Emirates REIT (EREIT) reported a good set of results for 2H16, with revenue showing healthy 21% Y-o-Y growth and EBITDA margin expanding 5pps Y-o-Y to 42.3% (revenue: +22.2% Y-o-Y in 2016, EBITDA margin: +3.9pps Y-o-Y to 44.2%), driven by increased leasing at the Index Tower and the addition of the new British Columbia Canadian School, according to the earnings release. This has resulted in an increase in EREIT’s cash profits, which totalled USD6.4mn in 2H16 (+36% Y-o-Y) and USD11.3mn in 2016 (38% Y-o-Y). Overall occupancy rates came in at 81% (77% in 2015); still dragged down by the yet to be leased space in the Index Tower office space. Moreover, leverage continued to rise (LTV at 38% in December, September: 35%, regulatory ceiling: 50%).   As an operational update, management indicated that construction started at the new British Columbia Canadian School in September (total investment is estimated to be at USD24mn, with an IRR of 12%). Moreover, negotiations are underway for pre-leases on more than 50% of the retail podium GLA at the Index Tower. The re-modelling and fit-out of the retail space is expected to start in 2Q17.   We note that management had committed to, at least maintain the distribution of USD0.08/share in cash dividends, which is currently c50% internally covered despite the reported FFO increase. We expect the company to continue to increase its borrowing in order to meet its capex requirements over the short-term and to sustain this high dividend payout ratio, which is our main concern. EREIT offers a dividend yield of 7.2% for 2017e. We have a Neutral rating on the name, with our DDM-based TP of USD1.24 showing an upside potential of 11.7%.   Key positives: Revenue beat expectation, coming in at USD14.4mn in 4Q16 (+23.3% Y-o-Y, +13.3% Q-o-Q, EFGe: +8.8%). Revenue totaled USD23.6mn in 2H16 (+20.9% Y-o-Y) and USD50.7mn in 2016 (+22.2% Y-o-Y). Revenue growth was driven by  increased leasing at the Index Tower and the rent of the new British Colombia Canadian School (BCCS) Strong EBITDA margin of 43.9% in 4Q16, 42.3% in 1H16 and 40.6% in 2016, driven by the higher revenue and controlled costs. G&A were flat Y-o-Y in 2H16 at USD0.8mn and 2016 at USD1.6mn. Management has indicated that expenditure has been brought-down across the portfolio following the negotiations with existing suppliers and the introduction of energy efficiency programs (relative cost reduction estimated at 8% across the portfolio, according to management) Increase in FFO, growing by 48% Y-o-Y to USD3.6mn in 4Q16, 36% Y-o-Y to USD6.4mn in 2H16 and 38% Y-o-Y to USD11.3mn in 2016 Net income (including revaluation gains) beat our estimates, coming in at USD24.0mn in 2H16 (-9% Y-o-Y) and USD47.8mn in 2016 (-11% Y-o-Y) on the back of lower revaluation gains; however is 20% above our estimate for the year   Key negatives: Minimal improvement in average occupancy rate across the portfolio to 81% in December (September: 80% and 77% in 2015), implying minimal improvement in occupancy rates at the Index Tower and/or higher vacancy rates in other assets (not yet disclosed) Further pressure on leverage, with LTV ratio reaching 38% in December (September: 35%) as USD54mn 10-year loan facility was secured during the quarter This drove financing costs up; coming in at USD5.1mn in 2H16 (+37% Y-o-Y) and USD9.3mn in 2016 (+42% Y-o-Y) Slowdown in revaluation gains, albeit expected; totalled USD9.1mn in 4Q16 (-30% Y-o-Y; mainly comprised of: USD3.5mn from the Index Tower, USD2mn at Le Grande, USD1mn at the Office Park, and USD1.5mn at Jebel Ali School). The figure was USD17.7mn in 2H16 (-19% Y-o-Y) and USD36.5mn in 2016 (-17% Y-o-Y). Comparative figures were inflated by higher revaluation gains at the Index Tower with its kick-off. (Company, Mai Attia, Sara Boutros)     Emirates REIT (DU): USD1.11 as of 26 Feb. 2017, Rating: Neutral, TP: USD1.24/share, MCap: USD331mn, REIT DU/REIT.DI