Aldar Properties PJSC (ALDAR) Earnings Call Transcript & Summary

Greetings. Welcome to Aldar Properties First Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Faisal Falaknaz, Acting Group Chief Financial and Sustainability Officer. Mr. Falaknaz, you may begin.

Good afternoon, everybody. I hope you're well. I see a lot of familiar names I've met over the past few months since I've taken on the new role. I'm glad to be with you here for my first quarter release and our first quarter results for the year. I'll kick off with a very short summary of our financial and operational performance of the company with a few slides, which hopefully you guys can see through the webcast. If you're joining us through the conference call, you can access the full presentation, which is uploaded on the IR Section of our website. So I'd like to begin with the highlights of the group. We are very pleased to report that Aldar has achieved another quarter of very strong performance on the back of a resilient UAE economy and a growing demand for quality real estate. Despite the global headwinds when it comes to the banking sector and inflation, the UAE has proven to be a pocket of opportunity and growth and stability, and we've been key net beneficiaries of the structural reforms and the commitment and investment that the government is doing into the economy. Jumping into the number highlights. As you can see, our revenues have gone up by 14%, up to AED 3.1 billion. Our EBITDA is up by 18% to AED 955 million, and our net profit is up by 22% to AED 836 million. This was driven by a record quarter of development sales, which we'll get into very soon and the continued execution of our development backlog, which has started now getting realized onto the P&L. And then on the investment side, we've seen sustained rental growth across the recurring income portfolio and rising recurring income from the investment properties on the back of the strong acquisitions that we've done in 2022. Moving on to the next slide for Aldar Development. We had a record launch for the quarter as well. So for the first time, we launched 7 new projects and phases in 1 quarter, leading to a record UAE sales of AED 4.2 billion. This is up almost 3x year-on-year from the previous quarter, taking up our revenue backlog to AED 14.7 billion. What's interesting to note is we continue to see this secular trend of international investors and resident experts, further investing into Abu Dhabi. They made up 45% of our sales for the first quarter. I think this is a testament in terms of the appeal of Aldar's offering to those clients as one of the major developers and leading developers here in Abu Dhabi. I think more to that, Abu Dhabi continues to prove that it is a premier investment and lifestyle destination. And then going on to the group residential sales we had AED 4.5 billion, taking our backlog overall to AED 18.8 billion, which we think provides very strong visibility into our future earnings. Our Egyptian subsidiary SODIC contributed AED 281 million development sales during the quarter. Some of that was slightly impacted by the devaluation that has happened. We do, however, remain very positive on the long-term prospects of the business, and we are taking a very measured approach when it comes to launching new projects in the near term given the current inflationary environment there. Moving on to our Aldar Investments. Aldar Investments continues to outperform, driven by higher occupancy across the portfolio, significant contribution from the recent acquisitions. As you can see, we've started to reap the benefits of the acquisitions that we did last year, which are about AED 7.5 billion. Adjusted EBITDA for the division was up 43% year-on-year to AED 536 million. What's worthy to note, ADGM, which we acquired back in July from Mubadala for AED 4.3 billion. The occupancy of that asset was 79% when we acquired it. Today, it's trading at 97% occupancy. So not only has it overperformed in terms of ramp up, we've also seen market trends go up more than 10% since we acquired it. What we are seeing from the market is that GREs taking on office space, expanding on their existing footprint and then a lot of international demand is coming due to the structural reforms where a lot of companies are now taking Abu Dhabi as a base. And then the second strongest contributor was our hospitality segment. We did about AED 1.8 billion in acquisitions last year, 3 hotels, 2 hotels at Ras Al-Khaimah, which was our first in 3, for about roughly AED 1.5 billion followed with Nurai Island. Those assets are also performing better than underwriting and are contributing significantly to our P&L today. And then lastly, on the hotel portfolio, Abu Dhabi for the first half last year was still under somewhat COVID restrictions with PCR testings and