Aldar Properties PJSC (ALDAR) Earnings Call Transcript & Summary

Greetings, and welcome to the Aldar Properties Third Quarter 2022 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Greg Fewer, Chief Financial and Sustainability Officer. Thank you. You may begin.

Thank you, and good afternoon, everyone. Thank you for joining the call today, and we're going to be discussing Aldar's Q3 2022 financial results. As usual, I do look forward to taking your questions. I'll start with a few statements on the overall performance and turn the call over to the operator for Q&A. So we're very happy to be reporting an excellent set of numbers for the third quarter of 2022. Aldar's Q3 revenue rose 30% to AED 2.7 billion, while net profit increased 27% year-on-year to AED 601 million. This resulted in an outstanding year-to-date performance with a 28% rise in revenue to AED 8.1 billion and a 38% increase in net profit to AED 2.13 billion. The strong results across our areas of our business clearly demonstrates the success of our ongoing execution of Aldar's transformational growth strategy, which continues to deliver strong performance. The Aldar Development platform, which includes our Aldar Projects business is performing very well. Q3 EBITDA for the business increased 31% year-on-year to AED 1.26 billion on the back of continued strong sales. In fact, we've achieved the ninth consecutive quarter of record-breaking group sales with year-to-date sales standing at AED 9.3 billion, representing a 51% year-on-year rise from the same period last year. We've had a busy year so far in terms of development launches in the UAE. This enables us to achieve year-to-date UAE sales of AED 7.2 billion, surpassing the lower range of our full year guidance. This has been supported by strong local and international demand with international buyers now accounting for 38% of our UAE sales. Meanwhile, SODIC, our development business in Egypt, achieved AED 2 billion of sales this year to date and also contributed AED 360 million in revenue and AED 63 million in EBITDA for the third quarter. Our Development backlog on a group-wide basis now stands at AED 14.5 billion, which is up 150% from a year earlier. This is revenue that will be booked as developments progress and provide strong earnings visibility going forward as we deliver on these projects into the future. We've also witnessed the continued strengthening of Aldar Projects management services business, which we call Aldar Projects, with AED 31.6 billion of new projects awarded year-to-date across our construction management portfolio for infrastructure, community buildings, schools and national housing. Aldar Projects will continue to provide stable and recurring fee income and therefore, greater revenue visibility going forward and will be a significant engine of growth and stability for the group as we deliver on existing projects and take on new awarded projects. Our total CapEx backlog now stands at AED 62.4 billion, up 56% from the beginning of the year. AED 35 billion of this backlog relates to projects that are currently under construction and will be completed over the next 3 to 4 years. In addition, we have AED 28 billion of projects that are in the design stage that we expect to commence construction over the coming months. Meanwhile, the Aldar Investment platform is also seeing significant revenue growth due to new acquisitions and strong performance from retail, commercial and our hospitality segment. Revenue for the platform was up 34% year-on-year in Q3, with adjusted EBITDA rising 33% to AED 424 million. Adjusted EBITDA for the investment properties was 23% higher year-on-year at AED 342 million in the third quarter with occupancy across the portfolio, very strong, 91%. Residential adjusted EBITDA was up 7% year-on-year; retail up 12% and commercial increased by 46%, largely through the addition of the recently acquired ADGM, Abu Dhabi Global Markets, office towers. Our recently acquired logistics assets also made EBITDA contribution of AED 40 million over the quarter, and Aldar Education delivered EBITDA of AED 29 million, growing 14% year-on-year, with student numbers 25% higher at 33,000 students as the platform grows to include 28 owned and managed schools. Hospitality has also bounced back strongly with an adjusted EBITDA of AED 30 million in Q3 with occupancy at 70% during what is usually a relatively quiet quarter. We expect this growth to accelerate further as we enter a very busy season for events and tourism with expected boosts coming from the FIFA World Cup and the F1 Abu Dhabi Grand Prix. Our property management and facility management, Provis and Khidmah, respectively, are growing significantly. And during the quarter, we acquired Spark Security Services. The Principal Investments business that holds these assets achieved 60% year-on-year increase in EBITDA to AED 24 million in the third quarter. And as you're aware, Aldar has been pursuing an accelerated and transformational growth agenda over a year now with the aim of adding significant scale across our diverse businesses, not only our core development and investment property business but also project management, property, facility services, logistics and education. In this context, we have taken on a number of steps to accelerate our growth. Since this year, we have committed and deployed over AED 11 billion of capital to add to the scale and the diversification of both our