Aldar Properties PJSC (ALDAR) Earnings Call Transcript & Summary

Hello, and welcome to the Aldar Properties Q1 Results Call. [Operator Instructions] I will now hand you over to Steve Bramley-Jackson. Please begin.

Certainly. Thank you, Polly, and good afternoon, everyone. Welcome to the Aldar's Q1 '20 Results Call. As you've heard, my name is Steve Bramley-Jackson, and I'm from HSBC. I'm now going to hand the call over to Greg Fewer, CFO and Sustainability Officer, to present results. And as Polly said, after that, there'll be an opportunity for Q&A. Greg, over to you.

Thank you very much, Steve, and good afternoon, and good morning to everyone dialing in. Welcome to Aldar's Q1 2020 results conference call. As Steve said, my name is Greg Fewer, I'm the Chief Financial and Sustainability Officer here at Aldar Properties. I indeed hope you're all keeping safe and well. I just want to say our thoughts are definitely with everyone who's been impacted by this pandemic, in particular, in our region, where we've got -- send our heartfelt appreciation to all our front liners and essential workers who are working to protect our safety and well-being every day of the week. I'd like to start by providing an overview of our performance in the first quarter of 2020, and then we'll open up the floor to Q&A. So first, I just want to give you a brief update on how Aldar is navigating through these unusual times. So since the onset of the pandemic, we have prioritized health and safety of our employees and our customers and the communities in which we serve. In line with our government and health authorities' guidelines and recommendations, we've taken some decisive steps to implement strict hygiene and sanitation measures across our assets to ensure appropriate social distancing protocols. And by demonstrating some significant market leadership, we've gone beyond this to roll a comprehensive support program worth up to AED 190 million for our tenants, homebuyers, students and business partners. As part of those initiatives, we have waived all administrative fees associated with transactions with Aldar. We've introduced an e-learning platform for Aldar Education, and we've allocated about AED 60 million to support our partners in our retail chain. We've also partnered with several banks to offer homebuyers attractive subsidized lending rate, all in an effort to support our markets in which we lead. I'll now run through the headline numbers for the first quarter of 2020. During this period, Aldar achieved a very solid business performance despite challenges of COVID-19. Aldar has a business model that is unique when compared against other real estate companies in the region. We have a very good balance between our Development Management and our Asset Management business. In addition, our adjacent businesses, Aldar Education and our property management and facility management companies, Provis and Khidmah, are contributing very positively to our business. Our assets are also highly diversified across sectors, including retail, residential, commercial and hospitality. And this diversification continues to be a source of strength especially during these challenging operating times that we're experiencing currently. In the first quarter, our revenues were steady year-on-year at AED 1.8 billion. Gross profit was also on par with the first quarter of last year as we maintained a gross profit margin of 40%, partly supported by the release of some excess cost revisions across a number of our developments that entered the handover space. Net profit came in at AED 302 million, a year-on-year decrease that was mainly driven by a AED 95 million one-off fair value adjustment to our investment properties. And we recorded lower other income than we did in the prior year's period. The Development Management business recorded sales over the first quarter of 2020 of AED 333 million, driven primarily by inventory sales. This meant that, that as of the end of March, 83% of our development pipeline has been sold. It's worth noting that although sales are down versus the same period a year ago, this is partly because unlike Q1 2019, we have not launched any new projects so far this year. We also made good progress on our previously announced projects with handover continuing at Mamsha and Jawaher on Saadiyat Island. And the initial handover is kicking off at The Bridges on Reem Island and at Yas Acres on Yas Island. Turning to our Asset Management business. Principally, the income-generating assets owned and managed by Aldar investors. These produced a solid net operating income of AED 404 million in the first quarter. Occupancy remains steady across the portfolio at 89% and this portfolio, of course, benefits from the high-quality portfolio of assets that benefit from long-term and committed lease contract offtakes with high-quality government counterparties. Our WAULT range from 3.7 years to 5.7 years across our investment property portfolio as at the end of the quarter. Our adjacent business which, as I mentioned, has been contributing meaningfully to our growth, performed exceptionally well during the quarter, with gross profit at that business increasing 40%. This is a result of investments we've made into that business over the last 18 months. It's important to point out that travel restrictions and temporary mall closures took place and took effect from the end of February and impacted Aldar's hospitality and retail assets. However, as of early May, some key retail assets, such as Yas Mall and Al Jimi Mall in Al Ain have begun to open. Aldar has a robust balance sheet and is, therefore, in an extremely strong position to weather the challenges that we're facing. With our average debt maturity sitting today at 5.1 years and with no immediate loan repayment coming up until August of next year. Our cash and liquidity position is also very comfortable. Aldar held AED 6.8 billion of free cash and undrawn credit facility as of the end of the first quarter, following a new AED 500 million facility that was agreed during the quarter. It's worth noting that this amount did include our approved AED 1.14 billion dividend that was declared during the first quarter and paid in April. We're also stepping up our commitment to sustainability through many initiatives, from enhancing our financial reporting, taking steps to reduce our carbon footprint and supporting Abu Dhabi's social impact initiatives. So during these uncertain times, we certainly remain prudent in our management of our business and get a steep in terms of profitable opportunities and growth opportunities that are going to exist in this market. While it still remains unclear what lasting impacts the pandemic will have on our business and consumer behavior, we're in a very strong position to navigate these uncertainties because of our diversified business model, relatively low debt exposure, strong cash and liquidity position and the underlying strength of Abu Dhabi. So we'll continue to monitor these highly fluid -- this highly fluid situation closely in terms of COVID in this market environment. At this stage, we believe it's too early to quantify the full impact that's going to have on our business in terms of our guidance. So with that, I'm happy to open up the floor to questions.