whatnot. Those were removed around May or June. And so we're seeing that significant recovery happen in Abu Dhabi hotels this quarter with both occupancies and ADRs significantly up. The retail portfolio continues to benefit from the robust consumer confidence, which supported occupancy and all our leasing activity. Yas Mall, for example, our flagship assets, which has undergone a major transformation, we have seen 30% increase in tenant sales and 48% increase in footfall. Our logistics portfolio, which was a new addition to our portfolio last year, continues to make a solid contribution to performance, and we continue to explore opportunities in this space to scale this further. And then lastly, our education business also continues to perform very well with enrollment having gone up 25% year-on-year to about 33,000 students from 26,000 students last year. Moving on to the next slide. We had a busy quarter when it came to deals. The most notable one was Fahid, which was our acquisition of unique beachfront offering in Abu Dhabi. This island is between Al Jubail and Saadiyat, which really complements the offering that Aldar has. We're looking at about 4,000 units in that development with a GDV of over AED 26 billion. That's going to be a mix of luxury business, townhouses, apartments and the master-planned community, which we're going to complement with the offering that we have through our retail and hospitality and education business. The second very exciting thing, obviously, is our announcement of our entry into Dubai. This is the JV with Dubai Holdings. That JV is progressing extremely well. The team are working very hard in terms of getting all the design approvals in place to get that project launched before the end of the year. We are looking at about 9,000 retail units across the lifecycle of that project, which has 3 master communities across various locations in Dubai with more than 20 billion GDV. And then lastly, given the significant demand we've seen on Al Maryah Island in terms of commercial assets from tenants, we've also announced a new JV with Mubadala, we are going to jointly develop a new commercial office tower with a net leasable area of over 60,000 square meters. That's expected to be completed by the end of 2026. Moving on -- so which slide are we on? Sorry, I just can't see the slides. One second. Sorry, Slide #7, just on our debt. We continue to maintain a very responsible debt policy in line with our debt policy. So our LTV on the recurring income side of the business is about 35%. We don't have any major refinancings come up -- coming over the next 2 years. We've been renegotiating a number of our facilities with the bags, our RCFs and term loans, where we've been able to get very competitive terms when it comes to spreads. We're looking at spreads below 1% in addition to being able to take security out of those facilities. So a lot of those facilities used to be secured. The majority today on the balance sheet are unsecured. And again, going back to the comment that I made earlier, despite the global challenges on the banking sector, the banking sector here in the UAE is very strong, it's very liquid, and that liquidity is coming into strong credit names such as ourselves, which has recently been iterated by Moody's. So Moody's further iterated our investment-grade credit rating, I believe just last week. Last point, we have AED 6 billion worth of free cash sitting on the balance sheet and another AED 4.4 billion of committed undrawn facilities that we can tap into. Moving on to sustainability, which obviously Aldar has taken a leadership role on not only in the UAE, but as a regional champion here. We published our 2022 Sustainability Report, which you can check out, which outlines the progress we've been making. We've also launched a very ambitious net-zero plan aligned with our near and long-term targets where we want to achieve net-zero in Scope 1, 2 and 3 by 2050. We believe this is one of the most comprehensive plan to decarbonize the company of such scale in the region. We've also seen a lot of our ratings improve. And then one major announcement we had in the quarter was, alongside the Ministry of Climate Change and Environment, Aldar announced a pledge where 28 of the real estate companies and construction companies committed to publishing their decarbonization plans before COP28, which is held -- which going to be held in the UAE in November. Lastly, I just want to reiterate the guidance that we have previously provided to you. We remain very upbeat and optimistic on the outlook going forward, we expect to maintain the same level momentum of growth and are confident that we're going to be able to deliver on the guidance that we have provided to you. Thank you. And I'll hand back the call now to the operator to open the floor for questions.

