding assets. Is REIT trades at a 52% discount to its estimated 2012YE NAV, in line with its three year average of 49%, which we find unjustifiable since no value is attached to on-going projects. While REITs have not been permitted to disclose their current NAV tables since 2011, we estimate the NAV for 2012YE based on appraisal values.
Is REIT SoTP Calculation (US$mn) Operating Income of Operations (+) Rent Income (+) Service Income (-) Management Expense (-) Insurance and Other Expenses Cash Operating Expenses Maintenance CAPEX Net Operating Income of Operations (2013E) Value of Cashlow @ 9% Capitalization Rate - 1% Perpetuity Growth Land @ YE12 Appraisal Value + Levent + Kartal + Uskudar + Atasehir NPV of Ongoing Projects + Ege Perla (mixed project in Izmir) + Tuzla Cinarli Bahce (residential project in Istanbul) + Tuzla Technology & Operation Center (office project in Istanbul) + Tuzla Project (mixed project in Istanbul) + Office Lamartine (office project in Istanbul) Net Cash (+) / Debt (-) @ 1H'13 Total Equity Value (US$mn) Current Market Cap (US$mn) # of Shares 1 Yr Forward US$/TRL Target Equity TRYmn Target per Share Current Price Upside
Source: FinansInvest Estimates
54 60 14 -17 -4 -5 -9 39 497 98 0.6 32 12 53 91 23 23 25 8 12 -38 648 458 630 1.92 1,245 1.98 1.44 37%
13
Izmir Ege Perla
Saleable area (sqm) 30,000
Total Units 176
Avg. Sqm/unit 170
Avg. Price (US$) 3,000
Leasable Area (sqm) 25,000
Total expense (US$mn) -150
FY12 Units sold Rental revenues Sales proceeds CAPEX Cash costs Free Cash Flow DCF NPV Delivery (%) Sales P&L (US$mn) COS P&L (US$mn) Gross Profit (US$mn)
Saleable area (sqm) 58,278
FY13 57 11 -42 0.0 -31 -32
FY14 57
FY15
FY16 8
FY17 8 9 -0.5 -0.8 16 11
FY18 8 -0.5 -0.8 7 4
FY19 8 -0.5 -0.8 7 4
FY20 8 -0.5 -0.8 7 4
FY21 8 -0.5 -0.8 7 3
FY22 8 -0.5 -0.8 7 3
62 3 -5 0.0 -2 23
21 -42 0.0 -20 -19
27 -42 0.0 -15 -13 100% 90 -71 19
19 -0.5 -0.8 26 20
Tuzla Cinarli Bahce
Total Units 476
Avg. Sqm/unit 122.4
Avg. Price (US$) 1,500
Total expense (US$mn) -70
FY11 Units sold Sales proceeds CAPEX Free Cash Flow DCF NPV Delivery (%) Sales P&L (US$mn) COS P&L (US$mn) Gross Profit (US$mn) 23 323 15 -5 10
FY12 84 15 -26 -11
FY13 39 20 -24 -4 -4 100% 79 -65 14
FY14 20 20 19
FY15 5 5 5
FY16 5 5 4
Tuzla Operation Center
Avg. Price (US$/sqm) 98
Total expense (US$mn) 180
FY12 Revenues Cash costs CAPEX Free Cash Flow DCF NPV 25
FY13
FY14
FY15
FY16 18.0 -1.8
FY17 18.2 -1.8 -0.5 16 11
FY18 18.4 -1.8 -0.5 16 10
FY19 18.5 -1.9 -0.5 16 10
FY20 18.7 -1.9 -0.5 16 9
FY21 18.9 -1.9 -0.5 17 8
FY22 19.1 -1.9 -0.5 17 8
-45 -45
-47 -47 -49

Avg. Price (US$/sqm) 43 Total expense (US$mn) 100
-47 -47 -44
-41 -41 -35
-0.5 16 12
Tuzla Mixed Project
FY13 Revenues Cash costs CAPEX Free Cash Flow DCF NPV 0.0 -21 -21 -21.9 8
FY14 0.0 -21 -21 -20.0
FY15 0.0 -18 -18.3 -15.7
FY16 8.0 -0.8 -0.5 6.7 5.2
FY17 8.1 -0.8 -0.5 6.8 4.8
FY18 8.2 -0.8 -0.5 6.8 4.4
FY19 8.2 -0.8 -0.5 6.9 4.1
FY20 8.3 -0.8 -0.5 7.0 3.8
FY21 8.4 -0.8 -0.5 7.0 3.5
FY22 8.5 -0.8 -0.5 7.1 3.2
14
Figure 7 Annual forecasts and outlook (TRYmn)

Income statement Revenues Gross profit EBITDA Depreciation EBIT Net other income Net financial income Profit before taxes and minorities Taxes Net income Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Shareholders' equity Total liabilities and equity Net debt Cash flow Cash Inflows Total CAPEX (incl. maintenance) Cash OPEX FCFF Key metrics Growth Revenue growth EBITDA growth Net income growth Margins EBIT margin EBITDA margin Net margin Return on equity (ROE) Net debt / Equity
2012 132 74 89 25 64 0 1 66 0 65 2012 240 1,152 1,392 107 215 1,070 1,392 42 2012 163 138 9 16 2012 7% -5% -2% 49% 68% 50% 6% 4%
2013E 278 101 116 25 91 22 -11 101 1 101 2013E 79 1,352 1,431 23 267 1,141 1,431 97 2013E 201 195 10 -4 2013E 111% 30% 55% 33% 42% 36% 9% 8%
2014E 148 84 99 26 73 0 -5 69 2 69 2014E 142 1,477 1,619 65 377 1,178 1,619 201 2014E 237 195 11 31 2014E -47% -14% -32% 50% 67% 46% 6% 17%
2015E 369 159 174 26 148 0 -15 133 2 133 2015E 85 1,618 1,703 24 400 1,279 1,703 283 2015E 255 181 11 63 2015E 149% 75% 94% 40% 47% 36% 11% 22%
2016E 226 139 163 35 128 0 -16 112 2 115 2016E 98 1,606 1,704 25 352 1,328 1,704 216 2016E 276 29 12 235 2016E -39% -7% -14% 56% 72% 51% 9% 16%
15
Sinpas REIT
REITs
Outperform
(Re-initiated)
Dirt cheap with new catalysts

Five new projects in the next six months since being quiet for more than a year Sinpas plans to launch five projects on 127,687sqm saleable area in the next six months. The pre-sales of three of them has started in September; the high-end Istanbul project - Bomonti Time (50,983sqm saleable area) and two in Ankara - The First and Ankara Incek Life Blue (115,701sqm saleable area). An aggregate 12% of units offered have been pre-sold in September. We deem Bomonti Time and The First projects important, which are to contribute to the target value of real estate portfolio by 8%, since we expect them to generate 17% and 22% IRRs. We assume Sinpas will start the pre-sales of additional two projects (Istanbul Halkal Park and Ankara Buyukesat) on 145,674sqm saleable areas in 1H14. We forecast pre-sales of 1,075 units in FY13, down 24% YoY, compared with the guidance of 1,498 provided at beginning of 2013 on the assumption that five projects would be launched in 2013. In-house payment plan with 30% down-payment is currently the most preferred With the steady rise in average mortgage rates from 9.6% in 1Q11 to 13.9% in 1Q12, c.70% of new buyers have opted for in-house financing models over mortgage loans. The drop in customer down-payments from an aggregate of 55% to 35% from 4Q11 resulted in working capital deficiencies of TRY306mn in 2011 and TRY130mn in 2012. Mortgage rates remained above 10% in 2012, discouraging use of bank loans. In 9M13, Sinpas has managed to impose bank financing dominated payment plans with min. 50% down-payments thanks to historic low level of mortgage rates at an average of 9.1%. With the fall season, Sinpas has been offering new payment options and the bulk of the buyers so far prefer a newly proposed in-house payment plan with 30% down-payments due to 2.71pps rise in mortgage rates to 11.0% since the lowest level of 8.3% in June. We believe it is fair to apply this plan to all future sales since we expect the mortgage rates to stabilise at around these levels over the next year. Unclear if signs of recovery in 1H13 cash flow quality is sustainable There were recovery signs in Sinpas cash flow quality in 1H13 due to the (i) shift to new payment plans with min. 50% down-payments and (ii) sizeable amount of collection from previous years sales, which were due in 1H13. Hence, it is unclear whether this recovery is sustainable since the overall sales momentum was subdued in 1H13 given that 83% of units in the eight on-going projects were already pre-sold. We therefore continue to assume a 30% down-payment ratio, which should not make a positive contribution to reduce net debt until 2015. We estimate a TRY250mn working capital deficiency for FY14 on TRY537mn construction expenses (FY13: TRY350mn). Dirt cheap on course for a reversal imminently, in our view Our upside in the stock 45%. Following a 48% underperformance since 2010-beginning (among the worst 15 performers of BIST100), the stock trades at a 76% discount to its NAV vs. the historic average of 57%. The stock lacked meaningful catalysts until recently, but this is likely to change with upcoming new solid cash generating projects.

