Aldar Properties PJSC (ALDAR) Earnings Call Transcript & Summary

[Audio Gap] Best practice disclosure guidelines this quarter in our annual report, and we are the first real estate company in the GCC to do so. So just to conclude, our results certainly reflect that Aldar continues to be in excellent financial and operational shape and are positioned extremely well to benefit from what we believe will be a strong demand like growth as the U economy continues to open up post pandemic and to take advantage of the very strong management of the health file here and some of the very proactive reforms that the government is doing to increase foreign direct investment to increase population and to elongate the average stay of expatriates in this country, all for the benefit of the domestic economy. And with that, I will open the floor to questions.

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

Congrats on a good setup. Couple of questions, if I may. First one is on the recurring portfolio. Is there any possibility just to give us some kind of guidance, how should we think about the NOI into 2021? And my second question is on the retail portfolio. I mean we continue to see like-for-like rates going down. Occupancy remains relatively lower than last year and the year before. So maybe just some update. Organically, how should we think about the retail portfolio within Aldar investments? And my third question is on the development portfolio, the development sales. Are you seeing any change in the buyer mix? It is more local, more expats, first time buyers? If you can just give us some update there, especially after your successful launch in April, that would be very helpful.

Sure. Thanks, Taher. So in turn, so the NOI guidance, I mean, we guided flat, and I think we're pretty much headed towards that. So no reason to, I think, materially revisit or rechange or reguide the overall NOI guidance for the portfolio. And so following on that, just on the retail side of things, 83% occupancy. I think the important thing to note there on the retail side is we announced the Yas Mall, what we've been calling the Yas Mall redevelopment plan. So if anyone has been to Yas Mall recently see there's quite a bit of hoardings up, which is reflective of the AED 0.5 billion development program into Yas Mall. So like any landlord of retail mall space, I mean you need to really be thoughtful and proactive in your asset management of these assets. So we announced that in Q1, but in reality, we've sort of set the seeds for that already in terms of managing with our tenants, managing their renewals and replacements into what we anticipated would be this redevelopment plan moving forward. So those low numbers you're seeing need to be looked at in the context of a significant repurposing of a number of the spaces there. So as we transition from the old mall configuration into the new mall configuration, you'll be in the sort of choppy period that we see for the next quarter or so. But we're very encouraged by the leasing program that the team is executing now in terms of the retail communities' response [Audio Gap] for Yas Mall, and its -- really its view of the Abu Dhabi market. I think one of the things that COVID has shown us is some of the strengths of the Abu Dhabi market being its strong, wealthy, affluent resident base. And when you -- when that's more internally focused we see that the basket sizes will increase as we get to retain more and more of the residence here. So I think that was a good reminder to everyone that there is a very healthy customer here. And with thoughtfully asset managed assets, like we're doing with Yas Mall with this program, our target is to capture more of them here before they either leak to Dubai or leak elsewhere to manage out the discretionary spend. So on the -- so basically, we see that 83% trending up, at least the occupancy rate as we continue to execute the leasing program in conjunction with the Yas Mall redevelopment plan. And then your final question was on DM sales and buyer mix. So we had about -- for Noya, there was around a 35% number, which was pretty much on par with what we're seeing in the Yas in terms of expatriates purchasing. But the inquiries, certainly are a lot higher, and you're going to see more launches on Yas. I mean the amount of noise, let's say, and the degree to which the government residency programs are starting to really drive sentiment change and really drive some behavioral change amongst the way expats think about life here, that's really starting to bed in. And so we see that number increasing. In particular, as we start to launch more on Saadiyat, so we've flagged that the Grove is a major development of ours. I mean Saadiyat is our most internationally marketable destination in the portfolio right now. And we're going to be bringing products steered towards that market, launch that later in 2021. So we see very -- a lot of encouragement around skewing that number more towards expat and complementing the already very strong, very liquid, very good appetite, UAE national buyer base that has been our bedrock for so long.

So we're still at 60%, 70% in terms of locals and the rest is mainly expats.

Correct. Correct.

Okay. And just sorry, one follow-up before I give it to someone else. In terms of the fee-based project, so what we're seeing today is mainly work being done, revenue being recognized primarily on the older backlog, right, the projects that have been awarded in '18 and '19. But the ADQ projects are still in very early stages. Is this a safe assumption?

Correct. Correct. I mean we only -- we onboarded those assets and the revenue recognition started mid-quarter. So you're not even seeing a full first quarter run rate. And those projects are nascent. They have growth to come. So our overall guidances around revenue recognition aren't changing on that. And I think we're very encouraged with what we're seeing thus far in terms of the scale of the portfolio, the substance in there, our engagement with government and the professionalism that's attaching to our engagement with them. It's all very encouraging and very much in keeping with what we've guided you guys on previously.

