Aldar Properties PJSC (ALDAR) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Aldar Properties First Quarter 2020 Financial Results Analyst and Investor call. I must advise you that this conference is being recorded today. [Operator Instructions] I would now like to hand the conference over to Greg Fewer, Chief Financial Officer and Sustainability Officer at Aldar. Please go ahead.

Thank you, very much, and good afternoon, everybody, and welcome to Aldar Properties third quarter financial results call. My name is Greg Fewer, and I'm the Chief Financial and Sustainability Officer here at Aldar. Firstly, I hope you are all keeping safe and well. And I appreciate all of you taking the time to join us for today's call. Before we begin, I just want to take a moment to thank our team, COVID-19 has brought unprecedented challenges to both our business and our stakeholders. We're super proud that we've been able to adapt to these uncertain and often very challenging conditions, whilst what you'll hear later is delivering what we think are exceptional operating and financial results, whilst focusing and maintaining health and safety practices to the highest standards possible for our employees, our customers and the communities in which we serve. So deeply appreciative of all our staff and people, who sit behind these results. I would like to start by providing an overview of our quarterly performance, then we'll open up quickly to questions. So I'll now run through the headline numbers for the third quarter, which has really been a stellar quarter for us and highlights the strength of our diversified business model. In this period, Aldar achieved very strong business performance, driven by record quarterly development sales. In the third quarter, on a consolidated basis, revenue was up 30% year-on-year to AED 2.1 billion, and gross profit was also up 5% year-on-year to AED 696 million. Net profit came in for the quarter at AED 416 million, which is an 8% increase versus the same quarter last year. Looking at the development management side of the business, we had a very strong third quarter, delivering record sales of AED 1.2 billion, representing a 7% increase year-on-year. And also a record quarterly revenues for us in the development division of AED 1.3 billion, more than double the level from the same quarter of 2019. As at the end of September 2020, 86% of our development pipeline have been sold, taking into account the launch of an additional 390 units at our Water's Edge on Yas Island during the quarter. The development management business has also performed strongly on a cash collection basis with AED 3.1 billion collected year-to-date from units handed over and projects under development. Moving on to our asset management business. Our recurring income portfolio produced a net operating income of AED 383 million, representing a 3.5% decline versus the same quarter of 2019. The portfolio has held up well. On account of high occupancy in our residential and commercial segments of the business, which have offset softness in the retail and hospitality segments. We're also witnessing and expecting improvements in the hospitality and retail segments following the easing of lockdown measures. Sales experienced by our retail tenants across our portfolio in the third quarter were in line with last year, and our hospitality assets are expected to benefit from upcoming bubble events. Such as the UFC Fight Islands and the Formula 1 coming this December. Occupancy remained steady at 87% across the investment property portfolio, which includes residential, retail and commercial, and benefits from long-term and committed lease contracts. Weighted average lease tenors range from 3 to 5 years across our portfolio as at the quarter end. Our adjacent businesses net operating income was up 5% versus the previous quarter and included strong performances from Aldar Education, which is up 44% versus the third quarter of 2019 as well as by Khidmah and Provis. Khidmah is our facility management business. Provis, our property management business, our gross profit collectively between them was up 33% versus the third quarter of 2019. Aldar maintains a strong cash and liquidity position with AED 4.5 billion of gross cash, comprising AED 2.5 billion of free cash, AED 1.1 billion of restricted cash, and just under AED 1 billion of cash in escrow. Our average debt maturity today sits at 4.8 years with no immediate loan repayments coming up until August of 2021 and an average total cost of debt of under 3%, at 2.9%. So overall Aldar's diversified business model with relatively low debt exposure and strong cash position allows us to actively pursue opportunities to invest in both our development pipeline and in expanding our investment portfolio. We seek opportunities to earn steady income from our third-party development management business, which is set to expand further following the new mandate announced in late October, whereby we're taking over the development and management of a portfolio of over AED 30 billion of projects from the government of Abu Dhabi. This is in addition to the current portfolio of projects we're managing for the government amounting to AED 5 billion that we discussed in 2019. So that concludes my comments. And with that, I'm happy to pass it back to Marina, the operator, who will coordinate questions. Thank you.

[Operator Instructions] First question comes from Taher Safieddine, JPMorgan.