Stock data Bloomberg / Reuters 12m expected total return 52-week price range (TRY/share) Outstanding shares (m) Mcap (TRYmn) Mcap (US$mn) EV (TRYmn) Trading data ISE relative performance 3m 12m 3m avg daily trading vol. (US$mn) Weight in ISE100 Beta (5y, weekly returns) Free float (%) Foreign ownership (% free float) Current 12m ago Shareholder structure Sinpas Yapi Avni Celik Omer Faruk Celik Ahmet Celik Free Float SNGYO TI / SNGYO.IS 45% 0.86-1.54 600.00 642 324 958
-4.4% -21.2% 2.0 0.2% 0.96 37% 31.7% 34.4% 31% 17% 2% 2% 49%
Company in brief Sinpas REIT is a pure residential developer specialized in upper-middle and upper segment projects. While Sinpas REIT was established in 2006 and went public in 2007, Sinpas Group has a 35 year history in construction and project development. The Company owns a 1.1mn sqm land portfolio with eight ongoing projects on 867,000 sqm of land.
Financials Revenues (TRYmn) EBITDA (TRYmn) Net profit (TRYmn) BV (TRYmn) EPS (TRY) DPS (TRY) Key metrics EV/Revenues (x) P/E (x) EV/EBITDA (x) P/BV (x) FCF yield (%) Dividend yield (%)
2011 655 151 140 1,051 0.27 0.06 2011 0.7 6.5 6.2 0.9 7% 3.3%
2012 604 54 76 1,075 0.13 0.05 2012 0.6 10.0 18.0 0.7 4% 4.0%
2013E 607 112 73 1,118 0.12 0.05 2013E 0.6 8.8 8.4 0.6 32% 4.7%
2014E 820 139 146 1,223 0.24 0.07 2014E 0.9 4.4 6.8 0.5 -5% 6.3%
2015E 1,586 312 348 1,541 0.58 0.05 2015E 1.7 1.8 3.1 0.4 -2% 4.7%
Price performance
150
10% 0%
100
-10% -20%
50 Oct 12
Dec 12
Feb 13 Apr 13
Jun 13
Aug 13
-30% Oct 13

SNGYO (rebased, lhs)
Gaye Abidin
16

Key estimates (TRYmn) Revenues EBITDA Net profit Old n.a. n.a. n.a. 2013E New 607 112 73 Chg. n.a. n.a. n.a. Old n.a. n.a. n.a. 2014E New 820 139 146 Chg. n.a. n.a. n.a. Notes Transfer of coverage.

Key estimates (TRYmn) Revenues EBITDA Net profit Est. 607 112 73 2013E Cons. 637 109 104 Diff. -5% 3% -30% Est. 820 139 146 2014E Cons. 711 134 134 Diff. 15% 4% 9% Notes The deviation between our own and the market estimates can be attributed to the shift in assumptions over the timing of the deliveries. We assume 1,528 units to be delivered in 2013 and 1,815 in 2014. We forecast a TRY32mn net financial expense for FY13 and TRY14mn net financial income for FY14.
Figure 10 BIST100 Relative Stock Performance vs. Mortgage Rates

40% 20% 0% Sep-10 -20% -40% -60% Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 16.00 14.00 12.00 10.00 8.00 6.00
Figure 11 Sinpas REITs Discount to Estimated NAV

Mar-11 Mar-12 Mar-13 Jun-11 Jun-12 Dec-10 Dec-11 Sep-10 Sep-11 Sep-12 Dec-12 Jun-13 Sep-13 -25% -45% -65% -85% Average Premium / (Discount) to Estimated NAV Based on Appraisal Values Premium / (Discount) to Estimated NAV Based on Appraisal Values
Regional expansion and segmentation for middle-income to provide a balanced portfolio. Predominantly a premium home developer, Sinpas is well known for the unique concepts in its projects which target the upper-middle and upper income segments. In anticipation of the potential impact of the governments urban transformation project on the middle income segment, which is set to become the fastest growing segment in the medium term, Sinpas entered this high potential segment through its new brand, Eviya. The first project was launched under the Eviya brand, Ege boyu, in November 2011, and 30% of the 566 units were sold in just 2 months. While Ege Boyu had been developed as an upper-middle segment project with the aim of building strong brand equity in the first stage, Eviya will target the middle-income segment of the residential real estate market in its second project. We believe the widening in segmental diversification is positive for Sinpas as it provides flexibility in meeting changing demand conditions. Moreover, we calculate that the on-going and upcoming projects in Ankara will contribute around 13% to the value of Sinpas real estate portfolio. The on-going Incek Life project in Ankara has proved a success with a 83% pre-sales ratio. These initiatives should help compensate the negative impact of prospective over-capacity in Istanbul in the longer term. Conservative OPEX assumptions may provide further upside potential. Sinpas cash operating expenses increased from TRY26mn in 2008 to TRY80mn in 2012 despite a decline in the number of units pre-sold to 1,423 from 2,016; due to the penetration in new cities as well as tough competition between project developers. While we have assumed advertising expenses amounting to 5% of each years sales proceeds, we have forecasted a 6% rise in other cash operating expenses. Given that we do not factor in any further land acquisitions, our OPEX projections can be considered conservative, leaving room for potential estimate upgrades.

Strong pre-sales performance in new projects. Cash flow supportive payment plans applied to new projects. Acquisition of land plots at attractive prices.
17
Investment Theme
We attach an Outperform rating for Sinpas, which is one of our two top-picks in the REIT sector. The stock, which currently trades at a 76% discount to its NAV versus the historic average of 57%, has underperformed by 48% in the past three years due to (i) the Companys working capital deficiencies as a result of in-house payment options with low down-payments and long maturities, (ii) investor preference of Emlak REIT, which offers a safer exposure to residential market, and (iii) delay of the expected project launches by one year. The perfect negative correlation between relative stock performance and mortgage rates - as shown in Figure 10 was disrupted in 2013. Although rates have hovered below their historic average of 10%, Sinpas shares have underperformed the index and Emlak REIT by 23% and 17% in YTD terms. The investor concerns had been warranted in the past. Sinpas business model proved a challenging one with mortgage rates hovering over 10% until beginning of 2013 with pre-sales ramping up from 766 units to 1,423 in 2010 - 2013 accompanied by declining cash inflows from TRY512mn to TRY402mn. Adjusted for the average unit size pre-sold from each project, the aggregate cash inflow generated by Sinpas was eroded from TRY5,052/sqm in 2010 to TRY2,095/sqm in 2012. As a result of working capital deficiencies from 2010-12, its net debt had piled up to TRY412mn as of 1H13, amounting to 50% of its average MCap in 2Q13.
# of pre-sold units vs. cash flows (2010-13E)

700 600 500 400 300 200 100 0 766 2010 44 2011 512 431 301 299 1,037 70 2012 80 402 293 274 900 91 1,423 637 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600
# of pre-sold units vs. cash flows (1H12-1H13)

250 200 150 100 50 0 46 47 412 1H13 193 968 237 1,000 900 800 110 115 700 600 500 400 300 200
2013E
1H12 Cash inflow (mnTRY) - lhs M & S expense (mnTRY) - lhs
Cash inflow (mnTRY) - lhs M & S expense (mnTRY) - lhs
Construction outflow (mnTRY) - lhs # of units pre-sold - rhs
Construction outflow (mnTRY) - lhs # of units pre-sold - rhs
Cash inflow per average pre-sales (2010-13E)

7,000 5,000 3,000 1,000 5,052 3,105 2,095 2010 2011 TRY/sqm 2012 2013E 5,306
Cash inflow per average pre-sales (1H12-1H13)

4,136 3,500
2,000 1,400 500 1H12 TRY/sqm 1H13
Source: Company Data, Finans Inv. Estimates
Source: Company Data
18
On the other hand, we believe current stock prices reflect the above mentioned concerns fairly. At this stage, the stock offers an attractive valuation coupled with lucrative upcoming projects. Sinpas started the pre-sales of three of new projects in September; the high-end Istanbul project - Bomonti Time - on 50,983sqm saleable area and two in Ankara - The First and Ankara Incek Life Residence - on 115,701sqm saleable areas. 109 units from these projects have been sold in one month, implying a 12% pre-sales ratio. We expect Bomonti Time and The First projects to generate respective solid IRRs of 17% and 22%. Sinpas will start pre-sales of two additional projects (Istanbul Halkal Park and Ankara Buyukesat) on 145,674sqm saleable areas in 1H14. We calculate the net debt position of TRY338mn as of 13YE to turn into net cash position of TRY366mn, based on the assumption of no further land purchases. We understand that the bulk of the buyers currently prefer a newly proposed in-house payment plan with 30% downpayments due to 2.71pps rise in mortgage rates to 11.0% since the lowest level of 8.3% in June. We believe it is fair to apply this plan to all future sales since we expect the mortgage rates to stabilise around these levels over the next year. We calculate a TRY250mn working capital deficiency for FY14 due to TRY537mn construction expenses vs. TRY350mn in FY13. In 1H13, we have seen a recovery in the quality cash flows thanks to (i) the shift in new payment plans, increasing the down-payment ratio from 35% to 50%, and (ii) significant amount of collections from previous years pre-sales, which were due in 1H13. We estimate that the aggregate cash inflow (per unit area) from pre-sales tripled from TRY1,400/sqm in 1H12 to TRY4,136/sqm in 1H13. While we welcome these recovery signs, we lack the solid evidence that it will prove sustainable for FY14. On the the pre-sales financing for 9M13, the Management guides us that the bulk of home buyers have used mortgage loans with an aggregate down-payment ratio of 50% as monthly mortgage interest rates remained below 1.0%. Starting with the fall campaings, Sinpas has been offering new payment options. An in-house payment plan with c.30% down payment (number 4 in the table below) is the most widely used; hence, we apply it to all future sales. Effective payment options in 2013
Payment Plan 1 Introduction by Discount 4% Payment Plan 2 Through-out 9M13 none 80% - Down Payment (20% down payment + 60% interestfree mortgage with 60 monthly installments) 8% Payment Plan 3 Payment Plan 4 4Q13 none
Cash down payment (or mortgage loan)
50% - Mortgage Loan (49% mortgage + 1% down payment )
70% - Mortgage Loan
20% - Down Payment
Installment Plan
50% - Through Interim Installments 3 yearly installments (respective 20%, 15% and 15%)
15% - In one year 20% - In one year 15% - In two years
20% - In one year 15% - In two years 45% - Through 48 monthly installments
Source: The Company
We have performed a sensitivity analysis to evaluate the impact of alternative payment plans on the working capital requirements and valuation as shown in the figure below. We take the 2nd payment plan, with 80% down-payments, as the bullish case and the old plan, with the 15% down-payment, as the bear case. The analysis demonstrate the huge impact of payment options on the valuation and estimates.
19
Sensitivity of payment options