[Operator Instructions] So our first question is from Mohamad Haidar from Arqaam Capital.

Can you hear me?

Yes, we can hear you normal.

Yes. Cool. So can you give quick updates on how rental release is going to be expanded to retail tenants in Q2? And potentially, you have communicated that you might extend 5 weeks of rent release. Could this change if the lockdown continues? And what if tenants decide to not open their shops? What would be the case? And how would you be treating them?

Yes. Look, I mean, I think that's certainly part of this whole narrative that exists right now at this time in the crisis, which is -- remains to be seen. So we're engaging right now as we speak with all the tenants across our portfolio, especially at Yas Mall. And we came out really early with our statements around support. We came out early and sized these buckets relatively directionally with the state of intent to communicate strength and support and partnership with our tenants. But the ultimate contract or amendment will really be done on a case-by-case basis. And it almost sounds too flipping with that comment, but really, when you get into the weeds, no 2 situations are really the same. And we really take an intimate, careful, thoughtful approach to each tenant and each case. Now -- and I caveat that further by saying that whilst we have like almost 800 tenants in our portfolio, we do deal with large groups who we have very strategic and important relations with, and so that kind of -- and we're midway through those discussions now. I'd say things like it will support be in the form of forgiven rent, deferrals of rent, leases that will carry an extension as well as a deferral and just really a mix and match of all those things already being discussed with people given their specific situation. Including the recent opening of the mall, which sort of added another positive layer to the discussions that were -- didn't even exist even 3 weeks ago.

Yes. Understood. Understood. I also noticed that you haven't paid or deployed any CapEx towards investing properties in Q1. Is this a trend throughout 2020 and would this result in a revision to the AED 4 billion CapEx that you already announced before for 2020?

Yes. No, I mean, most of that CapEx is down to our develop-to-sell portfolio. So that's where the vast majority of that CapEx was tied. And I think, again, that was a statement that we came out early with, really to demonstrate leadership and to demonstrate the fact we've run the slide rule over every scenario that could be thrown at Aldar, and a very few of -- none of those scenarios involved us not completing the projects that we were progressing. So that communication was really designed around Aldar still in business, incredibly strong from a financial perspective, liquid and well intended and deliberately moving forward to conclude our construction contracts. And important to be said, also, in terms of how Abu Dhabi and our markets responded to this crisis, construction as an industry has kept moving. So early on, there's a lot of questions around what can you practically do here from a business and a commerce perspective and the business of construction and the business of development has continued relatively unabated, which has allowed us to move projects forward. It was important that we were there saying that, yes, we're here to finance this industry through a safe and healthy early stage of this crisis. And that's why we came out with that statement on CapEx, and then that hasn't changed at all as we sit here today.

Good. And possibly, would we be looking at [indiscernible] and handing over Yas this year since it's been slower-than-expected during the lockdown?