businesses Aldar Development and Aldar Investments. Our largest acquisition, the AED 4.3 billion transaction for the ADGM office towers, was closed during the third quarter. We are already making very good progress in increasing recurring income from these prime assets. Asset class diversification remains a key element of our strategy and we made further additions to our hospitality portfolio Q3 with the additions of the Nurai Island Resort, Rixos Bab Al Bahr, the DoubleTree by Hilton and Ras Al Khaimah. And we've expanded so far to see our retail segment in addition with the acquisition of the Al Hamra Mall also in Ras Al Khaimah. To further diversify our investment properties portfolio, we expanded into logistics earlier this year with the addition of the Abu Dhabi Business Hub. We also added a school -- we also have schools here in Abu Dhabi -- to our Aldar Education portfolio. In addition to this, we further expanded our development land bank with the acquisition of prime land on Saadiyat Island. In addition to lands acquired in association with the assets we acquired at the Marjan Island in Ras Al Khaimah and in Nurai. We continue to carve and create a credible track record in closing transactions and deploying capital and showing a pattern of outcomes that reflect the effort that the management team is putting into creating a pipeline and on executing growth-oriented transactions. Looking ahead, we continue to have a AED 5 billion allocation of surplus capital that has been allocated to fund equity contributions towards acquisitions over the next 12 months to further drive scale and to further grow and enhance and diversify our business. On the capital raising front, the remaining components of our USD 1.4 billion Apollo investment were closed and fully drawn during the third quarter. These included the USD 500 million land joint venture and a USD 400 million equity investment that Apollo made into Aldar Investment Properties at 100% of net asset value. And as we've highlighted before, this transaction, overall, adds a significant strategic partner and a significant financial back that will continue to help scaling up our real estate platform and help drive further transformational acquisitions going forward. The investment by -- the investment into Aldar by Apollo is an initial but very credible and real indicative indication of the value on offer in UAE for institutional real estate investors. So turning to overall market conditions in general. It is clear that property markets globally are coming under some pressure due to slowing economic -- slowing economies and rising interest rates as a response to inflation. UAE is not and will not be totally immune to these global trends. However, there are very credible reasons to believe the country will continue to prove highly resilient and to be an outlier at this time in our global markets. Robust global hydrocarbon prices are allowing the country to press ahead with investment programs to implement the strategies to drive economic diversification and the overall transition into an inclusive, [ next-generation ] economy. Moreover, the government continues to invest heavily in the UAE as demonstrated by the comprehensive program of economic and, importantly, social reforms that have already been implemented and designed to bring more capital and people to make them at home in this country. This bodes very well for Aldar's diverse businesses as these reforms have led to an increasingly mature asset market, and we are seeing growing demand from international customers and international investors and significant interest from growing expatriate and UAE -- growing from our expatriate and UAE core base of customers in our offline markets. As we approach the end of the year, we remain focused on accelerating our growth further and building on the strong momentum showcased to date by driving value and growth in our existing portfolio through our strong asset management experience, as well as pursuing acquisitions that build scale and enhance our offering. And to reiterate, we still have a further AED 5 billion of surplus capital that has been allocated to fund equity contributions towards acquisitions over the next 12 months to help drive this scale. The focus for those will be in our home market here in Abu Dhabi, Saudi Arabia and Dubai and across segments, including development, education and logistics, including our core investment property portfolio. We expect the strong momentum in development sales to continue, and we're updating our guidance such that we think we'll achieve AED 12 billion to AED 13 billion of group development sales for the full year of 2022. This comprises AED 9 billion to AED 10 billion of sales from UAE and a further AED 2.5 billion from Egypt. Separately, we continue to expect Aldar Investments to deliver on an EBITDA for the year of AED 1.9 billion for 2022. In summary, we are delivering sustainable growth to create value for our shareholders in both the short and long term across our platform. And we have a proven ability to deploy capital accretively to add scale and to diversify our sector and geographic footprint, and we remain uniquely positioned to continue to execute on this transformational growth strategy and to enhance and grow our earnings capacity further in 2023 and beyond. So that concludes the comments. I'm very happy now to turn the call back over to the operator. We can take some questions. Thanks.