Change in Working Capital (mn TRY) Bull case Base case Bear case
Source: CBT, Finansinvest Estimates
Net debt / (cash) 2013E 253 338 366 2014E -31 402 600 2015E -957 -366 58 2016E -856 -260 303
2009 28
2010 -68
2011 -306
2012 -130
2013E -45 -82 -111
2014E 88 -250 -420
2015E 402 404 178
2016E -73 -348 -488
12m TP/share 2.08 1.55 1.23
During difficult market conditions, Sinpas had offered flexible payment plans to its customers in a bid to maintain sales volume. The company had enjoyed lower mortgage rates in 1H11 (the monthly rate of 10-year mortgage loans had dipped to 0.80% at the beginning of 2011) and collected 50-55% of the payments in cash via mortgage loans. Due to the rise in mortgage rates to 1.25% in 2H11, the company started to offer new payment plans in 4Q11 (i.e. plans 2 and 3 as depicted in figure 14) and lengthened its collection period to 6 years, hurting cash flow quality. Sinpas was offering to buy through a 35% down-payment with the remaining portion to be paid in 55 equal monthly installments. This option had been chosen by around 70% of customers. Monthly mortgage rates remained above 1.0% in 2012, still discouraging home buyers from bank financing dominated payment plans with higher downpayments.
Previous payment options in 2011 and 2012

Payment Plan 1 Introduction by Cash down payment (or mortgage loan) Installment Plan Jan-11 55% - Mortgage Loan (10 years to maturity) 45% - Through Interim Installments 3 yearly interest-free installments Payment Plan 2 Oct-11 35% - Down Payment 65% - In house Financing 55 monthly interest-free installments Payment Plan 3 Dec-11 15% - Down Payment 40% - Through interim installments 5 yearly interest-free installments 45% - In house financing 72 monthly installments Customer Preference
Source: The Company
Most preferred until 9M11
Most preferred after 4Q11
Least preferred
20

We performed DCF analysis for Sinpas eight on-going and seven upcoming projects and attached the appraisal value to the remaining land bank. One of the on-going projects, ITower, is being developed by FerYapi on a revenue sharing basis. Sinpas aims to launch five new projects two in Istanbul and three in Ankara in six months. Sinpas started the pre-sales of three of new projects in September; the high-end Istanbul project - Bomonti Time - on 50,983sqm saleable area and two in Ankara - The First and Ankara Incek Life Residence - on 115,701sqm saleable areas. In our model, we assume Sinpas will start presales of additional two projects (Istanbul Halkal Park and Ankara Buyukesat) on 145,674sqm saleable areas in 1H14. In addition to these projects, the management is guiding for four projects; (i) Marmaris (468 homes on 85,000 sqm of saleable land) and Cakmak Istanbul (1,015 dwellings on 123,000 sqm of saleable land) in 2014, (ii) Bursa Modern 4-6 (1,118 units on 146,000 sqm of saleable land) in 2015 and (iii) Ankara Polatli (1,600 units on 160,000 sqm of saleable land) in 2016. We believe the start of these four projects, for which the Management has not shared any development cost estimates yet, is likely to be delayed until after 2014.
% of Total Real Estate Value 59% 3% 2% 13% 14% 5% 5% 15% 2% 35% 2% 5% 2% 7% 3% 1% 17% 6% 5% 1%
S-O-T-P Valuation Ongoing Projects Lagun Aquacity Bosphorus Bursa Modern 1 & 3 Ege Boyu (Eviya) Ankara Incek Life Istanbul Palaces I-tower Upcoming Projects Incek Life Residence (Alacaatli) Ankara Buyukesat (GOP) Ankara The First (Cankaya) Bomonti Time Istanbul Park (Halkali) Marmaris Umraniye Cakmak Land Bursa Modern 4 & 6 Ankara Polatli Total Real Estate Value Participations Saf REIT (6.93% stake) NPV of overhead expenses Net Debt Equity Value 12M Target Mcap Capital Target Price (TRY/share) Current Price (TRY/share)
Valuation Method DCF DCF DCF DCF DCF DCF DCF DCF DCF DCF DCF DCF DCF DCF DCF Appraisal Value
Value (TRYmn) 906 43 32 207 211 81 75 227 32 546 27 75 24 106 39 8 268 93 83 11 1,545 51
MCap@ 20% discount DCF 2Q13-end
51 -371 -412 813 931 600 1.55 1.07
Source: Finansinvest Est. * Exclusive of US$45mn outflow for the 50% stake of the 44,530 sqm plot in Atasehir Istanbul, since the deal has not yet been closed.
21
Finans Inv. Est. Pre-sales (# of units) Lagun Bursa Modern - 1 & 3 Bosphorus Aquacity Istanbul Palaces Egeboyu (Eviya) Ankara Incek Life (Alacaatli) I-tower Bomonti Time Pre-sales distribution Incek Life (Residence) Pre-sales distribution Istanbul Park (Halkal) Pre-sales distribution The First - Ankara Cankaya Oran Pre-sales distribution Ankara Buyukesat (GOP) Pre-sales distribution Commercial units Total 10 1,423 25 412 19 663 44 1,075 n.a. 0 0 n.a. 0 116 116 33% 0 n.a. 0 0 n.a. 0 71 2012 50 162 82 116 243 386 343 31 n.a. 1H13 3 8 35 32 134 80 87 8 0 2H13 5 62 53 17 122 30 71 5 92 FY13 8 70 88 49 256 110 158 13 92 30% 71 60% 0 FY14 1 88 80 0 100 0 47 22 122 40% 47 40% 192 44% 186 53% 186 40% 0 1,129 144 33% 140 40% 139 30% 0 701 96 22% 23 7% 93 20% 0 355 46 10% 0 183 44 1,578 85 48 11% 0 245 119 FY15 0 88 63 0 0 0 0 22 92 30% 0 0 0 80 FY16 0 88 0 0 0 0 0 0 0 FY17 0 88 0 0 0 0 0 0 0 FY13 Guidance provided in Jan'13 9 182 100 31 247 95 165 36 140
Delivery (# of units) Lagun Bursa Modern - 1 & 3 Bosphorus Aquacity Istanbul Palaces Egeboyu (Eviya) Ankara Incek Life (Alacaatli) I-tower Bomonti Time The First - Ankara Cankaya Oran Incek Life (Residence) Istanbul Park (Halkal) Ankara Buyukesat (GOP) Commercial units Other Total
2012 66 193 476 1,009 119 0 0 0 0 0 0 0 0 8 0 1,871
1H13 7 11 42 77 402 0 0 163 0 0 0 0 0 20 0 722
2H13 8 111 101 203 372 0 0 6 0 0 0 0 0 5 0 806
FY13 15 122 143 280 774 0 0 169 0 0 0 0 0 25 0 1,528
Finans Inv. Est. FY14 FY15 1 88 80 0 432 644 548 22 0 0 0 0 0 0 0 1,815 0 88 63 0 0 0 0 22 306 442 135 336 325 0 0 1,717
FY16 0 88 0 0 0 0 0 0 0 23 0 96 93 0 0 300
FY17 0 88 0 0 0 0 0 0 0 0 0 48 46 0 0 182
FY13 Guidance provided in Jan'13 16 190 175 109 774 0 0 192 0 0 0 0 0 45 0 1,501
mn TRY Cash Inflow Cash Outflow Construction exp M & S exp Net cash flow
2010 512 -345 -301 -44 167
2011 431 -369 -299 -70 63
2012 402 -373 -293 -80 29
1H13 237 -162 -115 -47 75
2H13E 418 -286 -235 -51 132
FY14E 619 -650 -537 -113 -31
FY15E 797 -808 -684 -125 -11
FY16E 810 -337 -230 -107 473
FY17E 649 -535 -450 -85 114
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Details of Sinpas ongoing projects

Project City Target Segment Land Area (sqm) Sellable Area (sqm) Est. Total # of units # of Presold Units (Jun'13) 509 Presales Ratio (Jun'13) 99% Const. Completion (Jun'13) # of Units Delivered (Jun'13) Start Date Comp. date SNGYO Share Status / Details Deliveries nearly complete. Construction work for stage 3 just completed. Sales & deliveries continuing. Deliveries nearly complete. Pre-sales continuing. RSM project. Min revenue share of the SNGYO: US$30mn. Construction started in 2H12. Construction started in 2H12.
Lagun
Istanbul
Upper
182,786
136,684
515
100%
506
2007
2010
78%
Bursa Modern 1&3
Bursa
Upper Middle
85,013
196,657
1,506
708
47%
100%
659
2007
2013
100%
Bosphorus City Aquacity 2010 Istanbul Saraylari
Istanbul
Upper Middle Upper Middle Upper Middle
246,092
347,867
2,796
2,592
93%
100%
2,552
2010
2012
100%
Istanbul
55,969
121,667
1,118
1,097
98%
100%
911
2009
2012
65%
Istanbul
124,201
167,577
1,206
984
82%
100%
521
2010
2013
100%
I-tower
Istanbul
Upper
4,243
23,651
213
164
77%
100%
163
2011
2013
61%
Ankara Alacaatli (Incek) Egeboyu (Eviya) Total
Ankara
Upper Middle Upper Middle
127,753
98,074
548
430
78%
45%
2012
2014
100%
Istanbul
40,548 866,605
70,000 1,159,633
566 8,546
172 7,112
30% 83%
75%
2012
2014
100%
Source: The Company, FinansInvest Estimates
Details of the upcoming projects

Project Bomonti Tower Ankara Buyukesat Incek Life Residence The First Istanbul Park Cakmak Marmaris Bursa Modern 4-6 Polatli Atasehir Total
Source: The Company, FinansInvest Estimates
City Istanbul Ankara Ankara Ankara Istanbul Istanbul Marmaris Bursa Ankara Istanbul
Target Segment Upper Upper Middle Upper Middle Upper Upper Middle Upper Middle N.A. N.A. N.A. N.A.
Land Area (sqm) 18,326 22,572 18,000 26,905 41,884 88,733 173,680 71,493 280,812 50,100 767,253
Sellable Area (sqm)* 50,983 88,074 20,000 87,500 56,543 123,455 85,944 146,161 160,000 N.A. 818,660
Est. Total # of units 306 464 135 513 550 1,015 468 1,118 1,600 N.A. 6,169
Est. Start Date 2013 2014 2013 2014 2013 N.A. N.A. N.A. N.A. N.A.
Est Comp. date 2015 2016 2015 2016 2015 N.A. N.A. N.A. N.A. N.A.
SNGYO Share 100% 100% 100% 77% 100% 100% 65% 100% 100% 50%
Status / Details Pre-sales started. Likely to be launched in 1H14. Pre-sales started. Pre-sales started. Likely to be launched in 1H14. Likely to be launched after 2014. Likely to be launched after 2014. Likely to be launched after 2014. May be discontinued due to poor performance of stages 1 and 3. Likely to be launched after 2014. The acquisition had yet to be completed as of 1H13. Total cost is US$90mn.
23