Yes. I mean it's still like -- it's progressed. There definitely has been some slowdown. But I would just -- I would characterize it as that, as just a slowdown. So instead of something taking a week has taken 2. Instead of something expected at the end of the month, it's now midway people following month after that. And I think one of the things to point to in terms of the health, the relative health of our market, we're in a very strong handover phase right now in our development cycle. And we've been very pleasantly watching the success and the ongoing completion and handover of units. And it's created a real connectivity between Aldar and its clients, and we're reminded with our primary client being the UAE nationals, this remains a very liquid, very wealthy group who are capable and willing and able to conclude transactions even in this market. So that has also progressed at pace. Our ability to collect cash has progressed at pace. Defaults are remaining at least at this early stage of the crisis and by Q1, have remained in that historical mid-single-digit number that we've been dealing with here. And in part, because of our model, remember, all pre-handover payment installments are all -- have pre-authorized checks for them. And then the final payment when it comes up, it's not a pre-authorized check, but we have a secured 30%, 40%, 50% down on a piece of real estate that people typically close on. So all that, at this point, generally, has progressed well. And we'll be looking to Q2 when there's a bigger group of handovers to be coming through to assess the default levels further then.

Yes. And would we be looking at some change in the payment terms to existing clients maybe and to [indiscernible] sales? Would the formula change 50% during construction, 50% on handover, possibly maybe extending some post-handover terms. Is this something you're looking at?

I mean, look, definitely. I think more from an incentives and promotions perspective, okay? So it's scaled with that context in mind, but not from a -- or we need to do this to transact or to affect a big portion of our business. We remain -- our philosophy, which we've shared many times and we like sharing with the investors when we have a chance to talk about it is, we're not a bank and our capital is expensive, and we generally don't like working with post-handover payment plans. There's a role for them. It's definitely a place for them. But our strategy has been to partner with banking partners to facilitate post-handover payment plans or to facilitate subsidized mortgage programs, like the one we announced as part of the early COVID measures. So we set up a program with 3 of our Abu Dhabi banks, been very successful helping with handovers the subsidy program for 1.99% mortgages for the current cohort of handovers. We've set up a financing facility with one of our relationship banks to fund post-handover payment plan for us. So we get a check upfront, and we don't wear that financing burden on ourselves. So there's a role for it, Mohamad, but it's a piece of the marketing budget and scale as such, not a piece of the funding or not a piece of our asset base, if that makes sense.

So the next question is from Taher Safieddine from JPMorgan.

Greg, it's Taher from JPMorgan. A couple of questions from my side. The first one is on the development business. I mean, clearly, the trend is moving more towards inventory sales. I just want to ask a question on post Q1. I mean, given that we're almost close to end of May, how is the uptake in terms of sales? Are you seeing any pressure in terms of cancellations from clients? And the other question is, I mean, assuming this is a -- looks like a heavy year in terms of handover, a couple of projects are in the process of handing over, how much cash would you expect to collect from these projects? I'm just looking at the ballpark figure in FY '20 from these handovers. So this is my first question. The second question is on the Development Management. Again, some solid growth there. It seems West Yas is tailing off, but you have the new AED 5 billion projects. I mean, how should we look at this business on an annual run rate in terms of revenues or management fees over the next couple of years? And the third one is on the recurring portfolio. Can you just give us some more of an update, trading update on April, May? Have you started to see pressure within the residential and the commercial portfolio? Or I mean, should we expect these to be stickier than hospitality and retail, given that you have 12 leases? That's my first question. And the second question is, in terms of free trade, it looked talked on the presentation at period end that Yas Mall saw a decent drop in occupancy. Can you comment on that? I don't know if this is correct as an analysis.

