Aldar Properties PJSC (ALDAR) Earnings Call Transcript & Summary

Hello, everybody, and welcome to the Aldar Properties Quarter 2 2021 Earnings Call. My name is Sam, and I will be coordinating your call today. [Operator Instructions] I'll now hand you over to your host, Mohamad Haidar from Arqaam Capital to begin. Mohamad, please go ahead..

Hello, everyone, and welcome to the Aldar Properties Second Quarter and First Half of 2021 Earnings Call. This is Mohamad Haidar from Arqaam Research. And as usual, we are joined today by Mr. Greg Fewer from Aldar Properties. He is the Group Chief Financial and Sustainability Officer. Over to you, Greg.

Thank you, Mohamad, and good afternoon, everybody, and welcome to our Q2 2021 results call. As Mohamad said, I'm Greg Fewer, the Chief -- the Group Chief Financial and Sustainability Officer. Thank you, everyone, for joining. Thank you, everyone, for joining on the relative brief exposure to our numbers. I think with the national holiday tomorrow, we decided having just walked out of our Board meeting to approve these numbers to have this call now. So I thank you all for, I guess, tolerating just receiving the numbers, and I appreciate you haven't had a lot of time to go through them, but we thought it was better to have this call today before the holiday, then after the long weekend sort of Sunday, Monday next week, sort of the -- we thought this is the best of a couple of bad options. But as ever, our Investor Relations team is available for any follow-up questions with you. Samar Khan, our Head of Investor Relations, is very accessible and once you've had a chance to look at the numbers, please do reach out to her with any other follow-up on this transcript or any other elaborations. So overall, we're very pleased to be reporting another very strong quarter. We're witnessing a meaningful uplift in activity this year, benefiting from improved consumer and business confidence in Abu Dhabi. This is once again a testament to the UAE's effective response to the global pandemic and rolling out a world-leading vaccination program whilst also implementing strong federal policies to encourage investment and private sector development. The supportive macro and policy backdrop is enabling a smooth and sustainable recovery, which is positively impacting a range of our indicators from increasing footfall and sales at retail properties, increased school enrollments to robust demand for our residential developments. Q2 group revenue increased 9% year-on-year to AED 2.19 billion. During the quarter, we registered AED 2.35 billion in development sales, matching a previous record for our quarter. The Project Management Services segment is ramping up and recorded a significant increase in fee income. Meanwhile, our investment properties continue to generate steady income with improvements across our various segments. Q2 gross profit grew 15% year-on-year to AED 824 million, and net profit increased 8% to AED 521 million. I would now like to dive a little deeper into the [indiscernible] Aldar Developments and Aldar Investments, respectively. Revenue for the Aldar Development business increased 7% to AED 1.35 billion and gross profit rose 10% to AED 444 million, driven by robust development revenue. This is generated by new launches and a steady pace of sales of existing inventory as well as a higher contribution from the fee-based projects management business. We recorded our highest ever quarterly sales of AED 2.35 billion in the second quarter of 2021, bringing the total for the first 6 months of 2021 to AED 3.4 billion. All our new development launches were rapidly sold out, and that momentum has extended into the third quarter with recent sellouts at Al Gurm Waterfront plot and our Saadiyat Reserve Villa development. We are seeking -- we're seeing positive trends and pickup in activity in the Abu Dhabi real estate market and are confident in our ability to successfully bring new projects to the market in the coming months. Expatriate homeowners and foreign investors very pleasantly are representing more than 42% of the buyers across our development business. We also attracted strong demand from first-time homebuyers and return buyers who have shown appetite for high-quality, well-designed communities. The strong sales of new developments in the period resulted in a 28% quarter-on-quarter increase in revenue backlog to 2.2 -- sorry, to AED 4.25 billion. Cash collections were 36% -- up 36% year-on-year to AED 1.06 billion and was driven by successfully collected handovers at Mamsha, Yas Acres, West Yas, Water's Edge and Nareel. Meanwhile, the project management services business unit is generating a consistent and increasing meaningful stream of revenue for our business, enhancing revenue visibility and providing healthy cash flow. Q2 revenue for this project management service business unit increased 58% year-on-year