Balance Sheet (mn TRY) Current Assets Cash and Cash Equivalents Marketable Securities Short-Term Trade Receivables Other Short-Term Receivables Inventories Other Current Assets Long Term Assets Long-Term Trade Receivables Long-Term Financial Assets Tangible Fixed Assets Intangible Fixed Assets Other Long-Term Assets TOTAL ASSETS Short Term Liabilities Short-Term Financial Loans Short-Term Trade Payables Other Short-Term Payables Other Short-Term Liabilities Long Term Liabilities Long-Term Financial Loans Long-Term Trade Payables Other Long-Term Payables Shareholders' Equity Total Paid-in Capital Premium in Excess of Par Revaluation Funds Reserves and Other Items Retained Earnings /(Acc. Losses) Current Year Income /(Losses) TOTAL LIABILITIES AND S.HOLDERS' EQUITY Net Sales Cost Of Sales GROSS PROFIT (LOSS) Marketing Selling & Distrib. Expenses (-) General Administrative Expenses (-) Income from Other Operations OPERATING PROFITS EBITDA Profit (Loss) from Subsidiaries Financial Income (from Other Operations) Financial Expenses (from Other Operations) (-) PROFIT BEFORE TAX FROM CONTINUING OPERATIONS NET PROFIT AFTER TAXES Change in trade receivables Change in inventory Change in other short and long term assets - advances paid Change in trade payables Advances received from customers CHANGE IN WORKING CAPITAL
2008/12 1,054 79 10 8 33 790 135 80 5 65 9 0 0 1,135 231 3 6 223 0 3 3 0 0 900 137 425 0 302 17 20 1,135 72 -52 20 -17 -9 0 -6 -4 -6 57 -25 20 20
2009/12 1,243 49 11 22 48 921 191 88 19 60 10 0 0 1,332 460 3 47 411 0 8 0 8 0 863 400 175 0 304 2 -18 1,332 171 -158 13 -33 -11 0 -33 -28 -1 28 -12 -18 -18 27 131 56 55 188 28
2010/12 1,499 51 13 64 35 1,102 234 153 61 79 13 1 0 1,653 669 14 47 608 0 46 26 20 0 937 500 75 19 299 -16 61 1,653 353 -257 96 -26 -18 0 52 56 -3 25 -14 61 61 84 181 43 42 197 -68
2011/12 938 28 18 153 11 558 170 1,056 129 82 14 1 831 1,994 559 96 111 352 0 384 186 0 198 1,051 600 62 22 217 9 140 1,994 655 -448 207 -51 -19 9 147 151 -11 66 -61 140 140 157 148 75 132 -58 -306
2012/12 1,083 51 0 238 20 541 233 1010 151 60 25 1 774 2,094 607 189 130 287 1 412 221 3 187 1,075 600 0 0 291 108 76 2,094 604 -485 119 -47 -33 9 48 54 0 97 -69 76 76 108 -109 98 42 -75 -130
2013/12 1,122 109 0 252 20 483 258 1077 151 60 25 1 840 2,199 703 206 114 383 0 378 242 3 133 1,118 600 0 0 291 154 73 2,199 607 -425 182 -58 -38 19 105 112 1 34 -66 73 73 14 3 91 -16 41 -82
2014/12 1,334 95 0 334 20 627 258 797 71 60 25 1 640 2,130 529 206 130 192 1 378 291 3 83 1,223 600 0 0 291 187 146 2,130 820 -593 228 -73 -40 17 132 139 20 41 -28 146 146 2 144 -200 -64 -240 -250
2015/12 1,766 676 0 474 20 339 258 550 24 60 25 1 440 2,316 629 211 166 252 1 145 99 3 43 1,541 600 0 0 291 303 348 2,316 1,586 -1,172 414 -83 -42 16 305 312 0 68 -25 348 348 93 -288 -200 -11 19 404
2016/12 1,708 477 0 730 20 223 258 333 7 60 25 1 240 2,041 271 216 50 4 1 5 1 3 0 1,766 600 0 0 291 581 294 2,041 906 -546 361 -63 -44 14 267 274 0 44 -18 294 294 240 -116 -200 -133 -291 -348
24
Emlak Konut REIT

REITs
Market Perform
(Re-initiated)
Upside lies in the future

A strong outlook yields 40% cash returns in 2013 Emlak is the best proxy for the residential market, capturing a wide range of middle income customers thanks to its safe revenue sharing model (RSM) and privileged access to TOKIs land bank. The RSM project-type enables solid cash flows and ability to develop numerous high-end projects simultaneously, since the contractors undertake the construction as well as the sales & marketing activities. Our valuation is conservative since (i) we attach a 1.30x multiplier to the appraisal value of vacant land vs. the historic of 1.58x for the completed RSM projects and (ii) we assume no increase in revenue targets of tendered land plots vs. the historic escalation of 1.46x. Thanks to the strong residential market outlook in 2013, Emlak reached a multiplier of 2.07x in the RSM tenders so far, implying a 40% return based on the assumptions of 13% WACC and 3 year collection period. A strong year ahead with ten RSM projects to be launched in 2014 With five more launches to kick off before the end of the year, we expect seven RSM projects to have been launched in 2013, representing 37% of on-going RSM projects value. Emlak sold 10,410 units YTD as of September, vs. 9,151 units in FY12 and is likely to reach the upper range of its 10,000-15,000 target for FY13. Emlak may even exceed its all-time record of 12,488 units sold in 2011. We expect at least five more RSM projects to be launched in FY14. Among the upcoming ten projects, a city centre plot of 127,920 sqm, with an appraisal value of TRY637mn (i.e. 20% vacant land) is to be tendered by December, which could trigger the stock performance. With upcoming project launches coupled with our strong demand projection (based on 4.2% private consumption growth forecast), we expect Emlak to exceed 10,000 unit sales in FY14 despite the high base effect. SPO overhang may continue Emlak shares have underperformed by 9% since the SPO announcement in February. The stock currently trades at a 14% discount to its estimated NAV deeper than its historic 5% discount. The SPO was postponed in June with the prospectus being valid for another year. Given that Emlak will have access to a 2mn sqm land plot in a reserve area determined in the north of Istanbul, as part of the urban transformation program, the Company will need to raise the cash the sooner or later. With TRY3-4bn in SPO proceeds, Emlak had planned to make land investments. The overhang on the share performance may even continue after 1H14, if the SPO is not held by then. Urban transformation in the next decade: opportunity or threat? Additions to TOKIs Istanbul land bank are possible at any time, since the city layout is continuously evolving, and at the same time expected to expand northwards over the next decade; TOKIs current inventory in central locations, which is suitable for RSM projects, is not infinite. Emlaks value creation will eventually stem from new undeveloped settlement zones in the north of the city. While expansion in these zones may support sales in the low-middle income segment, it may hamper solid returns of RSM projects since the upper middle would be less willing to move to these regions.
Financials Revenues (TRYmn) EBITDA (TRYmn) Net profit (TRYmn) BV (TRYmn) EPS (TRY) DPS (TRY) Key metrics EV/Revenues (x) P/E (x) EV/EBITDA (x) P/BV (x) FCF yield (%) Dividend yield (%)

Stock data Bloomberg / Reuters 12m expected total return 52-week price range (TRY/share) Outstanding shares (m) Mcap (TRYmn) Mcap (US$mn) EV (TRYmn) Trading data BIST relative performance 3m 12m 3m avg daily trading vol. (US$mn) Weight in BIST100 Beta (5y, weekly returns) Free float (%) Foreign ownership (% free float) Current 12m ago Shareholder structure Housing Development Administration (TOKI) Free Float EKGYO TI / EKGYO.IS 27% 2.38-3.40 2,500.00 7,025 3,559 5,471
2.1% 1.0% 9.9 1.2% 0.91 25% 59.1% 53.0%
75% 25%
Company in brief Emlak REIT is the largest REIT in terms of MCap and NAV, estimated at TRY8.2bn as of 1H13. Established as a private company in 1953, Emlak had been acquired by a state bank (Emlak Bank) in 1990. It was granted the status of REIT and went to an IPO in December 2010. A second offering of TRY1.3bn shares is possible by 1H14. In accordance with the protocol signed between Emlak and TOKI, Emlak purchases land plots from TOKI at their appraisal values without a bidding process and tenders are undertaken on a revenue sharing basis. The Company also develops projects for the low-middle and middle income segments.
2011 717 177 228 3,803 0.09 0.07 2011 8.1 27.6 33.0 1.7 4.1% 2.8%
2012 1,005 396 524 3,842 0.21 0.05 2012 5.4 11.5 13.6 1.6 -0.8% 2.0%
2013E 2,539 1,192 1,274 5,269 0.51 0.08 2013E 2.2 5.6 4.6 1.4 20.9% 2.8%
2014E 1,410 565 569 5,841 0.23 0.08 2014E 4.0 12.6 10.0 1.2 6.8% 2.8%
2015E 1,449 693 697 6,540 0.28 0.06 2015E 4.1 10.3 8.6 1.1 6.6% 2.1%
Price performance
150
20% 10% 0% -10%
100 50 0 Oct 12
Dec 12
Feb 13
Apr 13
Jun 13
Aug 13
Oct 13

EKGYO (rebased, lhs)
Gaye Abidin
25

Key estimates (TRYmn) Revenues EBITDA Net profit Old n.a. n.a. n.a. 2013E New 2,539 1,192 1,274 Chg. n.a. n.a. n.a. Old n.a. n.a. n.a. 2014E New 1,410 565 569 Chg. n.a. n.a. n.a. Notes Re-initiation of coverage.