Congratulations on the good set of numbers. Couple of questions, if I may, maybe we'll start one by one. Just on the development portfolio. The gross margin on the property development is down to 27% compared to around 35% last quarter and 36% in 2019. So I just want to get an understanding, what's happening there? Is it purely a revenue mix sort of change that's dragging the margin down? That's my first question on the development. And the second question, can you give us some color on this cash collection trend. I mean, it was very strong year-to-date, you said around AED 3 billion gross cash collection. As you move into handover phase into Q4 and next year, can we just get some color on what amount of free cash, like gross cash, net of CapEx that you expect to collect, that would be helpful. And then maybe I'll just go to the other question after that, please.

Sure, sure, sure. Okay, Taher, thanks. So on the gross profit margin in the development is a couple of trends to note, the first is on the homebuilding side -- the core homebuilding side, not the fee-based management side, you saw a combination, there was some slight increased costs that came from 1 of our projects on Yas. But primarily, what's happening is that as we were moving a lot of inventory, we were discounting a bit to move the inventory. And so net, that contributed to a slight reduction in the margins from the homebuilding business. The other thing to note is we're really ramping up that AED 5 billion program that we discussed -- that we announced last year. The structure of those contracts are such that we record revenue and cost of goods sold and about, let's say, 10% roughly profit margin on those as opposed to a 5% fee. We're recording a 10% profit margin, but putting the full building, let's say, for 2454 Yas Island or the National Housing at Al Falah. We're putting the full real estate through the P&L. So there's a bit of a gross up in revenue and a lower profit margin, but it represents the sort of risk-free nature of that business but it's shaping the P&L a little bit, and that's driving the profit margin changes you're looking at. With respect to the cash collection trend, yes. I mean, look, the -- a couple of things conspired on developments year-to-date. I mean, we were able to keep the business of construction moving that allowed us to complete our projects, and our customers are performing. They're making final payments. We've worked very hard with the banks to make sure that there's a mortgage product in place that we partnered with the local banks here to have some of that ready for handover. And that's worked very well for us to enable these collections. So as you know, we're in -- still in a handover period, where we thought, Yas Acres still to be handing over, and we're going to be opening up to Water's Edge very soon on Yas Island for handover. And we're looking at about AED 1 billion a quarter roughly in the current wave of development to still hand over as we finish collecting at The Bridges at Reem, which is handed over and into the Yas island delivery schedule.

And against that, how much is like CapEx -- remaining CapEx, SG&A, I just want to think about from a free cash point of view, I mean, should we expect what, around maybe AED 2.5 billion, AED 3 billion in terms of free cash from all these deliveries, handovers?

Yes, roughly. I mean, again, it's -- I guide you back to our famous chart in the investor pack, which really chronicles and puts in a time sequence when we're going to hand over the various projects. And then we guide the profit margins roughly for the various developments. Plans tend to be 40% plus. The middle-income stuff is low 20s and then the Villa product is sort of in that 35% profit range. That's your best way to build up the free cash profile that comes from the successful collection of these projects and then the receipt of the final payment. We're into the point now where there's generally pretty little CapEx. I mean, our overall program now sits at about AED 3.1 billion of overall CapEx. But we've got a lot of land Taher in the near term. And that's not as heavy lifting from the CapEx perspective, as you know, the big stuff like Yas Acres and Jawaher and Mamsha. So this cash looks like we're now will be quite cash positive. As we've already spent most of the CapEx at places like Yas Acres, and we're ready for the final payments due from customers as we hand over sections, G and D and H.

Okay. All right. Perfect. And just one final follow-up, sorry, before I give it to others. On the development management, I mean, MoU of AED 30 billion, that's massive. Clearly, the stock has reacted positively. I mean, just can you give us some just more color? We understand that these are usually fee-based projects, you've had already a couple of experiences, I mean, from the past, in terms of doing such type of businesses. But now it's a big amount, which is AED 30 billion backlog. If you can get some -- can you give us more color on the structure of this project is going to be off balance sheet, prefunded, what nature of margin? And how should we think about the development management gross profit trends moving forward? I mean, I'm assuming this is going to be a massive growth from next year onwards.

Yes. You look very much so. And I think the -- I mean it was MoU for now. So I think we're going to conclude the definitive documents this quarter, so we'll be able to be extremely precise once those are done, but it is our full expectation that the model will be the fee-based model that we executed, let's say, West Yas and Kazakhstan on, where we just get a low single-digit development fee for managing. And then the government, 100% funds everything, the government takes the cost overrun risk, and they receive the benefits of cost savings. So it's purely a development management arrangement. From an execution perspective, it's a big ramp up, but it's important to note that there's an existing program that we're stepping into really to take over. So there are people -- there are -- there is an apparatus in place that's already positioned to execute these, the current state of contracts, and we think there'll be more added to it. It's really -- it's very much a public-private partnership and a very unique one in its scale and commercial format, where it's not just the first 30, there will be more.