to AED 367 million, and gross profit jumped 192% to AED 108 million for the quarter. Turning to Aldar Investments, our asset management platform. This has shown considerable resilience over the last year and continues to do so through the second quarter. In the second quarter, Aldar Investment revenue was 15% higher year-on-year at AED 874 million, with net operating income for the businesses increasing 23% to AED 375 million. investment properties portfolio produced a 5% year-on-year increase in NOI to AED 308 million. Within that, the residential segment recorded just under 0.5% growth in NOI driven by higher income from new leases, occupancy increased to 89% at the end of the second quarter from 88% a year earlier. Meanwhile, retail saw an 18% increase in NOI, mainly due to higher footfall in sales, also reflecting the Q2 period when COVID hit last year, reflecting though improving consumer sentiment and purchasing power. Occupancy held firm at 86% and is expected to be supported by good progress made on the Yas Mall redevelopment plan. I'd like to remind you that in the first quarter, we announced AED 500 million redevelopment program at Yas Mall, which will be delivered in phases over the next 12 months. The project will repurpose about 40% of the gross leasable area to create high-impact, experiential retail and F&B spaces as well as adding a total of 15,000 square meters of office space. Turning to the commercial portfolio. NOI declined 0.5% year-on-year, mainly due to lease maturities within our operating Village segment. However, the underlying office occupancy held firm at 90%, supported by long-term committed lease contracts from government-related entities and corporate clients. The hospitality and leisure business is recovering with a 79% improvement in NOI supported by an increase in third-party asset management fees and prudent cost control measures across the hotel units. Meanwhile, Aldar Education reported a 208% increase year-on-year increase in net operating income to AED 49 million. This growth was driven by a 16% increase in student numbers over the last academic year and enhanced operational efficiencies. Provis, which has increased scale materially through the acquisition of Asteco produced a significant increase in NOI to AED 17 million, driven by the completion of the Asteco transaction and some contribution in this quarterly earnings along with growth across several of the service lines. At the end of a strong quarter, Aldar's balance sheet remains very strong with debt levels well within group policy ranges. Our liquidity position remains very healthy with AED 4.5 billion of unrestricted cash and a further AED 4.5 billion of long-term undrawn committed bank lines. And benefiting from this strong liquidity position, we are actively seeking attractive opportunities presented to us at this time in the market. We will continue to launch new developments in premier locations during the remainder of the year. And at this juncture, we'd like to revise our 2021 property sales guidance to over AED 5 billion. We also expect to pursue further asset growth and diversification of our investment property portfolio with an active deal pipeline heading into the second half of 2021 and looking to deploy the surplus capital that we're building. From a financing perspective, during the quarter, we signed a new 5-year AED 300 million sustainability linked loan with HSBC Bank. This represents a real statement of intent from Aldar on integrating ESG into all the various functions within Aldar and contributing to positioning Aldar as the highest ESG-rated real estate company -- listed real estate company in the UAE. We very much welcome the opportunity to link our financings and our treasury operations to metrics and KPIs along our sustainability goals. Amongst other initiatives in the second quarter, we also completed a business level climate risk assessment following the TCF guidelines, and we joined the United Nations Global Compact, world's largest corporate sustainability initiative. Sustainability of Aldar has also become very real for our employees with sustainability integrated within the company's competency and performance management frameworks, along with numerous other policy improvements that we're making contributing to are improving rankings along the ESG metrics. So overall, in conclusion, very strong second quarter results reflecting significant uplift in activity across Aldar's diverse interest over the last quarter. This has been a very busy period for us, and we expect to continue this accelerated pace of growth over the second half of the year. And with that, I'm very happy to turn things back to the operator and open the floor up to some questions.

[Operator Instructions] We currently have no questions. [Operator Instructions] We have a couple of questions now. First question comes from Taher from JPMorgan.