Key estimates (TRYmn) Revenues EBITDA Net profit 2013E Cons. 1,750 747 823 2014E Cons. 1,930 864 914 Notes Our FY13 forecasts are more bullish than the consensus figures, whereas our FY14 forecasts are less bullish, probably attributable to different delivery assumptions. We assume 2,522 and 1,405 units to be delivered in 2013 and 2014, respectively.
Est. 2,539 1,192 1,274
Diff. 45% 60% 55%
Est. 1,410 565 569
Diff. -27% -35% -38%
Figure 17 Emlak REITs Discount to Estimated NAV

35% 25% 15% 5% Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Jun-11 Jun-12 Dec-10 Dec-11 Dec-12 Feb-11 Feb-12 Aug-11 Aug-12 Feb-13 Jun-13 -15% -25% -35% Premium / (Discount) to Estimated NAV Based on Appraisal Values Average Premium / (Discount) to Estimated NAV Based on Appraisal Values Aug-13 Oct-13 -5%

Secured cash flows. In RSM projects, the developer guarantees a minimum payment to Emlak, and is responsible for the construction & marketing activities. The cash received from pre-sales is deposited in a project account under Emlaks control. Emlak releases the contractors share of the total sales revenue periodically during the development of the project according to realized construction costs. In the event of a slowdown in sales in RSM projects, we would observe some delay in cash inflows and a prospective decline in the premium to be gained from the corresponding project, while total cash flows are largely secured. Strong balance sheet. Emlak commanded a net cash position of TRY428mn as of 1H13, when adjusted for the contractors portion of cash and TRY447mn liability for the purchase of the 127,920 sqm Kazlicesme plot. Istanbul is the only boundary in land acquisitions. Emlak plans to re-invest all of its cash proceeds in land acquisitions with the target of acquiring attractive land plots in Istanbul for RSM projects. The inner-city concentration is not evident since the layout is continuously evolving. The acquisitions could be in traditional old city centres on the Asian or European sides as well as the new centres to be developed. The only limitation is that it invests in Istanbul, which may give rise to additional upside or downside risks for Emlak in the long term. TOKI estimated to have had 20mn sqm land in Istanbul at end of 2012 vs. 8.4mn sqm of vacant land held by Emlak as of 1H13. Given that Emlaks strength is drawn from its privileged access to TOKIs land bank, we seek to understand its limits. Some 116mn sqm of land was transferred to TOKI between 2002-2012, with 29mn sqm of this land located in Istanbul. In the same period, 7mn sqm of this land was sold to TOKI subsidiaries while TOKI developed projects on another 2mn sqm, with 20sqm left at the end of 2012. Note that 2mn sqm of land is determined as reserve area in 2013. While the city layout is continuously changing, and there may be additions to the TOKI land bank at any time, we think the urban transformation is critical for Emlak REIT in enhancing its value over the next decade.

Source: FinansInvest estimates, Bloomberg
Attractive land purchases from TOKIs land bank. Successful land tenders; the RSM tender of 127,920 sqm land in Zeytinburnu to follow by December.
26
Investment Theme
We like Emlak (i) as a good proxy of residential market capturing the widest range of middle income customers, from lower to upper, and for (ii) its strong cash returns. Over the past ten years, Emlak produced 75,000 units in Turkey via RSM and public procurement model (PPM), the highest number in the sector following 600,000 units produced by the Housing Development Agency of Turkey (TOKI). The value creation comes from RSM model, which targets upper-middle income and applied for 80% of on-going projects, and is dependent on what terms Emlak acquires and tenders the land. Emlak generates significant revenues and margins thanks to a combination of having large plots on which more luxurious projects can be developed and the fact that Emlak provides a network to TOKI, through which zoning issues are more easily resolved and municipalities complete infrastructure services more rapidly. Its track record proves that Emlak generally collects even more cash than the guaranteed amount. Total gain from the completed projects Multiplier progression at RSM tenders
5,000
2,463 782
1.58x
1.46x
4,000 3,000 2,000 1,000 0 2011 2012 1.62
2.07 1.85
2.20 2.00 1.80 1.60 1.40 1.20 1.00
1,058
623
2013 YTD
Base value of land at time of tender (mn TRY-lhs) Company share in total revenues (mn TRY-lhs)
Base Value for the Tender Appreciation During the Tender Estimated Appreciation During the Sales Final Revenue Share of the Project
Multiplier
Source: The Company
Source: The Company
Emlak had 8.4mn sqm of non-tendered land and 2.6mn sqm of tendered land (2.2mn sqm via RSM and 441,000 sqm in PPM projects) as of 1H13. As 2013 has been proving to be a strong year for the residential market, Emlak has so far tendered seven land plots for TRY1,527mn, having a base value of TRY738mn, which implies a 2.07x multiplier. Based on a 13% WACC and the assumption that the proceeds are collected in three years, this multiplier translates into a 40% return for Emlak. The land plots were mostly acquired from TOKI at their appraisal value without a bidding process, or had been placed by Emlak Bank as capital in-kind in 2000. In the completed projects, we observed a 1.58x value appreciation during the tenders and a further 1.46x appreciation during the sales. In projects tendered but not completed, the initial increases in the tenders have so far reached 1.73x. The urban transformation program, which leads to the continuous evolution of the city layout, will undoubtedly have an impact on Emlaks business model. About 10mn residential buildings (90% of total) are standing on areas of high earthquake risk, and half of them are thought to be unstable. The urban transformation program allows the re-construction of these buildings in their original location. If that is not possible, home owners are encouraged to move to the reserve area, where new buildings will be constructed according to new zoning plans. This paves the way for 423mn sqm of land to be developed on the outskirts of the European side of Istanbul. To speed up the process, the Government refined the condominium law in a bid to simplify the process of re-construction of unstable buildings. Previously an apartment block could only be reconstructed if all of the home-owners voted for it, rendering the process difficult to finalise. The recently changed law has removed a barrier, with no only a two thirds majority of the owners required to provide their assent for
27
the re-construction. So far, around 50,000 units (homes or offices) in Turkey have been demolished within the scope of the urban transformation program a far cry from the aggressive target of millions. However, if the targets are achieved, a transformation of such an immense magnitude could step up the pace of sales in middle segment residential projects. This might include Emlaks PPM project sales as well, which the Company has been developing in less attractive locations for the low-middle and middle income segments. The impact on RSM type of projects is harder to estimate. In December 2012, Emlak signed a protocol with TOKI and the Ministries of Environment & Urban Planning and Transportation as well as Housing Development Administration of Turkey to have access to 2mn sqm of land in the reserve area. While additions to its land bank are possible at any time, we estimate that TOKI was holding 20mn sqm of land in Istanbul at the end of 2012, based on the statements of Minister of the Environment and Urban Planning. The city layout will spread northward towards the Black Sea over the next decade with the third airport planned to be in operational by 2019. The change in the mix of Emlaks land bank in favour of new settlement areas in the north, and away from the old city centres in the south may put downward pressure on the Companys returns since the upper middle income would be less willing to move to these underdeveloped regions. On the other hand, the Government recently passed a bill in May 2012 to ease the regulations pertaining to the sale of real estate to foreigners. Beforehand, citizens of the Turkic Republics, Russia and countries in the Gulf region were not permitted to own office or residential property in Turkey. Foreigners invested US$3bn in Turkish real estate between 2006 and 2008, US$1.9bn in 2009 and US$2.5bn in 2010. The industry players expect the easing of the law to pave the way for around US$10bn in annual investment. This target may prove to be aggressive, yet Emlak REIT has witnessed some contribution from sales to foreigners in 2012 (4.4% in total) and 2013 (4.3% in total), compared to no contribution at all beforehand.
28

We valued Emlak through a DCF driven S-O-T-P model, reaching a 12 month target MCap of TRY8,962mn, denoting 25% upside potential. We employ Emlaks adjusted net cash position as of 1H13, taking the cash flows starting from 2H13. Likewise, we employed the appraisal values as of the end of June. The adjusted net debt position excludes the contractors cash portion as well as Emlaks liability of TRY447mn for the acquisition of 127,920 sqm Kazlicesme land in April 2013.
S-O-T-P Valuation On-going RSM Projects On-going PPM Projects Value of Vacant Land Value of Building Stocks Total Real Estate Value PV of G&A expenses Adjusted Net Cash (1H13) Equity value Target Mcap Number of shares Target price (TRY/share) Current price (TRY/share) Upside potential (%) WACC Beta Risk-free rate Market-risk premium Cost of Equity Cost of Debt Net debt/(Net debt+ Market cap) Equity/Capitalization WACC
Source: Finansinvest estimates
Value (TRYmn) 2,693 811 4,124 62 7,691 -188 428 7,931 8,962 2,500 3.58 2.81 27%
Valuation Method DCF DCF 1.3x Multiplier Attached to the Appraisal Values Appraisal Values
% of Total Real Estate Value 35% 11% 54% 1% 100%
1.0 8.0% 5.0% 13.0% 8.0% 0% 100% 13.0%
1- On-going RSM projects, which account for 35% of the real estate portfolio, are those for which the tender and zoning plans have been completed. Construction permits for the majority of these developments have been received and, accordingly, sales have been initiated. We value RSM projects using DCF analysis on the basis of Emlaks share in total project revenues and unit sales assumptions. In terms of completed RSM projects, the final project value has historically averaged 1.46x of the tender value. In the interests of adopting a conservative approach, we have not incorporated any price escalation in our valuation. The Companys share in total revenues stood at TRY5,910mn as of 1H13 compared with the book value of TRY2,692mn. The management guides that the bulk of the units are pre-sold through mortgage loans at a 75% loan to value ratio. The contractors may provide a maturity of up to two years for the remaining 25%. For the sake of simplicity, we assumed that 100% of the sales amount is collected upon the pre-sales. On the other hand, we assume a more conservative pre-sales distribution for new projects (i.e. 25% each in four years) compared with a more aggressive distribution track record (i.e. 50% at t, 25% at t+1, and 25% at t+2).
29
2- While we have only incorporated forecasted cash inflows for RSM projects, we also have incorporated cash outflows in our DCF model for on-going PPM projects, as the Company carries the costs of the construction and OPEX of those projects. In general, the Company receives a 10% down payment in the sales of PPM projects, and the average term for the remaining instalments is around 120 months, with the instalment amounts adjusted at the rate of CPI increase each year. PPM projects account for 11% in the real estate portfolio. 3- Completed buildings are the unsold units in the completed projects. We have attached their appraisal values which contribute a mere 1% to the real estate portfolio. Upside potential under different multiplier scenarios
Multiplier 1.50x 1.40x 1.30x 1.20x 1.10x
Source: Finansinvest estimates
Land Value (TRYmn) 4,759 4,442 4,124 3,807 3,490
Upside Potential (%) 36% 31% 25% 20% 15%
4- The total appraisal value of Emlaks 8,350,916 sqm of vacant land is TRY3,173mn. We incorporate a conservative 1.30x value multiplier over their appraisal value in our valuation, which is modest compared to 1.58x appreciation observed so far in terms of completed projects. The vacant land contributes TRY4,124mn (54% of the real estate value) to the SO-T-P valuation. Thus, the potential deviations between the realized value multiplier and our estimate of 1.30x would give rise to important deviations in our target price. Our analysis shows that the companys upside potential could vary by between 21 and 42pps according to the success of the tenders. Sales breakdown in 1H13 Sales from tendered projects
16,000 14,000 Sales of vacant land 30% Residential unit sales under PPM 36% 12,000 Revenues from RSM projects 34% 10,000 8,000 6,000 4,000 2,000 0 5,750 2011 6,837 8,355 796 2012 3,675 2013E 10,906 RSM PPM
Source: Finansinvest Estimates
Source: The Company, Finansinvest Estimates
5- Emlak had sold 9,151 units in 2012, of which 8,355 were from the RSM projects. In 2013, we expect the company to sell 14,581 units, 75% of which being from RSM projects, and the remainder 25% from PPM projects. Thanks to a 59% increase in unit sales, we expect the companys cash flow generation from its projects to almost double in 2013.
mn TRY Cash Inflow Cash Outflow Construction exp M & S exp Net cash flow
2011 1,123 -863 -810 -53 260
2012 1,198 -1,245 -1,188 -57 -47
FY13E 2,292 -799 -699 -101 1,492
FY14E 635 -150 -85 -65 485
FY15E 573 -100 -32 -68 472
30

