Aldar Properties PJSC (ALDAR) Earnings Call Transcript & Summary

Hello, everyone. Thank you for standing by. The Aldar Properties Investor and Analyst Briefing Call will be beginning in just a few minutes' time. We thank you for your patience, and we will begin soon. Hello, everyone, and welcome to the Aldar Properties Investor and Analyst Briefing Call. My name is Emily, and I'll be facilitating your call today. After the presentation, there will be the opportunity for any questions. [Operator Instructions] I will now turn the call over to our host, Faisal Falaknaz, Chief -- Group Chief Financial and Sustainability Officer. Please go ahead, Faisal.

[Foreign Language] Good afternoon, everybody. Thank you for joining us on the call. In case you didn't catch it, we've a presentation uploaded on the website regarding the update that we wanted to take you through today. So we're very excited about our 2 recent announcements. The first is the acquisition of London Square, which is a U.K. based developer. And the second is our partnership with Mubadala and Ares around our credit strategy. This follows our announcement post our Q3 results, where we came to you and we elaborated on our international expansion strategy, which went from our 1.0 up to our 2.0. So if I recap, a few years back, we were an Abu Dhabi only company. Fast forward, we announced our acquisition of SODIC. Fast forward, earlier this year, we announced our entry into Dubai and then followed by Ras Al Khaimah. We've been quite successful in terms of taking up our run rate in terms of sales. A couple of weeks back or a month ago, I think we announced -- launched -- sorry, Haven in Dubai, which was a complete sellout. We were able to sell AED 3.1 billion within a span of 2 days. It talks to the -- again, what I was always highlighting the strength of the locations, the strength of the JV partner that we decided to go with in Dubai, which helped us expedite the approval in terms of going to market with those developments. And then the strength of the Aldar brand name because there was a lot of excitement about Aldar coming into Dubai. That was also followed by our RAK launch, our branded residents in Nikki Beach. That was also a very strong sell-out. I think what we announced to the market a few days back was selling over AED 1 billion in sales, which is quite unprecedented in a market such as Ras Al Khaimah. And then, moving to the 2.0 strategy, which is the European strategy that we announced to the market. We feel that we've achieved considerable scale in the market here, and we still have room to grow, but we felt that we're ready to take it to the next level. This was extremely well thought of. We've been thinking about this for quite some time and the pillars of that strategy was that we wanted to expand our development platform. We wanted to expand into alternative real estate, alternative being credit, alternative being logistics, student housing. And perhaps also going into some other asset classes, which are focused more on the ESG side, given the demand for tenants and occupiers to go into such assets. Again, this strategy is ancillary to our geographic diversification strategy and sector diversification strategy. So we will continue to be a UAE dominant company. Our core market will continue to be Abu Dhabi because this is where the significant portion of our land bank sits. And we will continue being a UAE company. We will continue building our foothold, especially in Dubai, and the Northern Emirates, such as Ras Al Khaimah. But we will -- we expect, obviously, over the next few years, with SODIC and the acquisition of London Square, for our international sales to increase. And the thought behind that is we want to diversify from a geography point of view because we want to be diversified in terms of market cycles. The market, obviously, is going through a very good cycle today. The U.K. market, on the other hand, is going through somewhat of a corrective cycle, given where interest rates are. And we've taken advantage of that opportunity. And so I want to jump in and start talking about London Square. So if you look at London Square, we acquired 100% of this entity. It is a private transaction, nonpublic. This is a company that has been out in the market since 2010. We didn't only acquire a company, but we acquired a founding team and the founding team were a key part of this acquisition and retaining them to make sure that they execute on the growth plan that we have in mind. London Square is multifaceted in terms of its offering, which we found quite appealing. So they have their London Square segment, which is the build to sell, which fits very well with our development to sell business. They have a living segment, London Square Living, which is a build-to-rent segment. The way they've run it historically is this has mostly been forward funded by the institutional tenants that wanted to get access to those build-to-rent units or buildings. The third is affordable housing, which is their Square Roots division and affordable housing is a very important aspect of that market, given the way the entitlement and planning work happens around those borrowers and communities. The government usually requires that you have an affordable housing component in there and they typically build it and they typically manage it, where they make fees around it. And then lastly, there's a community building