Yes. Okay. So a few questions there. So the first one, just on handovers and how we're seeing that. I mean, look, again, the overarching comment is that we get -- we talk a lot about the profile of our average customer. And on the development side, the UAE national is our most important customer. We've been working to grow international sales, but UAE national remains our biggest client. And we've been impressed with what we've seen thus far. People have been handing over. People have been collecting. And that's been quite strong. I mean, we sold AED 330 million in the first quarter, and we've sold since then. We're selling villas, not at the pace to keep up with our guidance, but we're selling villas every day of the week, and some people might argue who's buying anything in this market. But there are people out there in our client base, who are liquid, and who like prices and are putting money to work. So I think that part is still active. I think -- and then you asked about pricing, look -- and then the overarching comment to frame that answer really, again, is the supply situation in Abu Dhabi, which is still generally a more constructively-supplied market. And so certainly, in terms of quality developments like Aldar delivers, I mean our off-plan launches over the last 3 or 4 years, I mean, we haven't seen a ton of price movement on those. I mean, there's been real estate softness here. But not to the extent you're seeing in Dubai, and prices here have generally, relatively speaking, held up well, in particular, and especially in the high-value destinations where our land banks are predominantly. So look -- so I think we're going behind clearly the guidances that we established in Q4. The state of the world that existed then, really doesn't exist now anymore. But there are defensive attributes to our business and our business model and our customers that I think are going to see us through. We're definitely in a collection wave. So we've got big deliveries at Yas Acres, at -- inventory now to sell at Mamsha and Jawaher in terms of delivered and sold real estate. So I mean, like we're in a wave now where we're going to generate a significant amount of operating cash flow over the next 18 months. I mean, just to give you some guidance on how to think about that, if you just look at our investor pack on Slide 11 the famous graph. I mean, there's a percent completion around all those projects that are handing over, whether it's Yas Acres or The Bridges, our average payment plan on delivery is between 60% and 70%. So you just multiply that against the sales value, and that gives you a ballpark around -- you can just carry that rate through that table to give you a sense about our operating cash flow that we're going to be collecting over the next 12 to 18 months. Your third question was on the recurring revenue portfolio and sort of a peak into April and May, and look, on that one, definitely, Q1, if you're trying to read across COVID Q1 to Q2, I mean, Q1, the impact was not that severe. We had 8 days of closure in our malls. So that was 8 days of straight-lining impact, if we were sort of making some assumptions on 0 rent or something like that. And as managers, we haven't concluded the commercial arrangements with those clients yet, because we really had to make some high-level judgments on how that will turn out. But on the retail portfolio, there was a modest hit in Q1. On the leisure side, our hotels got hit significantly. So that was a very deep hit, reflecting a half a quarter of next to no revenue we produce. On resi and commercial, though, we look at -- multifamily resi is now sort of a golden asset class in global real estate, and we're extremely well invested in this. And we're seeing why. Very defensive, everyone has to live, everyone who's employed here has a housing allowance and generally has a rent to pay and to make it. And so that portfolio has demonstrated that. And our commercial leases are primarily with government-related entities. So if retail and hotels just kind of hitting a pothole on the highway, resi and commercial is barely hitting a modest speed bump. And then -- and that same attribute attached to schools as well, which you touched on. So everyone here needs a roof on their head and every child has to get educated. And those businesses are continuing to move other than our sort of announced assistant packages that are designed to help people who need help and to acknowledge the sustainable long-term approach that we're taking to our position in the market. Your final question was on retail. And so my note was light on that. You might have to drag my memory a bit on what the specific question was. But occupancy in Yas Mall, I mean, we had our final renewal lease last year. So there would have been some impact November around locating some final tenants out, you would have seen a bit of that. I think very little COVID sort of impact, obviously in the occupancy. But they generally held up okay. I mean, I think the impact you're going to see in retail is really going to come in the second and third quarters in terms of what the current market environment is going to be.

Should we think about this more pressure on rental rates versus significant drop in occupancies? I mean, is this the correct way to look at it given the retail portfolio?

Yes. I mean, I think that's fair, right? I mean, like we closed the mall overnight, as we closed a very large full mall overnight. And all those people are all still there. So as we reopened it and we've done that in the last couple of weeks, they're still there, the day -- the same day that we closed. So all our discussions are with that current group. And we're having the same chat that every landlord on the planet is having with their tenants, like in a tough time, how are you doing? How's your shareholder? How's your merchandising? How's footfall? And then you have a partnership related discussion around a short-term burden share, let's say, for lack of a better term, but then a longer-term more natural tenant-landlord sort of relationship. So yes. So I think that first chat is just with our existing tenants, who can -- how much can you afford to pay. And then look, and also, it's a good chance. Also, it's a great catalyst to make significant changes in your real estate. So again, like good global leaders in this market, and you have a chance to hit a reset button with both your tenants and your customers all at the same time, you take advantage of it. So it's actually -- it's a great chance to sit down with some of the groups and some of the other tenants and say, look, let's exit or let's move you out, let's move you to different locations and affect some real meaningful change very quickly.

So the next question is from [ Nick Endesa ] from [indiscernible].

Great to hear that things are starting to come back a bit towards normality in Abu Dhabi. I just wanted to ask how you are thinking about the international aspect in terms of -- obviously, travel and so on is going to take a bit longer to return. And so just in terms of the direct impact, there might be on your business and indirectly in terms of the UAE economy. Maybe slightly unfair given more of an issue for Dubai. So yes, just very interested to hear your thoughts in terms of planning for that aspect of this whole situation?