Balance Sheet (mn TRY) Current Assets Cash and Cash Equivalents Marketable Securities Short-Term Trade Receivables Other Short-Term Receivables Inventories Other Current Assets Long Term Assets Long-Term Trade Receivables Long-Term Financial Assets Tangible Fixed Assets Land and residential inventories TOTAL ASSETS Short Term Liabilities Short-Term Financial Loans Short-Term Trade Payables Other Short-Term Loans Short-Term Provisions Other Short-Term Liabilities Long Term Liabilities Long-Term Financial Loans Long-Term Trade Payables Other Long-Term Payables Shareholders' Equity Total Paid-in Capital Premium in Excess of Par Income Reserves Retained Earnings /(Acc. Losses) Current Year Income /(Losses) Other Sholders Equity Items TOTAL LIABILITIES AND S.HOLDERS' EQUITY Net Sales Cost Of Sales GROSS PROFIT (LOSS) Operating Expenses (-) Income from Other Operations OPERATING PROFITS EBITDA Net Financial Expense PROFIT BEFORE TAX NET PROFIT AFTER TAXES
Source: The Companies, FinansInvest estimates
2007/12 1,668 773 0 113 252 0 530 2,101 47 0 34 2,019 3,769 2,645 0 266 1,784 9 585 2 0 0 2 1,122 253 0 21 436 0 411 3,769 1,111 -316 796 -50 -513 746 747 135 368 368
2008/12 1,581 102 438 101 269 0 672 2,791 48 0 36 2,707 4,372 1,414 117 119 643 9 526 1,309 1,304 3 2 1,649 253 0 69 916 0 411 4,372 1,045 -353 692 -56 -73 636 637 -36 527 527
2009/12 1,947 274 240 355 328 696 54 2,724 77 0 22 2,625 4,671 1,334 95 158 540 12 528 1,243 1,234 7 2 2,094 253 0 97 1,333 0 411 4,671 865 -363 502 -34 8 468 468 -30 446 446
2010/12 3,325 1,733 80 374 386 0 88 3,925 554 0 11 3,360 7,250 2,417 182 637 639 28 931 1,083 1,074 6 3 3,750 2,500 427 114 155 554 0 7,250 1,498 -759 739 -87 -24 652 653 -74 554 554
2011/12 3,149 774 572 366 468 0 968 4,550 783 0 11 3,582 7,699 2,783 186 316 693 54 1,534 928 914 11 4 3,988 2,500 0 149 683 228 427 7,699 717 -488 229 -53 23 176 177 29 228 228
2012/12 3,510 1,147 160 448 477 0 1,279 5,069 830 0 9 4,229 8,579 3,420 172 527 712 63 1,946 766 754 0 2 4,392 2,500 0 171 770 523 427 8,579 1,005 -552 453 -57 61 396 396 66 523 523
2013/12 5,196 2,895 442 448 477 0 935 5,928 1,099 0 6 4,823 11,125 5,260 208 1,723 771 61 2,497 596 594 0 2 5,269 2,500 0 171 1,094 1,077 427 11,125 2,539 -1,247 1,292 -101 1,191 1,192 1.3 38 45 1,277
2014/12 4,916 2,614 442 448 477 0 935 5,279 1,147 0 6 4,127 10,195 3,919 199 1,168 771 61 1,721 436 434 0 2 5,841 2,500 0 171 2,171 571 427 10,195 1,410 -782 628 -65 564 565 1.3 0 5 571
2015/12 4,324 2,022 442 448 477 0 935 5,247 1,771 0 6 3,469 9,570 2,815 248 891 771 61 845 216 214 0 2 6,540 2,500 0 171 2,742 699 427 9,570 1,449 -689 760 -68 692 693 1.3 0 5 699
31
Torunlar REIT
REIT
Market Perform
(Initiated)
Growth in a balanced portfolio

Initiating coverage with a Hold rating
We initiate our coverage of Torunlar REIT (Torunlar) with a Market Perform rating. Our S-O-T-P driven 12 month TP of TRY4.10/share indicates 12% upside potential. The stock trades at a 36% discount to its estimated NAV versus the historic average of 45%. Torunlar intends to expand its retail rent generating portfolio, investing in residential and mixed-use projects in Istanbul while also increasing its dividend payments. Yet, we believe its growth prospects to have been priced-in.

Stock data Bloomberg / Reuters 12m expected total return 52-week price range (TRY/share) Outstanding shares (m) Mcap (TRYmn) Mcap (US$mn) EV (TRYmn) Trading data ISE relative performance 3m 12m 3m avg daily trading vol. (US$mn) Weight in ISE100 Beta (5y, weekly returns) Free float (%) Foreign ownership (% free float) Current 12m ago Shareholder structure Mehmet Torun Aziz Torun Torun Food Free Float TRGYO TI / TRGYO.IS 11% 2.71-4.32 500.00 1,850 937 2,360
22% CAGR in EBITDA expected between 2012-16

Torunlar will expand its retail portfolio of 223,643 sqm in stake adjusted terms by 22% in 2013-16. The lions share of this will come from the Mall of Istanbul (MoI; 154,000sqm) by 1Q14 and Torun Tower (TT;45,000 sqm) by 1H14. The rental income should expand at a CAGR of 31% in the same period with EBITDA rising at a rd CAGR of 23%. As well as the MoI, TT, the 3 stage of Korupark and the Torun Center (TC) will provide 261,000sqm of residential saleable area. The MoI was launched in 2Q11 and 79% of residential and 64% of office units had been pre-sold as of 1H13 with deliveries in December boosting FY13 EBITDA by 92% YoY. In total, we expect TRY608mn in residential profits on deliveries in 2013-16. Furthermore, Torunlar is planning to initiate construction work on the Pasabahce and KIPTAS nd projects by 1Q14, Kemankes by 2Q14, the 2 stage of MoI and the Maltepe project by 4Q14. We currently attach the appraisal values for these projects.
0.0% 19.0% 1.2 0.2% 0.80 14% 23.4% 15.6% 39.4% 39.4% 7.1% 14.1%%
Net debt / EBITDA of 4.7x by 2014YE vs. 4.3x at end of 2012YE

In our investment horizon, we expect Torunlars net debt / EBITDA to peak at 4.7x by the end of 2014, from an actual 4.3x at the end of 2012. On top of its 1H13 adjusted net debt position of TRY1.2bn, the Company secured two loans of US$310mn and US$300mn in July and October. The bulk (65%) of the debt position is denominated in US$ terms, with the current weighted average cost of borrowing at 4.9%.
Key Risks
The key risks are; (i) overhang risk due to potential stake sale from major shareholders Mehmet and Aziz Torun, who each hold 9.6mn listed shares (i.e.7.6% of the FF) and the sister company Torun Food owning the 35.3mn shares acquired from the IPO, (i.e. 28% of the free float), (ii) FX losses on the short FX position we estimate TRY102mn FX losses in FY13 vs. TRY49mn FX gains in FY12 and (iii) oversupply risk for shopping malls in big cities, despite our bullish expectations of domestic consumption growth (4.2% YoY in FY14). Aggregate footfall fell by 3% in LFL terms in 1H13, mainly due to the 9% YoY fall in the footfall of Torium in Istanbul.
Financials Revenues (TRYmn) EBITDA (TRYmn) Net profit (TRYmn) BV (TRYmn) EPS (TRY) DPS (TRY) Key metrics EV/Revenues (x) P/E (x) EV/EBITDA (x) P/BV (x) Rental Yield (%) Dividend yield (%) 2011 163 76 177 2,533 0.79 0.06 2011 0.1 7.2 20.2 0.5 7.1% 1.0% 2012 227 122 337 2,847 0.83 0.06 2012 0.1 3.7 12.5 0.4 8.0% 1.8% 2013E 687 234 109 2,906 0.06 0.03 2013E 0.3 16.7 10.1 0.6 1.3% 2.7% 2014E 350 169 157 3,019 0.09 0.02 2014E 0.1 11.7 14.8 0.6 12% 2.4% 2015E* 1,748 543 506 3,462 0.28 0.03 2015E 0.7 3.6 4.4 0.5 32% 3.4%
Company in brief Torunlar REIT is the second largest REIT after Emlak REIT both in NAV terms (TRY2.8bn as of 1H13) and MCap. The Company held 223,000 sqm of GLA retail area and 237,000sqm of land at the end of 2012. The Company plans to invest a total of US$1bn in 2013-15 to expand its portfolio both in terms of GLA and mixed-used projects.
Price performance
200 150 100 50 0 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 0% -20% 40% 20%

TRGYO (rebased, lhs)
Gaye Abidin
Source: Company financials, FinansInvest estimates. * Torunlar will book estimated TRY285mn profits from the delivery of Torun Center project.
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Key estimates (TRYmn) Revenues EBITDA Net profit 2013E New 687 234 109 2014E New 350 169 157 Notes Initiation of coverage.
Old n.a. n.a. n.a.
Chg. n.a. n.a. n.a.
Old n.a. n.a. n.a.
Chg. n.a. n.a. n.a.

