Aldar Properties PJSC (ALDAR) Earnings Call Transcript & Summary

Good morning or good afternoon all, and welcome to today's Aldar Properties Investor and Analyst Briefing Conference Call. My name is Adam, and I'll be your operator for today. [Operator Instructions] I will now hand the floor to Faisal Falaknaz, Group Chief Financial and Sustainability Officer, to begin.

[Foreign Language] Good afternoon, everybody. Thank you all for joining us on this investor and analyst briefing call to discuss the latest joint ventures announced as part of our strategic partnership with Mubadala. Aldar benefits from a long-standing relationship with Mubadala, one of the largest global sovereign investors, a relationship which dates back to 2005 with Aldar being its strategic real estate partner in Abu Dhabi. Over the years, this strategic collaboration has strengthened and has been marked by several successful transactions that have had a positive impact on both shaping Abu Dhabi's real estate landscape and driving our growth and diversification strategy. Most notably, in 2022, we acquired the 4 ADGM office towers. At the time of the acquisition, the towers had 77% occupancy, and through a proactive leasing program, we have driven occupancy to 95% with double-digit rental growth. Through our joint venture, we also acquired Al Maryah Tower, which was vacant at the time. The tower is now operational with 83% occupancy and strong leasing activity underway that is expected to raise occupancy to over 90% in the near term. In 2023, we entered into a joint venture and to a further joint ventures to develop 2 commercial office towers on Al Maryah Island to satisfy the strong demand for office space from GREs and international corporates. These developments are expected to be completed in H2 of 2027. And lastly, through a tri-party relationship with Mubadala and Ares, we invested in a European private credit platform with a $400 million commitment. Through our leading development franchise and proactive asset management, these deals demonstrate that as Mubadala's strategic real estate partner, we are able to unlock value for them while also delivering one of our own strategic financial objectives for the benefit of our shareholders. Moving on to Slide #3. We are further expanding this partnership, leveraging our expertise in real estate development and asset management and Mubadala's institutional strength in prime land bank to generate substantial value for all stakeholders, including investors, leading businesses, residents and tourists that are increasingly calling Abu Dhabi home. This slide outlines the key elements as part of the next phase of our strategic partnership, which sees the formation of 4 joint ventures valued at over AED 30 billion, focusing on 5 key sectors: retail, commercial, residential, logistics and property development. I'll touch on this briefly now before going into further detail on each in the upcoming slides which include: one, the creation of a retail platform across key Abu Dhabi destinations with AED 9 billion in GAV; two, the acquisition of a diverse portfolio of commercial and residential income generating assets in Masdar City were AED 3 billion in GAV; three, the development of a large-scale logistics park in close proximity to Zayed International Airport with AED 5 billion in GDV; four, the development of new strategically located islands close to both Saadiyat Island and Yas Island with a GDV of AED 13 billion. This strategic move wholly aligns with Aldar's expansion plans to drive significant scale and diversification to our asset portfolio, further solidifying our position as the region's premier real estate player with a strong diversified portfolio and recurring income streams. These JVs will grow Aldar Investments' properties gross asset value by 23%. The acquisition of income-generating assets through the JVs enhances our high-quality asset base and enables Aldar to leverage its asset management capabilities to drive further value creation. Furthermore, this partnership will add further scale to our existing land bank as part of our strategic land bank replenishment program and enable us to lean into sectors such as logistics, where we are still underweight. Turning to Slide #4 to discuss the retail JV. This retail JV will see us contribute our flagship retail assets, Yas Mall, with Mubadala contributing The Galleria Luxury Collection into a new JV. This not only establishes in Abu Dhabi retail powerhouse with a gross asset value of AED 9 billion and 260,000 square meters of prime retail GLA, but also underpin Aldar's position as Abu Dhabi's retail champion and landlord of choice, especially following the success and value creation demonstrated through Yas Mall's repositioning. The consolidation of these assets under Aldar Investment's management diversifies Aldar's retail portfolio into