around those developments, which is their London Square Works division, which has done a little bit of commercial assets as well, which also is something we want to build up on going forward, which has synergies with our investment vertical. Now in terms of the acquisition, what was announced to the market was a GBP 230 million enterprise value. I think what I want you guys to focus on the most is the valuation. So we paid 1x enterprise value to TGAV. The way the market prices those developers in those markets is typically around those multiples. The relevant multiples we have here are typically EBITDA multiples. But if I dig further into that multiple. So 1x is the equivalent of buying it at NAV. If you go and look at privately traded transactions in the past or publicly trading developers today in the market, they typically tend to trade at significantly higher multiple than 1. So we believe that we bought this at a quite attractive valuation. This is a business that has developed to date over GBP 2 billion worth of developments. They have a significant backlog of around GBP 400 million. Moving on into the rationale. Obviously, I've spoken about the international expansion. Synergies is something that is very important for us. So what we want to do is we want to build an international sales network, where we go to our existing clients and we tell our clients we have properties all across Abu Dhabi, Dubai, Ras Al Khaimah, Egypt, and today, the U.K. or London. London Square as well has a significant client base that would also be typically interested to buy into the UAE. The other thing is growth. So London Square was historically somewhat capital constrained. And with us coming in and having the Aldar balance sheet to support this business, the strategy is pretty much similar to what we did with SODIC, where we bought a platform that has strong brand recognition. We bought a platform that has strong operating capabilities and the plan is to inject it with capital to buy land and to grow the revenues and the profits of that business. So the team at London Square have very strong relationships with the local authorities and the borrowers in the U.K. in terms of expediting and getting the proper land approvals done. The other thing is the guys have very good on-the-ground operating experience when it comes to delivering those assets. Unlike Aldar, the way London Square operates is they act as a main contractor and manage the subcontractors under them to have better control over the delivery, the quality and the cost of those projects. And we think given the scale that Aldar has, we can start working together in terms of best practices when it comes to design and supply chain. In terms of market focus, London Square today is focused on Central London, which is Zone 1, 2, 3, in addition to the commuter terms in Southeast. They have typically been focused on the middle -- middle-priced segment of the market, which we will continue doing. But where we see the opportunity is also going to the high end of the market in Central London, and we've already identified a number of interesting land opportunities where we could come in. Those would have typically higher margins, those would typically be more appealing to the type of customers that we have within our business. And lastly, the growth we will see through acquiring more land and expanding on the build-to-sell segment is going to help us grow the margin of this business. So we're targeting gross profit margins of north of 20% on this platform. So that's on London Square. I'll move on to the Ares and Mubadala platform. So this transaction has 2 legs. The first leg is we bought an existing -- we bought a stake into an existing portfolio, where Aldar committed $100 million into almost 7 or 8 assets. The other leg of the transaction was a new fund, where that fund has an equity commitment of $1 billion. Aldar represents 30% of that fund commitment, with Mubadala representing 50%, and Ares, which is the GP, which is going to be the operating partner running this platform, owning 20%. Credit, as you know, I don't need to tell you guys. You guys are probably following the market better than I. Given the increase in interest rates over the past few years, credit has become an interesting asset class that a lot of asset managers have been going into. There's been a gap in terms of capital availability from your traditional banking players. And so you've had those alternative asset providers come in to fill in the gap. This is a strategy that is quite appealing to us in terms of returns. We expect this to generate somewhere around 11% to 15% equity IRR, depending on the type of assets we deploy into. We find it interesting because we've typically been playing mostly on the equity side of the capital stack. And this is now allowing us to go into the debt side of things. We're not doing a pref or mezz, which is typically more risky. We're playing on the full debt stack. So this strategy is focused on the senior debt stack with the first lien on the assets with no recourse to the group. And what we see coming out of this is Aldar coming into a platform, having influence over the platform, having access to the know-how of this platform and taking that know-how and in due course, taking this and hopefully bringing this regionally here. I think that covers it. So that was quite a long introduction, and I'll start taking questions.