[Operator Instructions] And our first question is coming from Taher Safieddine with JPMorgan.

This is Taher from JPMorgan. Few questions, if I may. The first one is on the UAE development. I mean, clearly, the trend has been very supportive in terms of off-plan sales and where the backlog is today. I've noticed that you say the average duration of the UAE backlog is around 29 months. So if I just do a rough back of the envelope calculation, we could see UAE development revenues going closer to AED 6 billion into next year. Is that fair? I mean, given 2022 was around AED 4.4 billion. So, I mean, just correct me if I'm wrong, but the expectation is to see a significant growth or ramp-up in the UAE development sales from a revenue perspective. So maybe just this is my first question.

So just on guidance on revenue, on revenue part. So we generally don't provide guidance on development revenue, because it's a bit complicated in terms of project progressing, milestones, et cetera. But, yes, so that backlog of AED 18 billion, to your point, will be recognized over the next 28, 29 months, and you will see a significant uplift from what we have provided over the past year. And then we are seeing very strong trends when it comes to our currency, so that would only further add to that development backlog.

Understood. And just another question maybe on the recurring side. The first one is the equity deployment. I mean I can still see the guidance at AED 5 billion in equity deployment. So may if there's any update there on what kind of timeline? Is this still a 2023 target? So I mean, how should we think about it in terms of the taxes because, I mean, you've clearly transformed -- the way the structure, if you want, in terms of sector exposure, right? Today, it seems to be very well balanced, but logistics is still a small portion at 3% maybe. So if you can just share some color on that? And along the same lines, why is retail flat year-over-year despite Yas Mall being redeveloped? I'm just referring here to Slide 20. So maybe if you can just comment on that, that would be very helpful.

Okay. Just deployment. So I'll reiterate again, we have a very disciplined approach when it comes to the asset deployment. 2021, we didn't deploy much even though or not -- even though we have the cash. But then 2022, we deployed a lot, and we're proving today that, that deployment is creating long-term shareholder value. As management, we are not incentivized just to get a quarter or 2 quarters of income. We are incentivized to create long-term value. So we want to make sure that when we put that capital out, that capital creates long-term value. We have a very detailed and comprehensive pipeline across the sectors. Our M&A team has proven that they can close deals and extract value out of those deals. So we're very confident that we will deploy that capital, but it is very difficult to give a timing in terms of when that capital will be deployed. And then moving on to the second question, so just on retail. So I think we are reporting adjusted EBITDA. I think the guys can -- and I'll ask my team [ Obaid ] to connect with you. We'll provide you with the NOI numbers. So the NOI numbers on a like-for-like basis are actually up. But once you go down into adjusted EBITDA, then you have a little bit of delusion there, but the assets at the portfolio level are actually growing.

The next question is from the line of Mohamad Haidar with Arqaam Capital.

This is Mohamad Haidar from Arqaam. I have 3 questions, please. The first on developments. And since we don't hear a lot about this in the media when it comes to Abu Dhabi. So what's the nature of the new buyers in Abu Dhabi and specifically the overseas buyers? So are these like investors or like second homebuyers or vacation homebuyers in Abu Dhabi similar to what we're seeing in Abu Dhabi and in Dubai. And are these really wealthy high net worth individuals also moving to Abu Dhabi? Could you please shed some light on that? And other than the UAE nationals, which is the top buyer still for Aldar, what are the top 2 international nationalities, please? So that's my first question. My second is on rentals, specifically investing properties. And given that Q1 rentals were pretty much in line with Q4 rentals, does that mean this is the steady benchmark for 2023, what we are seeing in Q1, assuming no other addition in the existing portfolio? The third question is on Egypt. So I'll leave it probably after I get answers to these.

Okay. So let's talk about the buyers. And so if you go to Slide 4, you'll see the sales demographic, which is for this quarter broken up 55% UAE nationals, 31% resident expats and 14% overseas. That overseas and resident expats last quarter was 30%. And when I was meeting a lot of you guys, I was saying that we will continue seeing this secular trend play out. We have, one, expats -- resident expats living in Abu Dhabi are becoming first homebuyers, and we're seeing that conversion play out. And then we're seeing that trend of Abu Dhabi becoming appealing to international investors. We talk about nationalities. The top nationalities, we're seeing are Russian, Indian, Jordanian, U.K., Canada. So it's quite diverse. One pocket of opportunity that we have yet to see play is the Chinese. And then you also have to break it down by product, like, for example, the Grove, which is a luxury offering on Saadiyat, which is our luxury district, we generally see very high international buyers on that offering. So for example, we launched the stores this quarter. That's got almost 80% sold out to international buyers before we even went out to the market here domestically. And the prices that we were able to achieve on that offering was more than AED 30,000 per square meters, which is really a record for Abu Dhabi and we expect those prices to be sustainable and grow in the long-term because we're going to have all the museums open up on Saadiyat and the infrastructure really. And we are building Saadiyat Grove which is the retail part in that district. So we see prices go up in the future, and we think a lot of the investors that are buying today are going to benefit. And we're doing it ourselves. So every time we launch a new product, we are gradually increasing our prices to capture some of that upside. Lastly, the most important thing to note, which we've discussed in the past is payment plans. So we've been progressively improving our payment plans in our favor products such as the Grove, which is in high demand, you have a lot more inelasticity there. We are more aggressive on the payment plans. And then on Yas, we've also pushed the payment plans there to minimize our equity contribution and maximize our IRRs. Moving on to the second question, which is rentals. On the existing portfolio, you're going to see somewhere around single-digit growth across the various segments. But where you will see higher growth is where we do redevelopment or repositioning. So for example, the project that we did on Yas Mall, we are now planning on Al Jimi, which is one of the super-regional shopping centers we have in Al Ain. We're planning a project of very similar scale, which will pay off over the next 2 years, which will allow us not only to increase rents but to significantly increase the value of that asset, similar on Al Hamra. And then growth will also come from [indiscernible]. So we have a very healthy pipeline of development projects for these, which we will be announcing to the market over the next couple of quarters, but those are still in cooking and once they are ready, we would be ready to share it with you.