the luxury segment while also promising operational efficiencies, including cost savings, procurement synergies and enhanced relationships with brands through stronger negotiation power. Moreover, given Aldar's footprint across ADGM, this JV further consolidates Aldar's ownership within Abu Dhabi's private financial district, which is set to continue growing on the back of continued strong demand. On the next slide, we take a deeper look at the commercial and residential elements. We are establishing a 60-40 joint venture to own and manage a diverse portfolio of income-generating assets in Masdar City Free Zone in Abu Dhabi. As one of the world's most sustainable urban developments, Masdar City integrates renewable energy and green building technologies and has already attracted numerous businesses focused on sustainability, innovation and technology, including Siemens and Honeywell. Our expansion into Masdar City aligns with our strategy to enhance Abu Dhabi's urban landscape and strengthen Masdar City's status as a global leader in sustainability and innovation. With capital deployment of almost AED 1.8 billion, we are acquiring 17 income-generating commercial and residential assets. Among these 17 assets, there are 9 commercial properties, 3 are residential assets and 5 long-term land leases which are classified as commercial assets. Post deal completion, our commercial portfolio will hold 28 assets with a total GLA of over 750,000 square meters, up from 14 assets and 466,000 square meters as of H1 2024. Given Masdar City's sustainability focus, the acquisitions also add LEED Gold or LEED-certified assets to our commercial portfolio, which is what aligns our sustainability ambitions and accretive to our green sukuk issuance capacity going forward. Also included as part of this JV are 2 properties under construction in Masdar City Square and The Link, totaling 50,000 square meters in GLA. Turning to Slide #6 to touch on logistics and development. As part of this JV, we are adding considerable scale to our logistics portfolio through the development of Grade A logistics park in Al Falah. The logistics park to be delivered in phases over the coming years will cover 1.2 million square meters of gross floor area with a gross development value of AED 5 billion. Aldar will hold a 60% stake and will be responsible for development, asset management and property management. Meanwhile, Mubadala is contributing a strategic 2.3 million square meter land plots and holds a 40% stake. In response to the growing demand for infrastructure and logistics, we have made strong progress over the past couple of years adding significant exposure to this sector. This follows our recent AED 1 billion investment, which includes acquiring 7 Central a lands plots in Dubai with GRE partners and expansion plans for the Abu Dhabi business hub. Moving on to the second half of the slide, where we outline our plans as it relates to the development of new destinations across Abu Dhabi. The JV will see us embark on a transformative project to develop primary plots on strategically located and undeveloped islands between Saadiyat and Yas Island. With Aldar serving as the master planner and developer and Mubadala contributing 4 million square meters of land, the JV aims to create luxury waterfront communities with a total gross development value of AED 13 billion. The project covers 2 islands, the island between Saadiyat Marina and Reem Island with 300,000 square meters in land area as well as the island between Yas Island and Al Raha with around 3.7 million square meters in land area. These projects will drive further growth and transformation of Abu Dhabi's urban landscape as we continue to create vibrant thriving communities that deliver exceptional value and help shape the future of Abu Dhabi. In closing our partnership with Mubadala marks a pivotal step forward in our shared vision for Abu Dhabi's growth. Aldar has benefited and continues to benefit significantly from aligning its interest with the socioeconomic development of Abu Dhabi. We are an integral part of the growth and diversification of the economy, from supporting the growth at Abu Dhabi thriving financial center, ADGM, to the creation of the Saadiyat Cultural District and Yas development as a leisure and lifestyle center. By combining our expertise in real estate development and asset management with Mubadala's extensive land bank and institutional capabilities, we are set to drive further transformative growth across the Emirates and value for our shareholders. These joint ventures will only advance the development of landmark projects -- will not only advance the development of landmark projects but also solidify Abu Dhabi's position as a premier global destination for investment, lifestyle and work. Thank you for joining us today, and we will open the floor for questions.