Okay. So I mean, just doing some rough numbers, like assuming a 5% margin on AED 30 billion over 4 years, which was the MoU. I mean, we're talking about gross profit or NOI of somewhere around AED 350 million, AED 400 million per year. I mean, is this -- are these numbers make sense? I mean, overall, is this what should we expect from next year, I mean, in the development management type of businesses?

Yes. I mean, look, that's the revenue number. So there'll be a cost of goods sold attached to them in the form of people and technology and things like that. But the margin on that business is typically exceedingly high. And that's the kind of scale we're developing that there'll be a lot of platform synergies and technology synergies to maintain a very healthy margin on it.

[Operator Instructions] The next question comes from Alok Nawani, Gobash Trading.

Couple of questions from my side. The first one is on your NOI, specifically, the retail component. I'm interested to know what kind of relief measures are there in place for your Yas Mall asset? And what kind of conversations you've had with your tenants for this year and perhaps next? Also, your commercial side of the business seems to be doing fairly well with like-for-like around flat, but occupancy is a bit higher. Nonetheless, revenue growth seems to be encouraging. So is it really more of filling up spare inventory? Just like to understand what's happening there? And then finally, if you could also just comment on the fact that, I mean, Arabtec no longer seems to be active in the market. And I'm not really sure if they were one of your prime contractors. But assuming they were, you would have to find replacements for that contractor. And I'm just wondering what that would kind of imply for your development margins looking ahead on the pipeline that you perhaps might have to replace?

Yes. Okay. So just in order then. Alok, so the first question was on NOI retail. And yes, Alok, that's down. I mean there's AED 120 million down to AED 102 million, reflecting, to a large part, the relief measures that we've announced. So we came out very early and announced an overall program of AED 190 million, of which we allocated at that time, about AED 90 million to retailers that were almost fully deployed or fully committed, let's say, on that component of the stimulus -- our stimulus program that was targeted towards the tenant. We've taken a very case-by-case approach to it, where things were pretty dark at the height of lockdown. And as true as our messaging is, we are seeing a couple of positive trends in Abu Dhabi with the closed borders with Dubai. We're seeing a lot more stay-at-home shopping, and that's really benefited our malls. We have got our current trading is roughly flat to where we were pre COVID right now as we speak. And so the status of the tenants has commensurably improved with that. And so the team has been all over the tenant, and they're being very partner-oriented and very commercial in the way that they're dispensing that stimulus. So good tenants who are the right mix for us that are just losing a lot of money right now. That's the kind of person that we're giving stimulus to. And it's been received generally very well with the overall -- within the retail community. I mean, you really haven't seen the kind of volatility that you've seen down the road. And I think in some sense, the Abu Dhabi retail scene is -- like with our results and everything we're showing, there's a bit of a safe harbor in terms of relative performance with other retail assets in the region. So our tenants are acknowledging that in our discussions, which is really just in gearing them further to our assets, which I think helps us. Commercial. Yes, commercial, the numbers look good. I mean, I think there's a few things going on sort of under the sheet there. I mean we have some improved occupancy. So we've got a very strong Q1 commercial office portfolio. So the -- I'd say fully stabilized and operating fairly efficiently at 90% plus. And so the occupancies, quarter-on-quarter, 89%, 90%, 91%, there's sort of just reflecting a normal churn of people in and out. We are seeing some softness, though, in rental rates. So I think embedded in those numbers are some certain settlements on historical issues we had with some of our tenants, who we've just had favorable commercial agreements with. So I think you are seeing like small single-digit decline year-on-year in rents in commercial office. But by and large, it's a very steady business for us. On Arabtec, I mean, look, the -- we're, by far, especially with this announcement with ADQ, I mean, we are the most important master developer in the Abu Dhabi market. And we take that leadership role extremely seriously when it comes to ensuring the health and wealth of our supply chain. And so yes, Arabtec was a very important counterparty here, and we don't have, hardly any exposure to them right now. But yes, when someone that large falls away, it's incumbent on people like us to take a leadership role and work with contractors who are already in the region, whether they're in Dubai or some of the other Emirates or in Saudi or other places. And they are talented, and they have expertise in the areas that we want to develop. People like us are in a position we can bring them to Abu Dhabi. People like working with us. We're very professional. We pay on time. We go out of our way to pay on time. We really make sure that our supply chain is well fed. Sitting on the top of that real estate pyramid, we need to make sure that we're paying on time so that the prime contractor can pay the subcontractors, can pay the subcontractors and so on and so on. And that's one of our operating philosophies. So yes, I think we got a bit of work to do there. I don't see any margin issues. I mean the other dynamic that happens is that the contractors that are here at a time like this, they really tend to flock to the quality developers. So we still don't have issues not getting people bidding for our contracts. I think we do take more of an industry-wide role as leader in the industry saying, look, there's definitely room for some more contractors to come down the road. But we witnessed that they are in the region. They do like doing business with people like us. Our current pipeline of projects, we don't have any issues getting contractors to come because we're strong and people like doing business with us, and they know they can make money from us because we pay on time and such. So we feel good about our portfolio and the margins. So I hope that's a very long-winded answer to your 3 questions.

