Emirates REIT (EREIT) has reported its 2Q16 financial results. Total revenue (USD11.9mn) met our expectation, showing a healthy 23% Y-o-Y growth, driven by the additional income from the Index Tower (started to lease in 2H15), and that from Jebel Ali School, reflecting well on EBITDA (USD4.6mn, +88% Y-o-Y). The Index Tower occupancy rate continued to climb (16.3% in June 2016, up from 14.8% in March 2016, 12.5% in December 2015 and 0% in June 2015). On a negative note, LTV ratio continued to grow (36% in June 2016, 34% in March 2016, 27% in June 2015) and finance costs surged, explaining the miss on the net income before revaluation gain level. Also, lower-than-expected revaluation gains were booked during the quarter, but we are still awaiting feedback from management on the breakdown of the figure to see where the miss came from. We had expected USD9.0mn in 2Q16, higher than the booked USD6.7mn, which may have come on the back of less active fitting-out works at the Index, in light of management’s recent comments that it may consider reintroducing more core-and-shell space at the Index (rather than only fully-fitted out).   Key positives: Improved average occupancy rate at the Index Tower to 16.3%. This compares to 14.8% in March 2016, 12.5% in December 2015, and 0% in June 2015. Overall, portfolio occupancy rate was 77%, up from 67% a year ago and roughly unchanged Q-o-Q   Revenue met expectation, coming in at USD11.9mn in 2Q16 (+23.3% Y-o-Y, +1.3% Q-o-Q, EFG: +2.7%). 1H16 revenue totaled USD23.6mn (+23.8% Y-o-Y). We believe the driver of the revenue growth was higher rental income from the Index Tower, which started to actively lease in 2H15 EBITDA was USD4.6mn in 2Q16, growing 87.6% Y-o-Y, 2.3% Q-o-Q and +2.4% vs. EFGe. This translates into an EBITDA margin of 38.9% (2Q15: 25.5%, 1Q16: 38.5%, EFGe: 39.0%), driven by higher contribution from the Index Tower. 1H16 EBITDA was USD9.1mn (+41.5% Y-o-Y)   Key negatives: Higher finance costs, totaling USD2.8mn in 2Q16 (5.2x vs 2Q15, 2x vs 1Q16) and USD4.3mn in 1H16 (+47.1% Y-o-Y) Net income before revaluation gains missed by 10% in 2Q16, on higher-than-expected finance costs, coming in at USD2.8mn in 2Q16 (180.1% Y-o-Y, +27.5% Q-o-Q) and at USD4.9mn in 1H16 (+39.1% Y-o-Y) Lower-than-expected revaluation gains. We had estimated USD9mn higher than the booked USD6.7mn during the quarter. 1H16 revaluation gains totaled USD23.8mn (-32.3%, with 1H15 inflated by the completion of two fitted-out floors at the Index Tower) Net income after revaluation totaled USD9.5mn in 2Q16 (-63.6% Y-o-Y, -33.7% Q-o-Q, -21.6% vs. EFGe) and USD23.8mn in 1H16 (-32.3% Y-o-Y) Leverage rose again, with LTV ratio reaching 36% in June (34% in March 2016, 27% in June 2015)   An overall good set of results. We are pleased to see overall occupancy rate continuing to increase and property income growing in a healthy manner. We estimate rental income from the Index Tower to grow to USD12.8mn in 2016e (from USD1.2mn in 2015) and by a 23% five-year CAGR starting 2016. The Index Tower is therefore expected to continue to act as the growth engine for the company going forward. We expect the company to increase its borrowing in order to meet its capex requirements over the short term and to sustain its high dividend payout ratio. EREIT offers a dividend yield of 7.2% for 2016e. We have a Neutral recommendation on the name, with an upside potential of 11.7%. (Company disclosure, Mai Attia, Sara Boutros)   Emirates REIT (DU): USD1.11 as of 15 August 2016, Rating: Neutral, FV: USD1.24 per share, MCap: USD333 million, REIT DU / REIT.DI