[Operator Instructions] Our next question comes from Rakesh Tripathi of Franklin Templeton Investment. Rakesh.

I just had one question. So could you remind us: one, as to which particular assets out of the recurring revenue-generating assets are part of currently of the debt obligors, the debt serving entity that is.

Okay. So listen, Rakesh, you're cutting out, but I think I got the gist of your question. So you're asking of the recurring revenue assets, which ones are in Aldar Investment Properties, which is our -- or the obligor under our sukuk program and which ones are -- or which ones are inside and which ones are outside.

Yes.

So I think the -- so basically, the most important asset that's outside that group is the -- we have one building, one commercial office building called Al Mamoura, and that's just because it's on a short lease. The schools portfolio is outside. And some of our finance leases are outside, of which we only got maybe 100 million. So other than those specific assets I mentioned, everything else in the residential, the commercial and the retail portfolio other than those isolated assets I mentioned are in the obligor group.

Okay. Okay. So here, when we talk about the recurring revenue business, the Aldar Investment business in the presentation. So this is -- you already mentioned that the schools are outside, so Aldar education is not part of it, nor is -- not as [indiscernible] right?

So okay. So I'll make one more further distinction for you. When we refer to Aldar Investment, okay. That refers to the higher recurring revenue asset group, it's a little confusing, the nomenclature. The obligor -- okay, so that means that -- so a reference in this presentation to Aldar Investment is a reference to all the assets of Aldar Investment Properties as well as schools and property management and all the recurring revenue assets. A reference to Aldar Investment Properties, which is what your question specifically was, is everything in Aldar investment -- sorry, everything in Aldar Investments, less those 3 assets I described and the schools business.

[Operator Instructions] And our next question comes from Frances Ames of Ajeej Capital.

Congratulations on the good results. I actually just have a slight technical question on the new segmental information breakdown. I just want to make sure I understand exactly within the revenue what'd recognized over a period of time and what's recognize as point in time. Specifically in the property development and the hospitality and leisure. If you can just very quickly kind of outline how that's separated, that would be great.

Okay. So in the property development space, the -- almost exclusively, 100% of the revenue there is recorded under IFRS 15, but -- under IFRS 15, and it is over time interpretation. So we -- it used to be the case. We recorded revenue. We handed over a Villa with the keys when it was completed. Now we record that revenue as progress on-site and construction progresses. So unit sales of completed inventory, though, are point in time. And the hospitality business is a point in time revenue recognition as well.

That's just why I'm confused. So just so we're clear, like if I look at the Q1 numbers, it's AED 800 million in gross revenue for property development and sales, AED 660 million is over a period of time. This is the revenue recognition as you move through construction. AED 142 million is point in time. So those are sales of completed units. Is that the right way to read that?

Yes. And the unit sales, which are the completed inventory. So those would be point in time?

Yes, yes, yes.

So something we've done is report the revenue 100% when it's sold.

Okay. And then just in hospitality and leisure, that's where I'm just confused because it's about half and half between over a period of time and point in time. And that's where I'm trying to understand, which is which.

Okay. I mean, the core -- the -- like when someone comes and stays at a hotel, that business is point in time.

Yes. But then you've got AED 43 million or AED 49 million that's over a period of time in hospitality.

Oh, that mean...

I don't want to belabor the point. Is it right?

Yes. So we have some longer stays.

That's quite a significant figure for longer stays. I guess that's why I was curious about it just to understand the definition.

Yes. Okay. Maybe we can follow up with you after on that, just to show you the...

No problem at all. Otherwise, just one question on education. In terms of the outlook, obviously, the aggregate revenue is basically flat year-on-year and I just want to kind of understand that compared with the trajectory of more students. And then just in the outlook in terms of what you're planning to add over the course of this year in terms of capacity and education.

Okay. So on education, I mean, the growth we generally see there now is not so much like inventing new schools, it's filling up capacity in our existing schools. So we've got just over 9,000 in capacity, and we're just hitting 8,000 in student numbers. So as Grade 12 become Grade 13 from our old cohort of schools, that's where you're seeing growth in student numbers coming in. And what's great is that growth is still the dominant trend there, which is trumping people that are leaving the Emirates or trading in and out of different price points. We've seen our schools very sticky, retaining their students.

Okay. And in terms of additional capacity expansion and CapEx there?

Very limited. So at this point, we're not investing a lot of new greenfield schools. The growth there is going to be coming from the privatization program that the government has announced, and we're seeing growth in fee revenue. So the charter school program and the government just announced like a PPP initiative or are there some BOT schools that are going to be operated on behalf of school. The ADNOC school that we added 18 months ago now. That's all fee-based revenue that we're seeing the growth. And there's more of that to come as the government continues privatization program.