Much appreciate it, Greg. I just had one final question before I let you go. To just your view on dividends for this year. You've been quite prescriptive on that front in the past prior years. I understand it's slightly different environment, but your results are quite encouraging as well. So I'm just trying to think about how you might be approaching this topic?

Yes. I mean, look, as I say every time, and the exact same slide that we show the investors every time we talk to you guys is the exact same slide that goes through our board annually to recommend the dividend. So it's transparent for a reason. So you guys are on tune with our thinking, and it's based on the cash that we collect from our 2 businesses. And I mean -- so what we're seeing to date is strong performance from the development management business. So I'd say we're pretty much on par in terms of expectations thus far, and we relate in Q3 in terms of the kind of cash we're collecting from that business, and is consistent with our guidance as from the past, it's looking pretty good. Development -- sorry, the asset management side, I mean, you can see right from our results, we're still losing money in hotels. So year-on-year, that hurt. We're down in asset management as well. 66% collected on cash in terms of our investment properties against all the builds, everything built that we've sent out this far, that's also improving quite a bit. So I think that's an important marker that we'll see into the fourth -- that we're going to look at into the fourth quarter. How do our retail primarily, but the commercial and the residential tenant, how are they performing on the actual agreed rental invoices that we send to them. And so that's a positive trend. I mean, it was under 50% during COVID. And at the end of Q3, it was about 66%. And as I sit here today, it's at well above 70%. So that's -- that also bodes well going in. But I think because of the hotel number and because of just lower rent in the retail side, I think we'll watch that space carefully in the fourth quarter. The only other thing I'd add on top of that is, I think, the ADQ announcement as a general overlay is a positive overhang -- no such thing as a positive overhang, but heading into 2021, we've got a lot of visibility around good fee-generating income from managing these projects for the government. And I think that also puts the board and management in a certain frame of mind when it comes to the overall dividend recommendations. Bearing in mind that we're still in a COVID environment, and people are very concerned about jobs still and non-hydrocarbon economic development. And we've got some very idiosyncratic positive things, putting some wind in our sales.

Our next question comes from Divye Arora, Daman Investments.

My first question is linked to the development sales. So what we have seen is that there was a strong pickup in this quarter. So we saw that usage around AED 1.2 billion in the development sales. And you said that the reason for that is also the pent-up demand. So just to understand, given the underlying demand dynamics in Abu Dhabi, over the next 2 to 3 years, if you have to look at, still, the environment is tough, but if the things normalize in the next 6 months to 1 year, what is the intrinsic amount of demand that you see for you? Can you do AED 3 billion in a year, AED 4 billion in a year? And why that is important is that because we have seen that your development revenue has picked up pretty well this year. So you have done already AED 2.7 billion in the last 9 months, so which should annualize to around AED 3.4 billion, AED 3.5 billion for this year, which would mean that you should be doing around AED 3.5 billion to AED 4 billion in terms of development sales to make sure that this is sustainable, or there might be some inventory, which could be used. But just what is that number that we're looking at 2 to 3 years down the line annually?