Okay. Nick. Look, so yes, travel. I mean, I think when you talk about travel, you talk about Dubai in the first instance and you talk about, for us, it's our hotel and leisure portfolio. So the first thing to point out is just the seasonality there, maybe to share with everyone listening just the extent of that seasonality. So anyone who owns a hotel in Abu Dhabi or Dubai, you make a lot of money in Q1 and Q4 and you kind of tread water in Q2 and Q3. So with that said, we're -- everyone shut down all their malls at the end of -- or their hotels at the end of Q1. And as we emerge from this now and we're working with the authorities -- and we haven't opened our hotels yet, and we're working with the authorities on what the right time and way to do that is. We're opening those hotels up into and at the beginning of the season of treading water. So that's say the number one, and then each operator and manager then makes a decision on what the right way to open into that environment is, knowing in well that it's a full 6 months before you actually make money as a hotelier in this region. So in a sense then that gives you some degrees of freedom in terms of managing specifically to that environment with some option value and there's some, I won't say gambling, but just you're planning on, okay, is there going to be events in Q4? How many at my hotels? And how do I get operational by then, so I can have some positioning to make some hay to the extent that people start to return by that fourth quarter. And then this time next year is also a very solid time to make money for what groups and what people do decide to come. So that's, I guess, observation number one. Observation number two is that I think there's going to be a shakeout in hotels. I think this is a time when there's a lot of hotels in this country. And the strong will survive, and there might be a supply adjustment that is to play out. And then the only thing I'd conclude with is that we've been very impressed and look forward to some of the very interesting and creative policies coming out of the government. So -- and that's -- I think that attaches it to a broader theme that what we're seeing here, just about the government's response in the UAE and in Abu Dhabi into the crisis. And there's some excellent positioning and investing that the government is looking at making into the travel and tourism industry, bearing in mind and having full regard to the fact that global travel will need to be -- will need to come once people feel safe and secure when they travel, the manner that they travel, and the safety and security of the destination to which they travel. And I think that this country has an ability to really differentiate itself in terms of how it's handled itself in this crisis. And the position, the credible position that it puts itself in to be a very well invested, safe place in the world when the world is ready to open up. So I like what we're seeing and we're -- the strategies that are being devised there that I think we'll have some interesting commercial opportunity later on. So I hope that helps a bit.

So the next question is from Abdul Aziz from Jaguar Investments.

I have 2 questions. The first 1 on the hospitality front, how much of the segment's fixed cost can be litigated going forward as travel restrictions are not fully eased? And the second one on the retail front. How much do local shoppers make out of the total tenant sales?

So on hospitality, I think in terms of fixed costs, the first comment there would be our fixed cost is probably as competitive as you can get in our region. And I'll remind everyone that it was last year or late last year when we converted the commercial arrangements with our hotels from HMAs, like hotel management relationships with the operators through franchise arrangements with the operators, which means basically we get the reservation system, we have the banner, the flag and quality assurance comes from our brand, and -- but the back house, the back of shop, the laundry procurement, the finance, the HR, the -- like all of that part, the fixed part that you're referring to, Abdul Aziz, is now all uniformly run by Aldar, and that wasn't the case before. So we've had great synergy come out of that transfer to the franchise model that the team there has done a great job really pioneering into our market here. So look, and the only other comment I'd make is it's very cyclical. So the Q1, Q4 versus Q2, Q3, and for the whole year, you have to run at least in this market in a more healthier time in that 25%, 20% EBITDA range. Your fixed costs might be, I don't know, 10% of that in terms of the overall cost structure. And then -- but we're moving way down in terms of our -- of the efficiencies that we're driving from the franchise model. The second point would be on retail. So I think the question was what percent of sales, generally, the occupancy costs and -- our Yas Mall, across the mall, we have a lot of anchors. So generally, your anchor, your large space users would be on a smaller number, like your lower-margin business than we have Carrefour occupying a lot of space at a mall and your line shops would be sort of in that, you may say, 15% sort of range, a single-digit range for your increase. And across our whole mall, we average around 11%, 12%.

Okay. Well, that's a great point that you mentioned this, but this was not my question. My question was how much of the tenant sale is coming from local shoppers versus international shoppers?

Sorry. Okay. So yes, the vast majority comes from local. From the immediate area, Yas Island from the Shahama and Khalifa area and Saadiyat. So you're looking at 3 quarters plus.

Greg, so that was our final question today. So I'm going to pass back to you, Greg, for some final words.

Okay. Great. Listen, thank you, everyone, for dialing in, and we look forward to speaking to you again later in the summer for our Q2 results.

Okay. This now concludes today's call. Thank you all for joining. You may now disconnect your line.