[Operator Instructions] And our first question comes from Mohamad Haidar from Arqaam Capital.

Mohamad Haidar from Arqaam Capital. My first set of questions are more of confirmations. So on the commercial JV, this is -- is this part of a large AED 5 billion capital deployment plan Aldar will put AED 2 billion or AED 1.8 billion today, is this part of it?

Yes. It is, yes. So the Masdar portfolio, we will be buying 60% of that which is at AED 1.8 billion deployment and that is -- that and equity. So that is the total purchase value of the JV.

Should we expect something like a debt capital ratio close between 30%, 40%, similar to Aldar Investments?

Absolutely, yes. And so as we progress towards closing the deal, we'll be assessing what is the right capital structure between having debt at the JV level or having debt at the AIP level, which of that has not yet been decided.

In both cases, it will be consolidated, right?

Yes, absolutely.

My other question, on the residential development JV. So it's -- in simple terms, it's some sort of profit sharing JV. Aldar develops, Mubadala puts the land, Aldar keeps 60% of the profits and shares 40% with Mubadala.

Correct. So we are -- so there's no cash payment for the land, like we have on the Dubai housing JV, for example where there's a payment plan over a 5-year period. In this case, there's a value attributable to the land, which is part of the waterfall as the JV starts paying profits. You're absolutely correct. So we'll be taking 60% of the profit. Mubadala will be taking 40%. But we will also be taking development and sales fees on top.

On the retail JV, would you be able to provide the valuation of each assets? I know AED 9 billion combined for both assets, but Yas Mall in size terms is much bigger than Galleria. So yes, would you be able to provide the...

I think we got a couple of questions where people are asking about a 60-40 split. So the 60-40 split is actually a minimum for the JV. So the 60% is something that Aldar does not want to go below given we are going to be running this JV. And the starting point of the JV is probably going to be something around that 70%-30% mark. So Yas Mall today is valued over AED 6 billion. But the 60-40 is taking into account that we would probably contribute assets to that JV in the future, and we would not go below that 60%.

And I'm looking at a Yas Mall's valuation today over AED 6 billion, How does that compare to the book value? Should we expect any sort of fair value gains on the back of this JV?

We fair value our assets. So we do it on a biannual basis, at the end of the year and at the middle of the year. So this is very close to where we value the asset as of the end of June.

The next question comes from Taher from JPMorgan.

It's Taher from JPMorgan. Again, congrats on this JV. And just maybe a few questions from my side. Just the first one, just to follow up from Hamad's point on the retail. Again, it looks from a size perspective, GLA mix and then if you look at the JV details and also at the GAV, it just feels that you're more a bit getting diluted. But as you alluded that you will be -- this is opening the doors for maybe further asset contributions into the JV. But can I just get better understanding what is the rationale? I mean, you're just contributing Yas Mall, you're just keeping the other retail portfolio, 100% owned. Can you just help us explain, I mean, what is the rationale behind -- on the retail side? Because this is the only part of the JV where you are contributing assets, right? And the other, it's actually simpler in terms of Mubadala coming in with income-generating assets or contributing land and you guys putting in some CapEx. So maybe just help us understand the rationale on the retail side and also just the percentages would be helpful.

Okay. So like I said, so the JV is not going to start at the 60-40 level. It's going to start again, probably with a 7 handle for Aldar given, like you said, the proportionate size of Yas Mall versus Galleria. The rationale is to put together 2 very large dominant assets in Abu Dhabi. So Yas Mall is a super regional mall. That is the dominant center in Abu Dhabi, but it does not have a luxury offering. Galleria on the other side is not a super regional mall, it's a 40,000 square meter mall. But it is the dominant center today in Abu Dhabi on the luxury front. So while you're right, the GFA is much smaller, obviously the GFA is more productive in terms of sales given it is pretty much dominated by high-end luxury brands. And it makes sense, it further reinforces us as the landlord of choice given the significant relationships we have with tenants either on existing projects or new projects. The second thing is the further continuation of consolidation given we've acquired ADGM, and ADGM is actually connected to Galleria. So it's a further enforcement of that strategy. And then there are synergies that come out of this because, today, you have to distinct operating teams that are managing those 2 assets. Today, those teams will become one. So effectively, the team that is working with Mubadala on The Galleria side is now going to become part of the Aldar side. So there are both revenue and cost synergies that are going to come out of that. So there is immediate value accretion that we expect to come out with this even though, to your point, we are not deploying capital, per se. We are only merging those assets together.

I think the next question is really just more on the financial side because, I mean, we try to run some numbers and estimates. But from your standpoint, I think I just have 2 very direct questions. Number one is, with this JV, how should we think about EBITDA uplift for your recurring portfolio? Because if I really want to understand it correctly, you're just coming in with new assets. You own 60% of these assets. And you're pouring them into your existing very strong recurring base, right, whether it's retail, whether it's logistics, whether it's resi, whether it's commercial, I mean you've done this for a long time and you have a track record and you have an existing portfolio. So if we want to add this 60% JV across these segments, on the recurring side, how should we think about EBITDA uplift in the longer -- in the medium term once these assets are up and running? Just maybe help us maybe from, I don't know, NOI yield, if you like to guide on that or EBITDA. That would be very helpful just for us to put things in perspective.