Congratulations again on a solid set of numbers. A couple of questions, if I may. Maybe just first on the development property sales. I mean, the momentum has been extremely strong. Can you just maybe give us some more color on the nature of the buyers between residents, nonresidents, nationals, expats, so that would be helpful. And I think the second question is on the development of the fee-based projects. We are starting to see these big government projects that you signed filtering through the P&L. So maybe if you can just give us some guidance on the run rate on that project as the other Al Falah and these wind down. So this is, I think, my -- the first part of the question. And I think the second part, if you can just get some -- maybe more clarity on what's happening within the investment portfolio, specifically within the retail portfolio, that would be helpful in terms of trends. And how should we think about this active deal pipeline that you mentioned coming through into the second half. If you can just give us some clarity on sector segments, that would be helpful.

Sure. Okay. So just first question, Taher, on the development sales. So we included a statistic in our press release just around -- just to emphasize the point that we're seeing more interest now coming from a broader group of people. I mean the local Emirati investor has always been the anchor of our development franchise and they continue to be an important, the most important sort of constituency. But we're seeing a broadening and a deepening of the expatriate and the foreign buyers into our projects. And so we're seeing that, in particular the very expat friendly jurisdiction like Yas and Saadiyat and that's where our launches have really focused in the last couple of quarters. So Noya, Saadiyat Prime for expatriate homeownership. Really taking advantage of this thematic, this investment team playing out here, which is Abu Dhabi become more of a home for its long-term expatriates. Expatriates actually becoming -- converting from rental into homeownership and expatriates investing here as they start to get 5-year visas, 10-year visas, creating more permanent sticky residency here. So -- and they're showing up in our numbers. We're seeing a lot of young people. I mean the largest age group is 31 to 45 in terms of overall buyer profile and increasing in owner-occupied. So those numbers really are trending in the right direction and underpinning sort of the broadening and the confidence that we're having in the in our sales guidance is that, as I mentioned, we've increased now. Your second question was on the project side. And so yes, so we had just over AED 100 million, AED 108 million in profit from that division. It's still ramping up. I mean, what we're seeing is that the big mega projects that have come on from the ADQ transaction, particularly Riyadh City, Baniyas, these are still in their relative infancy, the early age of the S curve of the development. So with 108 profit for the quarter, on the early side of development for those big projects, we see further growth quarter-on-quarter coming from those big projects into the future. So we see that expanding. On investments, so you asked for a particular update on retail. Our retail performance going forward is really going to be driven by Yas Mall. It's a good -- as I mentioned on the last call, it's a good time to be having plans for the last 12 months, a redevelopment for that mall and to be executing it now sort of during the COVID and before tourism opens up here, it's actually a very good time to be doing that. And so we still have leasing to complete at Yas Mall. It's still in the mid-80s in terms of occupancy. We have line of sight to get into the more traditional low 90s where we expect to be within the next sort of 3 to 6 months as we execute that investment plan. So you're going to start to see NOI growth pick up across Yas Mall as that plan plays out. That's probably the most important trend there. We actually had a good quarter as well from a community retail perspective. So again, the theme that we saw, the very affluent and the local resident community here staying in Abu Dhabi more to -- for some of their immediate and discretionary spending, we're seeing that play out, and the stickiness of the sales at Yas Mall and the performance across our community retail malls. And then finally, you asked about the pipeline of acquisitions. So we've got a fair bit of cash piling up, and this has been a trend you've seen from Aldar over the last the last decade that I've been here is that we sort of pile up cash over time. We position ourselves for acquisitions when they come up. Generally, they come up infrequently in our market. But when they do come up, you need to be you need to be liquid. You need to be ready to take advantage of them and we're certainly doing that. I mean, the most obvious example is we've got a bid out right now for an expansion to the Egyptian market, which we're extremely excited about. There'll be more to play out on that. That's a very public transaction. We've got a mandatory bid to -- we've had a couple of extensions on now, and you'll hear more from us in the coming days about that as we work with the regulator and with that transaction. But it's a statement of intent with us. We've got cash. We've got appetite to grow certainly into Egypt and domestically within the UAE across our investment portfolio -- across all the segments, we're seeing very interesting opportunities in education and with some of the other big property owners in the UAE around consolidation and putting our cash to work. So I hope that I've talked too much. I hope that answered your 4 questions.