Key estimates (TRYmn) Revenues EBITDA Net profit 2013E Cons. 705 325 322 2014E Cons. 470 275 337 Notes The deviation between our own and the market estimates is attributable to the difference in assumptions over the timing of deliveries in MoI, and the operation dates of the new MoI and TT shopping malls. We project 922 dwellings and 134 offices to be delivered from MoI by December 2013. The MoI and TT shopping malls should be in operation by 1Q14 and 2Q14.
Est. 687 234 109
Diff. -3% -28% -66%
Est. 350 169 157
Diff. -25% -39% -54%
Figure 22 Torunlar REITs Discount to Estimated NAV

Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Jun-11 Jun-12 Dec-10 Dec-11 Dec-12 Feb-11 Feb-12 Aug-11 Aug-12 Feb-13 Jun-13 Aug-13 Oct-13 0% -10% -20% -30% -40% -50% -60% -70% Premium / (Discount) to Estimated NAV Based on Appraisal Values Average Premium / (Discount) to Estimated NAV Based on Appraisal Values
Improved economic outlook in FY14 should support the performance of rent generating retail assets. Torunlars operational performance is heavily dependent on the economic environment given that its real estate portfolio is focused on shopping malls. We anticipate 4.1% YoY consumption growth for FY13 to be followed by 4.5% YoY growth in FY14 on the assumption that volatility in financial markets gradually diminishes in the coming months. Torunlar charges its tenants a fixed rental fee on top of a turnover rent (expressed as a percentage of the fixed rent) and generates additional revenues from common areas. Note that 63% and 37% of rental revenues are generated in EUR and US$. Hard currency denominated revenues offer the Company a limited safety cushion since tenants require discounts in times of economic turmoil and sharp TRY depreciation. A more balanced portfolio should overcome potential struggles in the retail segment. At the end of 2012, 40% of Turkeys 8.6mn sqm of retail stock was located in Istanbul. With the projects under construction, this ratio should increase even further to 43% by 2015 (i.e. total GLA at 11.2mn sqm). Currently, 43% of Torunlar REITs shopping malls are located in Istanbul and the REIT intends to push this ratio to 67% by 2015. As it is clear that competition in Istanbuls retail market will become tougher by 2015, the Company has many residential and mixed-use projects in the pipeline in a bid to diversify risks by achieving a more balanced portfolio. Dividends from Yeni Gimat to rise. The CMB approved Yeni Gimats application to become a REIT. Yeni Gimat, in which Torunlar holds a 14.83% stake, is the owner of the 88,421 sqm Anka shopping mall in Ankara. Torunlar received TRY9.3mn of dividends in FY12 and Yeni Gimats exemption from the 20% corporate tax implies higher dividends for the Company.

Strong pre-sales performance in upcoming projects. Timely progress in project completions. High occupancy rates and NoI generation form shopping malls.
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Investment Theme
Torunlars portfolio is concentrated on rent generating retail assets; six shopping malls with an area of 220,599 sqm on a stake adjusted basis in five big cities. However, Torunlar is in the process of both (i) expanding its retail leasable space by 22% over the 2013-16 period to reach an area of 403,628 sqm, implying an expected 32% CAGR in rental and common area revenues and (ii) developing six residential and mixed-use projects on approximately 700,000sqm of saleable area. While we like the Companys growth story, we believe the prospects have already been priced-in to a large extent. The stock trades at a 36% discount to its estimated NAV, vs. its 45% historic average. While the management has more optimistic expectations for MoI and TT, we plug in more conservative assumptions to incorporate the challenging outlook facing Istanbuls shopping malls, leaving room for possible upgrades to our forecasts going forward. The tenants are expected to move in MoI, which is located on European side of Istanbul, by 1Q14 and to make the biggest contribution to retail rental portfolio by revenue (i.e. 49%) and profitability (3 pps rise in the NoI to71% levels). Their only current exposure in Istanbul is Torium, which is facing the most challenging competitive environment with four major shopping malls opened up in the same neighbourhood. That translates into the lowest occupancy rate (93%) and NoI (54%) for Torium vs. portfolio averages of 98% and 68%. The opening of MoI and Torun Tower should reinforce Torunlars presence in Istanbul and the steady cash flow generation, supportive of future cash dividends.
Progression of GLA (sqm) Retail Korupark Torium Deepo Zafer Bulvar Samsun Anka Mall MOI Deepo Extension Torun Tower Office Torun Tower Bulvar Samsun (40%) Hotel Pasabahce Other Marina
Source: Company Data
2012 Torunlar REIT stake 100% 100% 100% 72.3% 40.0% 14.8% City Bursa Istanbul Antalya Bursa Samsun Ankara Istanbul Antalya Istanbul 100% 40% Istanbul Samsun Istanbul 45% Marmaris 4Q15 2,663 2,663 223,643 Est. Operational Date Operational Operational Operational Operational Operational Operational 1Q14 3Q15 1H14 381 1H14 381 220,599 71,267 95,280 18,069 16,944 5,926 13,113
2013 220,599 71,267 95,280 18,069 16,944 5,926 13,113
2014 376,977 71,267 95,280 18,069 16,944 5,926 13,113 153,963 2,415
2015 403,628 71,267 95,280 18,069 16,944 5,926 13,113 153,963 26,651 2,415 45,141 44,760 381 6,000 6,000
2016 403,628 71,267 95,280 18,069 16,944 5,926 13,113 153,963 26,651 2,415 45,141 44,760 381 6,000 6,000 2,663 2,663 457,432
381 381
45,141 44,760 381
2,663 2,663 223,643
2,663 2,663 424,781
2,663 2,663 457,432
Grand Total
The major projects in the pipeline are Pasabahce and KIPTAS, with construction due to start by 1Q14. The highlights are as follows: 1-Pasabahce Project: A 200-room luxury hotel on 6,000 sqm of leasable space on the Anatolian seaside, with 45 villas on a 33,364 sqm saleable area. The cost of developing the villas and the hotel is estimated at TRY220mn. 2- KIPTAS Project: Torunlar offered the most competitive bid of a 54.28% company share in the Istanbul Metropolitan Municipalitys revenue sharing tender for a 578,400 sqm construction area on a 515,977 sqm land plot in Eyup (on the European side of Istanbul). Torunlar will be obliged to construct a residential complex on an area of approx. 265,000sqm for the low income segment, with mosques and school buildings, and develop a project on
34
the remainder of the plot at a total cost of TRY1bn. The sales price assumption stands at TRY4,000/sqm.

We value Torunlar through a sum-of-the-parts valuation, which indicates a 12 month TP of TRY4.10/share. We performed DCF analysis for the Companys rent generating retail assets, the on-going and upcoming projects. We attached the latest appraisal values for the land-bank and the unsold units in the completed projects and employed the dividend discount model to value Torunlars minority stakes of 15% and 45% in its dividend paying participations.
% of Total Portfolio Value 28% 13% 8% 3% 3% 1% 32% 19% 10% 3% 19% 17% 2% 3% 1% 1% 1% 0% 13% 11% 1% 1% 1% 5% 3% 1%
S-O-T-P Valuation Operating Shopping Malls Korupark Shopping Mall (Bursa) Torium Shopping Mall (Istanbul) Deepo Outlet Mall (99.99%) (Antalya) Zafer Plaza Shopping Mall (72.26%) (Bursa) Boulevard Samsun Shopping Mall (40%) Ongoing projects Mall of Istanbul Torun Tower Korupark III Upcoming Projects Ali Sami Yen Project (65%) Deepo Outlet Mall Extension (Antalya) Unsold Units in Completed Projects Korupark I & II NishIstanbul Kemankes Boutique Hotel Building Torium Residence Landbank Pasabahce Basaksehir, kitelli-2 Basaksehir, Kayabasi Maltepe Participations Yeni Gimat (14.83%) Netsel Marina (44.60%) Total Portfolio Value Adj. Net Debt 1H13* NPV of Operational Expenses 12 month target Mcap # of shares 12 month target price Current Price Upside potential
Valuation Method DCF DCF DCF DCF DCF
Value (TRYmn) 911 425 260 95 99 31 1,032
DCF DCF DCF
616 319 97 614
DCF DCF
564 51 103
Appraisal Value Appraisal Value Appraisal Value Appraisal Value
48 30 18 6 429
Appraisal Value Appraisal Value Appraisal Value Appraisal Value
356 32 21 20 149
DDM DDM
106 42 3,237 1,234 185 2,049 500 4.10 3.70 11%
Source: Finans Invest Estimates * Adj. To Pasabahce Land purchase
35
2010 Total Revenues (mn TRY) Rental Income Korupark SM (Bursa) Torium SM Antalya Deepo SM Zafer Plaza SM Bulvar Samsun SM (40%) MOI Torun Tower Deepo Extension Residential Sales Korupark Residential 3 MOI ASY (65%) Korupark Residential 1-2 Nishistanbul Torium Residential Other Total Gross Margin Rental Generating Asset GM Korupark SM Torium SM Antalya Deepo SM Zafer Plaza SM Bulvar Samsun SM (40%) MOI Torun Tower Deepo Extension Residential Sales GM Korupark Residential 3 MOI ASY (65%) Korupark Residential 1-2 Nishistanbul Torium Residential Other GM
Source: Company Data, Finans Invest Estimates
2011 163 123 52 48 15 9 0 0 0 0 38 0 0 0 25 12 1 2 61% 67% 73% 55% 75% 73% n.a. n.a. n.a. n.a. 46% n.a. n.a. n.a. 50% 43% -31% 29%
2012 227 141 60 49 16 14 2 0 0 0 85 74 0 0 3 6 2 1 62% 68% 74% 57% 79% 73% 41% n.a. n.a. n.a. 51% 52% n.a. n.a. 53% 49% 15% 74%
2013E 687 144 63 45 17 15 4 0 0 0 541 48 465 0 16 10 2 1 38% 67% 74% 59% 74% 72% 70% 0% 0% 0% 31% 52% 28% 24% 50% 50% 7% 48%
2014E 350 213 64 46 18 16 4 53 11 0 136 44 63 0 16 10 2 1 57% 68% 73% 58% 73% 72% 70% 75% 70% 0% 40% 52% 28% 24% 50% 50% 7% 45%
2015E 1748 289 65 48 18 18 4 84 44 7 1457 48 27 1,354 16 10 2 1 33% 71% 72% 57% 72% 71% 70% 80% 75% 70% 25% 52% 28% 24% 50% 50% 7% 43%
2016E 587 332 67 51 19 20 4 94 51 28 254 15 0 239 0 0 0 1 51% 71% 70% 57% 71% 71% 70% 80% 75% 70% 26% 52% 28% 24% 50% 50% 7% 41%
233 71 40 9 14 8 0 0 0 0 161 0 0 0 42 119 0 0 34% 68% 75% 38% 69% 73% n.a. n.a. n.a. n.a. 19% n.a. n.a. n.a. 52% 8% n.a. 73%
36