So on the conservative side, I would say that it is not decretive for sure, okay? And the way you model it as it has today no effect whatsoever. And it's a fair question where I think we need to come back to you and give you some guidance around that in the future. And we'll do that in due course. But what we will -- we will have to come back to you with some direction in terms of how to model the synergies that are going to come from this. So the uplift, the incremental EBITDA that is going to be driven by combining those 2 assets together. But it's still very early today for me to give that guidance.

So without synergies, can you give some guidance on how much EBITDA capacity is there within the JV?

Yes, yes. So they're both generating more than 7% on their current fair values.

We have no further audio questions at this time. [Operator Instructions] We will move on to text questions. We have a group of 4 anonymous text questions. I'll read this out until it's done. What are the implied cap rates based on the JV valuation for Yas Mall and Galleria mall? And what will the method of consolidation be for all the JVs?

So cap rates generally across all of the deals that we have here, commercial, retail and resi, range somewhere between 7% to 7.5%, I would say. And then given we are at least 60% of the JVs, then we are fully consolidating those JVs into our P&L and balance sheet. And then you have the NCI, the 40%, that's going to come out at the bottom.

You have the 2 anonymous text questions read. Who will contribute to the 2 properties under development, Aldar or Mubadala? And who will pay for the development of the logistics part? And what would the development cost and time line be?

Who will contribute, okay. So Masdar, the AED 3 billion that we mentioned as they're currently operational side of the asset portfolio. We haven't included the value for those 2 properties. As soon as we have information about those, then those assets will be contributed to the JV with the same split that we have today, which is the 60-40. So Masdar is contributing those assets. And then in terms of who's developing the logistics JV, it is both partners. So this is going to be funded 60-40 between Aldar and Mubadala. The development cost and time line, I think, is a bit early today. The estimates that we have put on this is that this can generate at least AED 5 billion of gross development value. It's a very strategic location. It sits on very important connection points and gross proximity to the airport. Now the nice thing about logistics is obviously the development time lines are typically shorter than what you see on what we develop on resi, commercial and retail, which generally take 3 to 4 years. But again, we need to come up with a full plan in terms of how we're going to develop this plot and what does it include, which would be mainly focused around warehousing. But we'll come back to you guys in due course.

Steve Bramley of HSBC asks 2 questions. First one, can you outline the terms of the management agreement for the JVs? Is it a percentage of AUM? And if so, what is the percentage? Also, is there a performance fee element? And the second question reads, of the AED 13 billion of GAV for the strategic island JV, how much of the AED 13 billion is nonyielding infrastructure cost?

On the recurring income side, we have asset management fees that are in line with markets. We'll disclose those at the right time. And then -- sorry, what was the second question?

Of the AED 13 billion of GAV for the strategic island JV, how much of the AED 13 billion is non-yielding infrastructure cost?

AED 13 billion is the sales potential of those islands. And you should model a gross margin that is typically, again, 30% to 35% gross profit margin. But you should also consider that we are making development and sales management fees on top. So that's going to be cherry on the top.

Jonathan Milan from Waha Capital asks, what is the rationale for only adding Galleria Luxury and excluding the extension which is huge and has high occupancy? And the second question reads, doesn't the GDV of AED 13 billion for the two islands sound extremely low? A 4 million square meter land bank in such locations can presumably generate multiple times that.

The extension is not fully owned by Mubadala, so that is something separate. The GDV sound extremely low. Well, you have one island which is little Yas, which is probably 70% to 80% of the value. And then you have little Saadiyat which is the remaining. On little Saadiyat, I think we have around 90 to 100 villas planned. And then on little Yas, we probably have 400 to 500 villas planned with a luxury offering there. Now that's the numbers today. We still are very early stages. Whether it's conservative or not, view that you are taking. But we'll come back to all of you in due course once we finalize the brief on both those items.

Nikita from Emirates NBD asked, are you planning to raise debt to acquire commercial and residential assets? Where will the JV sit, at AIP or parent company level?