[Operator Instructions] Our first question comes from the line of Taher Safieddine with JPMorgan.

Yes. Am I audible? [Foreign Language] Faisal, I hope all is well. Two questions, if I may, and I'm here, I want to play, really, the devil's advocate. I think on the first one, given the success you've had on the development side in Abu Dhabi over the last couple of years, people look at the backlog growth, it's quite impressive. The quality of the project offering. And then you go into Ras Al Khaimah, you go into Dubai, sell out, you're a national champion, you have the best land bank. Why go to London? Mature, developed markets, lower margin. I mean, ideally, I just want to understand, you said it's constrained in terms of capital. It seems from the discussion, you've highlighted that there needs to be some significant capital allocation towards getting this business to grow, focus on new segments. I mean, I just sense that there might be some kind of a diversion in terms of strategy on the development, which again has been maybe doing very well in the UAE. A bit skepticism around Egypt because of the macro. But again, SODIC is a very well-known platform. It's listed very high quality. I mean, London seems to be far away. I mean, just to really thinking out loud in terms of the nature of the customer profile, the nature of the market dynamics. I mean, I just want to maybe hear really your thoughts here, just from that side. So that's, I think, the first question, and maybe then I'll channel into the second one on the private credit fund.

Taher, I think, today, we're capitalizing on a very strong market. And sometimes, it's easy to forget that this market -- any development market tends to be cyclical. And so while we will continue capitalizing on the UAE market and the UAE market, as I iterated at the start, we'll continue making north of 80%, 90% of our profits going forward. This is really a diversification play where we can diversify into markets that we have proximity to. So you said it's further out, but there's a lot of G2G relationships with the U.K. There's a lot of affinity, both sides between the GCC market and the U.K. in terms of countries. The U.K. in our view is a winning city. Europe, yes, has been going through some difficult times, but we're confident that the U.K. market will come back. There is some opportunistic side of things where we're taking advantage of repricing that has happened into the market. Given the increase in interest rates over the past few years and until recently, we've seen a lot of repricing happened on land prices. And again, I noted the valuation. So this was an opportunity to acquire a very well-known platform, take control of this platform. It's not easy to find such a platform, so those opportunities are not easy to come through. So that's my answer in terms of why London on the development side. Other than the synergies that will come on the development side by itself, there's the strategy of doing more alternative and doing more things on the recurring income side. And now we have a platform on the ground where we can build that capability and be able, for example, to go into senior living, to go to student housing. So yes, there will be a capital allocation to this, but it will not represent the majority of our capital allocation going forward. And if I remind you, our backlog today is AED 30 billion, that will continue going -- growing going forward. And in the next 2, 3 years, we're going to have significant windfalls coming back. And so Aldar will be in a very good position to fund any future capital deployment that will have to create value for our shareholders. I think we've proven in the past that we've been quite disciplined when it comes to putting capital out. So we, on our side, have been quite thoughtful about this expansion strategy, and we feel confident that we will be able to deliver on our promises.

Okay. All right. I'm clear. Just another question, maybe on the private real estate credit. I mean, just maybe help us understand the economics. I mean, how will you generate -- I mean, I understand, you're investing in a senior secured debt, right? I mean, across different real estate segments. Is there more to it in terms of how we understand the economics? I mean, you're just going to be providing credit across -- through that structure and then you collect some sort of interest. I mean, just how should we think about the economics of this? And maybe the key question is, does any of these 2 transactions feel delight out of the AED 5 billion equity you talked about, which was expected to be pulled into the recurring assets or the 5 billion is still something that you are still looking at in terms of equity deployment? I just want to understand how much -- where is the breakdown among this?