Income statement Revenues Gross profit EBITDA Depreciation EBIT Net other income Net financial income Profit before taxes and minorities Taxes Net income Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Shareholders' equity Total liabilities and equity Net debt Cash flow Cash Inflows Total CAPEX (incl. maintenance) Cash OPEX FCFF Key metrics Growth Revenue growth EBITDA growth Net income growth Margins EBIT margin EBITDA margin Net margin Return on equity (ROE) Net debt / Equity
Source: FinansInvest estimates; Company Data
2011 163 100 76 0.3 76 177 -119 179 2 177 2011 841 3,102 3,944 388 1,022 2,533 3,944 446 2011 334 181 25 128 2011 -30% 48% -17% 46% 47% 109% 7.2% 18%
2012 227 140 122 0.6 122 160 42 346 9 337 2012 1,111 3,383 4,494 668 980 2,847 4,494 525 2012 310 293 18 -2 2012 39% 61% 90% 54% 54% 149% 12.5% 18%
2013E 687 263 234 0.6 234 -2 -131 112 3 109 2013E 767 3,906 4,674 256 1,512 2,906 4,674 1053 2013E 609 500 29 80 2013E 203% 92% -68% 34% 34% 16% 3.8% 36%
2014E 350 199 169 0.6 168 -1 -25 155 -2 157 2014E 1,052 4,084 5,136 221 1,896 3,019 5,136 787 2014E 729 162 31 536 2014E -49% -28% 43% 48% 48% 45% 5.3% 26%
2015E 1,748 575 543 0.6 542 -4 -40 511 5 506 2015E 1,066 4,526 5,591 186 1,944 3,462 5,592 804 2015E 700 69 33 598 2015E 399% 221% 223% 31% 31% 29% 15.6% 23%
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FinansInvest Rating System

We employ a relative scale in our rating system (i.e. Market Outperform, Neutral, Underperform) in order to better present relative value propositions and more actively pursue long vs. short ideas at the BIST. The relevant benchmark is the broader Turkish stock market, using the BIST-100 index as a basis. The ratings also incorporate a certain degree of relativity within the analysts own stock coverage universe due to asymmetric return expectations among the industries under our BIST coverage. The rating system combines analysts views on a stock relative to the sectors under coverage, and the sector call relative to the market, together providing a view on the stock relative to the market. Individual ratings reflect the expected performance of the stock relative to the broader market over the next 6 to 12 months. The assessment of expected performance includes a function of near-term company fundamentals, industry outlook, confidence in earnings estimates and valuation, and other factors. An essential element of our rating methodology involves benchmarking a 12-month expected return against the cost of equity. We set a required rate of return for each stock, calculated from our risk-free rate and equity risk premium assumptions. The price target for a stock represents the value that the stock is expected to reach or sustain over the performance horizon of 12 months, according to the view of the analyst. We have separated the stocks under our coverage into two groups, mainly with respect to their liquidity (market cap, free float market cap and historical average daily trading volume) as small-cap stocks exhibit different risk/return characteristics to more-liquid large-caps. For the purposes of the relative stock rating, however, stocks within each group will be considered on an unweighted basis with regard to their market capitalization. For a stock to be assigned an Outperform rating, the implied return must exceed the required rate of return by at least 5 percentage points over the next 12 months for our larger-cap stock coverage, or by 10 percentage points for the small-cap group. For a stock to be assigned an Underperform rating, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months. Stocks between these bands will be classified as Neutral. When the potential upside of an average stock in our coverage exceeds its required rate of return (i.e. the market upside exceeding the implied average cost of capital), a greater number of stocks would fall into the aforementioned Outperform (Buy) category, illustrating the significance of the relative return concept (vis--vis absolute return) in picking better investment ideas with a positive alpha. The same holds true when the potential upside of an average stock in our coverage falls short of its required rate of return. In this regard, as a supplemental methodology, we rank the stocks in our coverage according to their notional target price with respect to their current market price, and then categorise the top group (approximately 40-50% of the companies under coverage) as Outperform, the next 40-50% as Neutral and the lowest 10-20% (and no less than 10%) as Underperform. It should be noted that the expected returns on some stocks may at times fall outside the relevant ranges of the applicable respective rating category because of market price movements and/or other short-term volatility or trading patterns. Such interim deviations from specified ranges are permitted but becomes subject to review. Also note that the analysts short-term view may occasionally diverge from the stocks longer-term fundamental rating. Outperform. We expect the stock to outperform the BIST-100 over the next 6 to 12 months. Neutral (Market Perform). We expect the stock to broadly perform in line with the BIST-100 index over the next 6 to 12 months. (Although we would normally have a neutral assessment of stocks in this category, if a stock has gone through a period of market underperformance, it would be an indication that the stock may be expected to improve its performance relative to market averages in the coming period, and vice versa). Underperform. We expect the stock to underperform the BIST-100 over the next 6 to 12 months. N/R. Not Rated. U/R. Under Review.
Analyst Certification
The following analysts hereby certify that the views expressed in this research report accurately reflect their own personal views regarding the securities and issuers referred to therein and that no part of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report: Gaye Abidin. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.
Disclaimer
All information enclosed in this document has been obtained from sources believed to be reliable. While FINANSINVEST has spent reasonable care in verifying the accuracy and completeness of the information presented herein, it cannot be held responsible for any errors, omissions or for consequences arising from the use of such information. This document is published for purposes of providing information to investors who are expected to make their own investment decisions without undue reliance on this report. Therefore, no article or statement can be construed as an investment advice or a solicitation to buy or sell the securities mentioned herein. The affiliates, officers, partners and employees, including persons involved in the preparation or issuance of this material may have a direct or indirect position in any security mentioned in this report.
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Turkish Reits: Top Plays: Sinpas and Is Reit

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Turkish Reits: Top Plays: Sinpas and Is Reit

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Turkish Equities / Transfer of coverage

Emlak, a residential proxy, offers lower upside and few catalysts

Growth prospects of Torunlar priced-in

REIT Sector, 24 October 2013

Figure 1 Summary table for REIT companies in our coverage

REIT Sector, 24 October 2013

Figure 1 Summary table for REIT companies in our coverage (continued)

Lower upside potential

Relative stock performances (rebased Dec10)

Relative stock performances (rebased Dec10)

REIT Sector, 24 October 2013

The Turkish Residential Market

YoY Change n.a. 14% 24% 7% 1% 1% 0% 1% 1% 1% 1% -1%

Source: The Association of Real Estate Investment Companies, May 2012

REIT Sector, 24 October 2013

Owner-Occupied Urban Dwellings (blue) and Total Urban Population (grey)

Construction Permits (# of units)

Occupancy Permits (# of units)

REIT Sector, 24 October 2013

Mortgage Loans (mn TRY) - LHS

Mortgage Rates (%) - RHS

Median Sales Price in Istanbul (TRY/sqm)

Construction Cost Index

REIT Sector, 24 October 2013

FY13E Median Disposable Income of Urban Households (mn TRY)

Mortgage Rates vs. House Sales

Construction Permits vs. House Sales

Total Home Sales

Mortgage Rates (%)

Source: TURKSTAT, CBT, Finansinvest Estimates

Source: TURSTAT, CBT

REIT Sector, 24 October 2013

YE mortgage rates vs. private consumption growth

12.0% 10.0% 8.0% 6.0% 4.0% 2.0%

0.0% -2.0% -4.0%

Mortgage rates (lhs)

Seasonally adj. growth of private consumption (rhs)

REIT Sector, 24 October 2013

Prospects being realised with solid delivery

Price: TRY1.44 12m Target Price: TRY1.98

Outperformance (rhs) ISE100 (rebased, lhs)

isgyo (rebased, lhs)

REIT Sector, 24 October 2013

Figure 2 Revenues-EBITDA-Net earnings estimates

Source: FinansInvest estimates

Figure 3 FinansInvest vs. Consensus

Source: Bloomberg, FinansInvest estimates

Figure 4 Is REITs Discount to Estimated NAV

Figure 5 Investment debates

Figure 6 Potential catalysts

REIT Sector, 24 October 2013

Progression of GLA and GSA (000 sqm)

2013 Office (GLA)

2014 Retail (GLA)

2015 Hotel (GLA)

2016 Residential (GSA)

REIT Sector, 24 October 2013

Valuation & Assumptions

REIT Sector, 24 October 2013

Izmir Ege Perla

Saleable area (sqm) 30,000

Total Units 176