My question on Egypt is, so why the postponement in the new projects? Is it because of the complexity in the relationship with the contractors? Or is it more on the end user or the affordability with the buyers and the embedded interest rates and the selling price?

So there's surely demand from the end users. We are managing the inflation risk. So the strategy with Egypt is you don't want to launch and sell quickly and then get caught in a devaluation scenario. So we're taking a very cautious approach when it comes to launching those projects. But yes, you have seen the devaluation and some impairment that we have taken in the previous quarter flow through both the P&L and other comprehensive income. But most important thing is that Egypt makes a very small part of our business, and it's probably going to be even smaller given how fast the UAE business is growing. So the impact is really not going to be significant on the group overall.

We have another question coming from the line of Harsh Mehta with Goldman Sachs.

So my first question is regarding your net income. So obviously, the net income that you have shown, AED 836 million is up 22% year-on-year. I want to say just for the minorities, it's up 11%. And when I look at the financials, there's coupon payment that's done on the hybrids, which is AED 51 million. So I understand it's adjusted against equity. But if I were to adjust it against the residual income, the net income is pretty much flat year-on-year. So I wanted to understand when do we start seeing an uplift on the net income after all the transactions that have happened over the last 12 months. I can ask the next question now or if you want, I can pause and ask it after answer.

Yes. Let me take that on. So you probably shouldn't look at it in one quarter, but we will surely see EPS accretion in this year. This will come through as the acquisition income flows through the P&L, you're going to have the fair value gains that are going to come through the P&L, through the value creation that we have made across the portfolio. And then obviously, the development business is also going to continue growing. So yes, you will see that EPS accretion happening this year.

So it's pretty much as you pointed out, is kind of a timing difference and probably over the next few quarters, we should start seeing that coming through?

Absolutely.

The second question I have is regarding the refundable costs, which I believe is largely with regard to the recovery from the government on...

But I didn't catch it, forgive me. Can you repeat that again? What cost?

The refundable costs.

The what, sorry?

Refundable costs.

Refundable costs?

Yes. It shows its up…

Okay. That project. Okay.

Yes. So it shows it's up to AED 2.6 billion versus around AED 800 million at the end of last year.

Yes. So because we act as an agent for the government -- we act, sorry, as a principal for the government, the balance sheet of the projects that we undertake is consolidated on ours. So it creates a distortion, which is really not what the economic reality is. And so do we provide the adjusted cash flows to the market? Yes. So if you adjust for that, we are actually very positive. So it's just that those projects, the inflows and the timing of those inflows and outflows just distort both the balance sheet and the cash flow statement.

And I was just trying to understand, does Aldar then end up investing in the working capital over there or it's more of an accounting impact while the cash flows are all like provided by the...

No, no. It's more of an accounting -- it's more of an accounting impact. So we invoice the government, so that's recorded as a receivable, but then they haven't paid us the cash yet. So that cash for that receivable was received in April exactly. So it hasn't appeared in that -- in the current quarter, but it will appear in Q2.

Understood. And then one last question. So one of the slides in the presentation gives a lot of granular details about the project. And what's striking was there's a project Alreeman, which was launched in 2019 with 923 units. Now that was showing 93% sold as of FY '22. But in the latest presentation, it shows it's 40% sold and the total value is unchanged. So I was just trying to understand, did you have some reversal or cancellations over there?