So the London Square acquisition is part of that AED 5 billion. There's an immediate $100 million deployment into credit. The second leg of the transaction is going to happen over the next 4 to 5 years, probably. So let's say, $50 million, $75 million or $100 million per year going forward, which is not that significant. In terms of the economics, we would typically target good quality assets, creditworthy sponsors and owners, where if you have an asset that is worth $100 million, the owner would typically put, let's say, 30% equity, and then we'd be at 70%. And then of that 70%, we'd be putting in equity ourselves and then getting back-to-back financing to fund that whole 70% to the borrower in mind. And with that strategy, depending on the asset class and the location and the type of assets, we expect to generate levered equity IRRs of 11% to 15%. And typically, you have duration or funding matching where the funding you're getting on the back end matches, so it's a floating funding, a floating funding, for example, with a fixed spread that gives you that upside on the investment.

Okay. All right. So clearly, these 2 investments are taking out of the AED 5 billion equity deployment, right, if you want to think about it just as a push?

Yes, sir. And sorry, one thing to add is the tenor of those investments are typically short on the credit side. They typically range around 2 years. So it's something that recycles quite quickly.

Our next question comes from Mohamad Haidar with Arqaam Capital.

Faisal [Foreign Language]. So is it going to be like a straightforward consolidation when it comes to London Square, AED 1.2 billion in revenues? That was for 2023. Should we expect the same for next year, that's how much it's going to add in on top line? And when you say you're targeting 15% to 20% gross margins, obviously, current margins are like half of that. Is it going to be on the -- like the available land bank, which is AED 9 billion, and the gross development value, that's the existing land bank, correct?

So I wouldn't focus too much on the revenue and gross profit numbers that we provided. Those are as of their calendar year, which is March 2023. So the first thing is, yes, this business will fully consolidate. The second thing is the revenues next year will depend on obviously the progress of the projects that we have and the progress of our activation of the land sites that we have and whatever new land sites that we acquire. We had actually updated the presentation on the website. My team are trying to be a little bit more conservative. They put 15% to 20%. But I think this platform will be achieving gross profit margins of more than 20%. That compares to 30% margin here in the UAE. But I think they're very different markets, so you cannot compare them like-for-like. It's still a profitable business. And the underwriting that we have done in terms of our London Square acquisition is that we expect to make something around the high teens on this platform. Now we're not going to -- we're not sellers, typically we're long-term holders. But assuming a 10-year hold or whatever, in growing this platform to a scale, which is profitable and sizable, we expect a return north of high teens.

That's very clear. Another question, please. So we know you are targeting AED 5 billion in extra capital deployment. But it can be levered up to AED 8 billion. Have you taken any debt on these 2 transactions, just to fund these transactions?

So on the credit one, let's go with that, that's an easy one. So that's outright equity. And then there's leverage that is taken, obviously, to deploy into the senior loans. And that leverage is, again, nonrecourse. And then on London Square, the enterprise value is GBP 230 million, but the equity value is around GBP 120 million. So the company today is sitting somewhat at around more than GBP 100 million of debt. Another upside of the transaction is you have a very strong creditworthy developer coming in. Not a fund, this was previously owned by a fund. We're a developer. We're an investment-grade company. So we're already in discussions with the existing banks, with future banks to renegotiate our facilities to get more competitive commercial and terms on all of them.

At this time, we have no further questions. So Faisal, I will hand back to you.

That was easy. Taher is taking the [Foreign Language] Taher.

We do have a follow-up question from Taher.