[Operator Instructions] Our next question comes from Admire Mavolwane of Terra Partners.

I have a quick question. We saw a change, a slight change in the shareholding, where a new shareholder purchased about 12%. I just wanted to find out, will that new shareholder change the strategy of the group, will they be seeking a Board seat? And also in the aftermath of that acquisition, the share price sort of weakened, would you know for any reason why that was the case?

Yes. I mean the very public investor called Abu Dhabi acquired 12% of our shares. And we think it's a very strong ringing endorsement of the Aldar business model and our overall growth trajectory is where you're seeing some very sophisticated local investors, mobilizing significant cash into our -- in the secondary market into our shares. So I mean, look, we're management. We [Audio Gap] noses down, and we execute a business plan. We work with our Board and it's up to the shareholders to buy and sell our shares and sort of vote with their feet as it were. So this is not a shareholder who's engaged with us, and we read about that transaction in the paper when everyone else did. And it's the media that followed and the storylines we pick up locally here this is an investor who has purchased shares because they like the growth prospects. And that's -- and we have no formal engagement with that investor. Yes. Now, look, in light of who they announced to, who they were in the press release, we will undertake a normal analysis around related parties and have a very transparent and clear disclosure around if we do commercially transact in the normal course with people in that group, and that will form part of our related party disclosures. But that's it. That's the only thing that's really happened since that announcement. So there is not someone who's sort of swooped in and made statements to the management around Board expectations when we have full information like that. We're just running the company, and this has been someone who likes what they see, and they're putting their money to work in us. And we're -- we feel privileged and honored and humbled by such significant votes of confidence in us, and we just continue to execute our strategy.

[Operator Instructions] And our next question comes from Zohaib Pervez of Al Rayan Investment.

Actually, I just joined in, I was on another call, so probably I missed the entire presentation, but I've got one question. If you have already addressed it, I apologize for it. Could you give the update on your Egyptian, your investment in Egypt and where do we stand on that? And the second thing is, in the recent past, you've seen the Egyptian pound went through a significant decline. Do you plan on -- how do you plan on taking on this risk? Do you plan on doing some derivatives, some hedging? Or you want to keep this risk as open.

Yes. So just -- so on the first part, the update on the Egyptian -- on the Sodic transaction. So that is under -- there's a due diligence period that is underway right now. So we have 60 days from the announcement, the filing of the offer to conclude due diligence. It's ongoing, and we're in the midst of that process right now. So there's really not much to advise other than that process is taking its time. The company has been very welcoming and forthcoming in terms of providing information, and we're in that process with them right now. Any updates to that would be shared simultaneously with yourselves and with Sodic's shareholders. In terms of the overall Egypt pound exposure, I think at the levels that we're currently looking at in terms of capital deployment into Egypt, we are not seeking to hedge. It's been our experience to date sort of reviewing this, that those hedges can be quite expensive. And we think that the -- by announcing Egypt as a core element in our new operating model that we did in January, we view that as part of core Aldar raison d'etre and part of our strategic footprint. And that -- the exposure to the immense growth that we see in Egypt also comes with that macro impact that it has on its currency. So I guess the management's view on that is that we see it as a core attribute to what is Aldar now. There's a minimal piece of capital, a minority piece of capital, that will be exposed to Egyptian pound currency and be exposed to the Egyptian pound real estate development market on an unhedged basis. Now if the exposure started to go up significantly, that would be a reason why we would revisit that, call it, policy stance. But we feel strong enough about the fundamentals there that we think it's smart and good business for us. And we think our shareholders should carry that exposure in our share price.

Okay. All right. sounds good.

Sorry. Just to -- operator, I'll just have a follow-up. Just on Frances' question on revenue recognition in the hotel business. So just a further point of clarification. So it's -- I said it was long-stay revenue recognition was over time. It's actually long if it's any stay of a length of time is considered over time revenue recognition. And hence, even a 1 or 2 night stay is considered over time revenue recognition. The point in time element is really down to the F&B business, which is quite significant that we have at the hotel. So that brings that proportionality more into context. So apologies for that and then a clarification. Go ahead with the next question please, operator.

[Operator Instructions] We have no further questions. I'll hand back over to Mohamed for closing.

Thank you, Charlie. Greg, do you have any final remarks?

No. So thank you, everyone, for dialing in late in the afternoon [Eid Al-Fitr]. So have a great holiday, everybody, and we look forward to seeing you in Q2.

Okay. We have a question from Taher if you have time to take it.