Yes. I mean, look, we've guided pretty consistently this concept of through the cycles. We see ourselves developing about 1,500 households a year. And so we've been talking in those terms for really since 2014, 2015. I'd say we're running a little behind that just because this year, not much, though, because this year, we haven't launched anything new to date. But that's really a statement around that's the final answer after some homebuilding calculus gets run, which is the combination of change in population. It's the dilapidation rates and irrelevant and powerful demographic shifts whether young -- a very young Emirati population getting older and number of people per household for UAE nationals is reducing over time. And that's all stuff that creates demand for new homes. And so all that calculus works, and we see that sometimes dilapidation is the more powerful coefficient than the change in population and the demographic one is the pretty constant and growing one. And everyone spends a lot of time understandably on the population one, but they probably spend a little less time than they should on the dilapidation and the demographic one when it comes to the requirement for new homes in our market. So generally, we're not changing that language going forward. 1,500 units a year in new launches, absent, of course, a pandemic black swan, we see when the market opens up again, and we also view our market as relatively imbalanced from a supply and demand perspective to pick that pace up again immediately on the market reopening. And as a market leader, we're very close to the pulse on when we think that time is right to bring new product to our market.

All right. Just to go into your dividend policy, you have mentioned that for the asset management business, it is 65% to 80% of the distributable free cash flow. How should we get to this number? Because we see that you give the NOI or the gross profit by this segment, but then the SG&A are at the group level. So how should we come to this number?

So the rest of the walk from the net operating income number, there's interest, okay? And pretty much all our interest is attributable to the bonds that we issue out of AIP. So AIP is -- those financials are a great source of -- to see how much interest is attributable to that. There's maintenance CapEx, of which there's very little, like around AED 100 million or less annually. And then there's OpEx, which runs between AED 50 million and AED 70 million in terms of technology, people, investment, platform costs, things like that. The guys have an update on the investor pack. I don't know if it's been updated. Usually in the fourth quarter, we update that, just so people can see clearly in the -- from the accounts which key items to focus on. But the biggest by far, though, is interest, which is mostly attributable to the asset management side of the business.

Okay. All right. Just last question on the receivables -- trade receivables. We have seen that they have gone up from AED 2.3 billion to AED 2.7 billion, and also your revenue has been up. But just to understand this increase in the receivables, is this coming more from the side of the retail side, as you said that you have collected 66% of your rents. Or there is also a portion, which is coming from the development side?

Yes. I mean there's definitely certainly from both. So the development side, there's a separate line in the financials called due from customers under sale of property contracts. So that receivable represents this idea that towards the end of the development, if we're 100% complete, we've recorded 100% of the revenue, yet we've only collected between 30% and 50% of the cash from the client, and as we're late in the delivery cycle, you're going to see that receivable grow. The balance that you're referring to, yes, it refers to trade receivables, which is coming to a large extent from the asset management portfolio.

Okay. Is it also linked to the post payment plans over here? So that's flowing into the trade receivables part or that's flowing into the gross amount due from the customer on contracts, the post payment plans?

Sorry, Alok (sic) [ Arora ], can you repeat that?

Sorry, I'm talking about the post payment plans, the receivables, which are linked to the post payment plans, where are they exactly going into this in the balance?

Very good. Yes, yes. Correct. Correct. So that's true. So the final units, when they flip into -- when they're completed and they move from -- so in accounting terms, when we finished construction on site, then we change the recognition on the balance sheet, it moved, the receivable moves from this growth amounts due from customers on contracts for sale of properties, a bit of a mouthful, but that's the line in the Note 10, it flips to trade receivables. So that's true. And that's even true of -- like sometimes customers take a month or 2 months or 3 months to make that final payment. That final receivable reduction will come down from trade receivable because of that reclassification. But also just a footnote is, we're really -- we're not in that business of post handover payment plans. I mean, I think our overall balance sheet exposure is sort of in the order of like AED 200 million, AED 250 million in post handover payment plans. We're extremely selective on when they happen. We announced a rent-to-own plan, a very limited extension of product like that. We really think as a developer, you need to rely on the banks and other people to finance, and we just want to build and sell.

But just a thing on receivables itself. So are you comfortable with the current amount of receivables on your books? Or do you think there could be a risk of impairments in Q4? Or IFRS...

In the subset that belongs to retail. I think once we fully squeeze our way out of the COVID bit and notwithstanding everything I said about improved conditions. I mean, we're coming off an absolutely atrocious position for a lot of tenants have really taken a body blow and even trading on par with last year might not be enough. So like we're definitely not calling an end to risk in that asset class. I mean we're well provisioned right now, and we study that very closely and very carefully. Could you see some more in the future? Absolutely, every day is a new day and the risk horizon expands 24 hours every day of the week. And we still -- we're still watching that space very closely. But we're very comfortable with our overall provisioning that we have right now.