Yes. Faisal. It's Taher again. Again, just -- I want to maybe take a step back and thinking about all of this from the start. Initially, where it was a couple of years back, clearly now, there's a recurring portfolio. Apollo is a minority stake, there's a development portfolio that has been growing in terms of sales. There's a development management portfolio. There are some adjacencies. And now we're introducing this. I mean, this is becoming more of a maybe more complicated structure. So I just want to maybe take your view as part of the senior management of Aldar. I mean 2, 3 years down the line, is there a way to, I don't know, simplify the business model? I mean, in terms of, I don't know, spin-offs, trying to exit certain parts of the portfolio because the last thing you want maybe as an investor or an analyst, this becomes a holding discount because there's not much clarity around the capital allocation. How I'm going to reconcile a private credit with a London based developer versus a recurring portfolio that sits in Abu Dhabi versus an education business. So maybe just a theoretical question, and I don't know if I'm making sense, but is there any thoughts on that you can share with us?

You say complicated, we say mature, Taher. So we -- it's been quite a journey for us over the past few years. We're a very different company than what we used to be. I go back to when we announced our operating model in 2020, and there was a reason we implemented that operating model with having separate management teams that can run those businesses. And remember, London Square is a stand-alone business by itself. It's going to have its Board, which we will represent. It's going to have its own management committee. So we believe that we're quite well set up to manage such a diversified business. In terms of exit opportunities, there's answer I always give investors, analysts, I'm always mesmerized with the idea of IPOs. We're not -- we're focused on shareholder value creation. Shareholder value creation can make sense, perhaps with an IPO if the market is fitting, but they can also make sense from a private sale point of view. We could do another private sale in AIP, similar to what we did to Apollo. We could do another private sale in education and development in Eltizam. You saw us do a merger. There's another -- there's a ton of ways where we can crystallize some value and get capital for further growth. In terms of valuing the business, I think it's pretty straightforward, and we've been quite transparent in terms of our performance and the segment breakdown. And so it comes down very simply to the sum of the parts. And so I mean, I don't see an issue of valuing the business. I think today, we're -- we remain to be significantly undervalued. The analyst reports say we're trading above book. I say, we're still trading below book because a lot of our businesses are not fair valued and a lot of the analysts are not giving us credit for our backlog that is in our pockets and for a lot of the growth upside that's going to come through deployment through proactive asset management. And so yes, that's my answer.

Okay. Very clear. Again, I'm not sure. I mean, maybe not in the negative sense of being complicated, just in terms of the different business segments. But maybe just a follow-up. 2, 3 years down the line, UAE will remain, what, 75%, 80% of the business. I'm talking here about just as a holding, Aldar in full, with these 2 acquisitions, TDIC and SODIC.

Yes. Yes. Absolutely. Absolutely 100%.

What 75%? Closer to that or 75%?

More than -- I'd say, more than 80%, more than 80%.

Okay. So more than 80% is UAE. And sorry, I'm just maybe bombarding this call. But if I have room, just the last question from my side.

Nobody is asking questions, Taher. So the floor is yours.

Okay. So with these 2 acquisitions, does this mean that we're setting an eye away from any other recurring assets that you've talked about inside the UAE, maybe, or the GCC? Or you're still in this -- on the lookout? I just want to understand what's the view on that in terms of the lookouts and deployment? Or will you be doing both of that?

Not on the lookout. Not on the lookout. We're in the works. So we're very confident that we will be announcing a number of them in due course. I promised you towards the end of the year, maybe I'll miss my promise by a month or so, let's see. But again, it's about getting the right deal. And so when we're ready to announce those transactions, we'll come out to the market, but we have a very good, I wouldn't say pipeline, but very good advanced stages of deals happening.

[Operator Instructions] Up next, we have another follow-up from Mohamad Haidar.

A quick question from my side, Faisal. So will any of these 2 investments, be it London Square or the credit one be part of Aldar's dividend policy in the future?

Yes. I mean our dividend policy covers everything, right? So Aldar Investment has its own investment policy and Aldar Development has its own development -- dividend policy. London Square is part of Aldar Development. And credit is going to be part of Aldar Investment.

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

Okay everybody. Thank you, guys. And I hope you guys have a good holiday break. And I look forward to talking to you in February when we announce our full year results. Thank you.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.