No, no, it's fine. I just -- maybe just catching it from the end, which takes me to my final question. Aldar Education, I mean, it's quite significant the growth that we have been seeing there, a number of students, enrollments. I think currently, you're sitting at 24,000. I mean, what is the end game for Aldar Education? I mean, this is more of maybe non-core from Aldar's perspective. But again, I mean, you're seeing some very healthy revenue, gross profit and margins. I mean, what should -- how should we think about Aldar Education over the next, I don't know, 12 to 18 months?

Look, I mean that's been one of our success stories for sure. I mean that is -- we have called that and it remains sort of, say, noncore, but highly valuable. And even just stepping back and we're calling the history of Aldar Education, sort of emanated and grew from our position as a developer, where schools were sort of blocked on a master development, and we had to build them as part of the communities, and we sort of built these one by one, started to manage them one-on-one, created excellent curriculum and focus -- the focus in the last 5 years has been about corporatizing it more and really flipping it from "excellence in education" into both "excellence and in education and profitability." And we've absolutely achieved all that. The real growth has come from -- again, going back to the themes in the market around the government of Abu Dhabi privatizing a lot and Aldar being a trusted partner is ramping up our fee business within Aldar Education. So we took over the management of ADNOC portfolio of schools. We've taken over a number of charter schools, and we see a healthy pipeline with a very active government in Abu Dhabi seeking private sector engagement in its schools further. So I think you could see more there. And like with any valuable noncore business, you always seek monetization opportunities in schools, is one of those areas where a lot of private capital and a lot of investors spend a lot of time on education, is a very investable sector. So as we continue to corporatize it, as we continue to improve its profit margins, as we continue to scale it, lots of opportunities present themselves then to the owner of a noncore, highly valuable business and the management team has every incentive to continue growing that and show good realization opportunities for us.

Our next question comes from Rakesh Tripathi from Franklin Templeton.

Thank you very much for the presentation and the call. I had just 1 question that was regarding the transfer of some of the residential assets that was supposed to happen to the Aldar Investments entity. So I suppose there were some units that were to be transferred from the bridges and then some units from Water's Edge. So where are we on that? Can you talk a little bit about what's the status end? When do you expect those trances to happen though that it transfers?

The bridges trends were actually took place in this quarter. So sort of embedded in the ebbs and flows in the balance sheet. There's a transfer from DWIP to investment properties of just under AED 0.5 billion to reflect the bridges. And Water's Edge is a project that's handing over literally as we speak right now. And those transfers will take place in the third and fourth quarters of this year.

Right. So these transfers happen via some exchange of cash? I mean, how is the parent compensated for these transfers?

It's a capital contribution from the parent into Aldar Investment properties.

Okay. So there's no cash outflow really at the Aldar Investment's entity really for this.

No, it's an equity capital contribution and then there's a leverage applied to us and then our leverage policy applies and a 37% leverage would be attached to those projects.

37% leverage here, okay.

[Operator Instructions] Our next question comes from Harsh from International Securities.

Two questions from my side. There is an increase in the commodity prices, construction costs over the last 6 to 12 months. I mean I just wanted to understand how do you see the higher costs impacting your margin, not for the current projects, but maybe for the future projects. And if you can also share such inflation component, how you are dealing with the contractors. My second question is if you can briefly discuss your Egypt strategy. I mean what role you intend to play. Obviously, it's a growing market. But again, there is a sharp contrast with respect to interest rate, mortgage penetration, demographics when we look compare Abu Dhabi and Egypt. These are my questions.