Well, our debt raising strategy is again always opportunistic given the condition of the market. But at the same time, we have extensive liquidity sitting at both the group and AIP level, where we have committed 5-years facilities with capacity of more than AED 9 billion that can help us fund those acquisitions.

An anonymous question asks, why has Aldar and Mubadala not chosen to transfer the assets to Aldar company and issue Aldar shares to Mubadala?

So why didn't Aldar issue share to Mubadala? Because we think our shares are worth more. Share is a very precious asset. When the share price is right, then we will issue shares.

[indiscernible] from Hassana Investment Company asks, can you provide details on cash outflow from development JVs?

Development JVs are basically mainly funded through presales. And the guidance that we have typically given to the market, is if you have AED 10 billion of GDV, then you should expect that the equity requirement or the capital required to fund that development is somewhere around 10% to 20% on the back of the very strong payment plans that we have been able to achieve to date.

[Operator Instructions] An anonymous question asks, how would Aldar's leverage change as a result of the JVs? And should we expect it to increase further in the next 2 years as developments progress?

No change. We are very much committed to our debt policy, which is no more than 40% on investment and no more than 25% on the development front.

We have a follow-up from Taher at JPMorgan.

It's Taher again. Maybe just the first one is more of an ask. Clearly, you guys have been busy, right, keeping everyone busy also with M&A, and you have your own pipeline and now there's a JV with Mubadala which is quite sizable. I think it would really be helpful if we maybe get an update in terms of what kind of, I don't know, EBITDA targets, especially on the recurring portfolio because there is a lot of action happening there across different segments. So maybe just if you can share some kind of a medium-term guidance, maybe not only specifically to this JV in terms of what kind of incremental EBITDA, but in general, just what would be an EBITDA capacity or a base 2, 3 years down the line once a lot of these projects come on stream. That would really, I think, help investors and analysts. So that's just an ask for you maybe to keep in mind. My question is, again -- my follow-up question, Faisal, is on Aldar recurring portfolio. Because Apollo came in back in '22, if I remember correctly. And now there's a JV with Mubadala. So I just want to get your thoughts, what is the long-term game for the recurring portfolio? Just continue to find maybe more partners to do business with? Or at one point, you'll start, I don't know, maybe consolidating your stake, buying out the JVs or thinking about unlocking value. I just want to understand, this portfolio has been growing quite extensively, right, over the last couple of years. So how should we think about the medium-term capital plan for this portfolio especially, I think, within the holding, right, within Aldar because that will also reflect on Aldar.

So just on the first point, Taher, we remain very, very much committed to the guidance that we have given for the Aldar Investment vertical from an adjusted EBITDA basis, which I think was AED 2.5 billion to AED 2.6 billion, if my memory serves me correct. And then -- this is this year and excluding any acquisitions. Now those acquisitions are targeted to close before the end of the year. So therefore, I would model that those acquisitions would be factored in next year's numbers. The back of the envelope calculations that you did, I did see your research notes, are probably in the right direction. If you want, we can have a follow-up with the team just to confirm. But the 7% yield and the taking out of minorities, is absolutely something that makes sense. So on the Masdar assets, I think you're thinking about it correctly and taking out the 40% minority. On the retail, like you said, it's a bit difficult to give a guidance on the numbers. So I would assume for the time being that there's no addition for now, even though there will be. And then on Al Falah, Al Falah is going to take a little bit of time, obviously, because that's a development asset. And then on Saadiyat, little Yas and little Saadiyat, that's going to play out like any of our other developments where we're probably going to start launching it next year, and then it takes from 6 to 9 months after we launched for it to start contributing to the bottom line. And then sorry, the team corrected me on the guidance. The guidance for Aldar Investments is AED 2.3 billion to AED 2.5 billion, and we're very confident that we're going to be hitting the high end of that range. And then any acquisitions between now and the year-end is just cherry on the top. Sorry, the second question, Taher, if you remind me, did I answer it or not?

The longer term because Apollo is a shareholder and AIP, and now there's a JV with Mubadala. And you already -- I mean, you have also your existing CapEx plan. But what is the medium-term plan for Aldar, you want to buy out the JVs or get another minority shareholders and a much bigger ecosystem or unlock value? I mean it's getting bigger and bigger, right? With more growth with more diversification, CapEx and so on. So maybe just help us understand where do you see Aldar Investments or maybe the recurring portfolio down the road?