Yes. Of course.

Perfect. So our next question comes from Taher of JPMorgan.

Yes. Sorry, Greg. Just one final follow-up. Can you give us just some update? I mean lots of things are happening in Abu Dhabi, ADQ, ADNOC, it feels like things are moving. So I just want to get maybe an update from your point of view about M&A within Aldar Investments. I mean is there any update there? I mean how should we think about corporate actions? You have some additions coming into the residential portfolio, you have the refurbishment of repurposing of Yas Mall. But maybe can you give us some color on time line in terms of what are we thinking about in terms of M&A, given that you've allocated a decent amount of capital for that in your FY '20 results.

Yes, we did. And look, we still feel good about deploying that. And there's definitely a lot going on here. I mean, everyone who spends time thinking about Abu Dhabi and about investing into Abu Dhabi. I mean there is a frenetic pace of policy change and leadership within government and government data on enterprises are super energized around growth, around attracting FDI, around policies that, as I said at the beginning, my earlier remarks about elongating, the amount of time expats stay here, making them feel more like home, making capital intellectual and economic capital more sticky and showing companies of greater size and strength into the capital markets. And so that's the attitude here. It's real. It's active. You're seeing a bit of that in us already with our ADQ transaction announcement that's going to be revamping up our fee-based revenues upwards of AED 0.5 billion. So we are seeing the benefit of that frenetic pace. And I think that frenetic pace of activity will extend into corporate action opportunities for us. So there's definitely dialogues ongoing. We were deliberate in setting a guidance for it. Because that sentiment, there's a lot of extensions into real estate based on that sentiment I'm describing. And one of our big jobs here is to make sure that we position the Aldar Properties portfolio to be the beneficiaries of some of those real estate transactions when they come up. It's an important source of value creation for our shareholders. So look, it's real. Leadership is extremely engaged down here, and we're positioning Aldar really well to benefit from that. So that guidance remains. And we hope to reporting some activity on that later in the year.

Our next question comes from Harshjit Oza of Internal (sic) [ International ] Securities.

Just one question I have remaining. I'm referring to the additional disclosure for the provision and the sensitivity analysis in your financials, where you have given different scenarios of change in the cap rates by 50 basis points and how it will impact your valuation. I mean, are these cap rates are linked to any interest rate? Or what are -- I mean, how do you -- I mean, on what -- in which situation, these cap rates are likely to change? I mean are these cap rates are linked to the interest rates?

Yes. So look, so I think -- so the cap rate, the best way to think about those, if you're in the real estate investment business, the cap rate is the rate that next year's rent for a building is divided by that cap rate, and that gives you your valuation. So a number of factors go into that. And as a reminder, we don't make those cap rates, we take them, right? We get independent third-party valuers to come in and look at all our properties. So if I had a JLL on the call right now or a CBRE, who do our valuations for us, the discussion around what drives those cap rates, it includes things like scarcity value, it includes things like growth in foreign direct investment coming into the country. It includes things like long-term 10-year swap rates in terms of just like a macro interest rate variable to it. It includes what global cap rates are doing in the peer group around the region. So it's -- there's a number of different things that comprise the calculus that makes the cap rate. But it's definitely much more than just what our 10-year swap is doing. I think like -- and one, the macro issue or the macro trends that you should be considering is that in Abu Dhabi, the spread between, let's say, 10-year swap rates, dollar swap rates and your overall commercial real estate cap rates here are super high. Like, we have one of the largest spreads. Again, it's a real estate investor sort of KPI or a value metric we look at, which is that spread between sovereign and commercial real estate. And here, it's amongst the highest on the planet. So I think that also gives those valuers a lot of comfort knowing that there's value in these cap rates here as there's so much liquidity on the planet searching for yield. Abu Dhabi is a double economy, 0 taxation, free flow of capital in and out, AA rated and 7%, 8% real estate yields. And so from the supply demand for capital around the planet is one thing, even if global 10-year swap rates will start to go up as people search for more yield, they're attracted to these areas where there's this strong spread to sovereign. So anyway, sorry, it's a long-winded answer, I'm just describing the very nuanced debate that -- what affects cap rates going up and down. So we talk about cap rate compression here a lot. That's the debate with these valuers. There's a lot of value here. And as more people start to [Audio Gap] capital into Abu Dhabi, that will chip away at these cap rates, bring cap rates down, raise values of properties, raise the value of our shares.

And that concludes today's Q&A. So I'll now hand back to Mohamed for closing.

Thank you, Greg, for your time today. Thanks, everyone. I wish you all happy Eid and happy holidays.

Thanks, everyone.

Ladies and gentlemen, this concludes today's call. You may now disconnect.