It's difficult to give you like 1 answer. I think what we are focused on is how can we continue growing and how can we continue attracting strategic capital that further reinforces that this is a platform that is institutional, very good quality that by a strong management team that gives us credibility. And in terms of the JV structure, now Apollo sits at the top at the AIP level. The retail is sitting at the bottom as one aspect of the retail segment. Now with Mubadala, there are mechanisms obviously built in for the future for us to eventually fully consolidate our positions in those assets. Mubadala fairly believes that there are value in those assets. And hence, fairly wants to participate in that upside because they trust that we can unlock that value. So the plan is, eventually there will be some sort of consolidation happening.

[Operator Instructions]. We have a question from Harsh Mehta from Goldman Sachs.

Congratulations on the transaction. I have 2 specific questions. So the first one is, in the past, whenever you acquired assets from Mubadala or government, these assets have generally been underutilized. And you've come in, you've improved occupancy, that's driven increase in rentals. And that's the kind of yield compression that we see on those assets, which creates value for Aldar. Here, most of these assets on the recurring revenue side are pretty well occupied, and that, in my opinion, probably drives limited room for increasing rents, or correct me if I'm wrong. And so besides these assets being good and, yes, besides the fact that you mentioned there are certain synergies on the cost side, how do we see incremental growth from these assets or from these JVs? And secondly, I can understand that on the logistics side and on the development side, yes, there are new assets to be created, and that will add more value, both in terms of earnings growth and overall value of the business. But could you please provide us a time frame in terms of how are you seeing the milestones and development on these 2 assets on the logistics and development side in terms of contribution to your earnings?

So I would disagree with the point that the upside is limited. Like even on the Masdar portfolio, where portfolio is pretty -- trading at a high occupancy. Number one, you have built in rent escalations. Number three, you have award over 3 years. And as those leases roll over, then we can capitalize on much higher rents. And then you have the development assets, which should also have a higher return as they come in. And then even on the retail side, even though we're not deploying capital. But again, the Aldar machine, once it comes in through our platform as the leases roll over, we would be able to capitalize, hopefully, on significant value. And then we're going to get our hands dirty and see where are opportunities where we can invest CapEx and earn a very good double-digit return on that CapEx, which is typically what allows us to grow our NOIs at double digits. And then on the time line, Harsh, I think again, it's still very early stages. On the logistics, please give us time to close those deals and come back to you, guys, with exactly what the strategy is going to be around logistics. I think what you need to be focused on is we've been saying in the past that we want to be a champion when it comes to logistics, and this is one piece of the puzzle. We wanted to do it at scale because we were doing it with bolt-on acquisitions previously. On the development front, that machine is roaring. And so I think the time lines there are -- we target launching this sometime towards next year. Maybe the second half, we'll have to get in and see how soon can we get those approvals, which should hopefully be in an expedited manner. And then it's your usual 3, 4 year development period from there.

So it is fair to assume that even on the recurring, let's say, retail or commercial side, you do have that optionality that as you come in and use your expertise in terms of churning the tenants and the renewals come in, there is room for upside on the rentals as well despite these assets currently at pretty much kind of optimum level on the occupancy?

Yes, that's correct. Absolutely. That's what I said.

We have a text question from Jonathan Milan at Waha Capital. What is the NOI of Galleria Luxury? And could you add 1 day later to the extension? And another question they've written, could you buy out the other shareholders?

NOI yield, like I said, is north of 7%. Let's enjoy the moment today and worry about tomorrow later.

An anonymous text question asks, doesn't Aldar owned land assets already for waterfront luxury developments? For [indiscernible] how do new plots differ from what is owned? Similarly, could you not use existing land for the logistics park?

Yes, but I think there's not enough waterfront land. If we can capitalize on that, then why not? And we're making -- we're confident we can activate it very quickly. So we're not land banking. So we're going to take it and immediately activate it. On the land for logistics. So [indiscernible] is actually something we are considering for the future. But you have to remember that this is a much more strategically located land today given the proximity to the airport here in Abu Dhabi.

[Operator Instructions] We have no further questions, so I'll hand the call back to the Group CFO for any concluding remarks.

Thank you, everybody, for all the support and patience with us, and we look forward to updating you on those deals as we progress towards closing them before the end of the year.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.