[Operator Instructions] Our first questions come from the line of Taher Safieddine with JPMorgan.

This is Taher from JPMorgan. Maybe couple of questions from my side. The first one is just on the Apollo deal. Can you just indicate what kind of valuation for the investment portfolio was finalized? If you can just throw some number and what's the implied stake, minority stake that these guys have taken in the business? That's my first question. And my second question is just on the recurring portfolio. You mentioned on the M&A deployment, the sectors. I don't know if I heard that correctly, but you focused on education and logistics. So I just want to check if that's correct? And the other part of the question is the strong trends we saw in the residential and retail portfolio on EBITDA and also on occupancy, if you can just throw some color there and maybe update us on the redevelopment of Yas Mall in terms of KPIs.

Okay. Thank you, Taher. So just on the first question, so the valuation that Apollo entered AIP at was book value with NAV. 100% of NAV, no discount or anything. It was 100% of NAV. That equates to about 11.1% of the issued share capital of AIP. There's a slight -- there's a 0.7% of the company that we're sort of holding in escrow pending the outcome of corporate tax. And so those disclosures are in the financial statements. We're confident that there will be a REIT tax regime. And if there is a REIT tax regime, then we'll be making that 0.75% back again. But the core valuation was based on the book NAV and a nontax environment of 11.1% at 100% of book value. In terms of the second question on the recurring assets in the focus areas. It really remains -- we see opportunities across all the main sectors. I mean the ones that we really -- we had a focus to fill were logistics because that was a sector that was conspicuously absent from our portfolio, and it's a high growth, very important sector in our region. So we're very happy to have closed the Abu Dhabi Business Hub transaction earlier in the year. And we definitely see more opportunities in that space. But given the scale, again, of our -- and the diversity of our portfolio, it was nice that we can act on great opportunities when we see them wherever -- whichever sector they are in. Whether it's commercial office as we did with the ADGM towers, multifamily is an attractive asset class as always and the hospitality, which we acted on a lot during the year, really responding to good niches like we have done in Ras Al Khaimah or with Nurai Island, which is really a unique, one-of-a-kind asset and at very good entry prices. Education remains very interesting. We're really enjoying the growth that we're seeing in Aldar Education. We think there's a lot more to run in terms of expanding that platform into -- within Abu Dhabi as the government continues to privatize and use the -- and activate the private sector and its charter school program, which has been the main source of growth, as well as Egypt. Your third question was on some of the sector performance. So yes, very strong performance in resi from an occupancy perspective and retail, again, from an occupancy perspective. So in retail, we saw additions coming from Hamra Mall, that drove our NOI up. But occupancy at Yas Mall has been exceptional really because -- if anyone's in the mall, all the hoardings are sort of 99% down from the redevelopment program that we executed over the last 12 months, and we're enjoying 97% occupancy within the mall right now. So again, the whole success of our redevelopment plan there has been shining through the success we've had leasing -- success, you have leasing in our market is really the brand and the retail franchise or who operates here, revalidating Yas Mall as the #1 mall in Abu Dhabi. So that was really doubled down. And as the COVID restrictions continue to loosen, we see a lot more upside further to achieve in what we've done there.

[Operator Instructions] Our next questions come from the line of Mohamad Haidar with Arqaam Capital.

This is Mohamad Haidar from Arqaam Capital. A follow-up on the Apollo deal regarding the $400 million investment in AIP. So what's exactly included in Aldar Investment properties? Is it the investment properties, hotels, education and projects, all these combined? That's one. Two, we saw that the new acquisitions contributed roughly AED 100 million in Q3. How much do you think this will grow in Q4? So it's going to more or less double in Q4. So we should expect roughly AED 200 million contribution to NOI in Q4? That's it from my side.

Okay. So Mohamad, good to hear from you again. So on the first question on the AIP perimeter, it excludes education and hospitality and the service businesses and includes what you'd consider to be core investment properties, like the commercial office buildings, the multifamily rental assets and the malls. So that's sort of what's in the perimeter. So they have not bought a minority stake in education. They have not thought minority stake in the service businesses. They have not bought a minority stake in the hotels.

Very clear.

Second question was on sort of the contribution from the acquisitions we've announced for the fourth quarter. So we did about AED 100 million in the third quarter. It won't double. I mean the biggest one was the acquisition from ADGM which closed in July. So we're just doing some math in our heads right now, and I think you can expect some modest gains from that, but not doubling, like sort of in the 30% to 50% range increase of what we saw in Q3. The only other comment I'd add to that is that we've acquired a lot of hotels. So whether it's the Rixos or DoubleTree or Nurai, they always do much better in the fourth quarter. So there's a seasonality overlay that you need to throw on that as well.

[Operator Instructions] Now we will move over to web questions. We do have a few questions in. Our first question is from Frances Ames. She said -- sorry -- what would have been year-over-year NOI growth for 9 months and Q3, excluding acquisitions?

Okay. So the acquisition contribution in the 9 months has been about AED 145 million or so. For the -- if you added everything up, including all the bids that we did, it's about AED 170 million. So then you would just adjust that from the year-on-year -- from the year-on-year growth that we've achieved. So like-for-like, this time last year, we did about AED 975 million. And those like -- this is NOI, not EBITDA, net NOI income. And the like-for-like on those same assets this time around has been about AED 1.1 billion.

The next question is, what is the annual level of depreciation for the hospitality business post acquisitions? What is the breakeven level of occupancy and ADR required to achieve full year net profit in hospitality and how many total rooms now in the consolidated hotels portfolio?

Okay. Well, so the -- so I'll just break that down a little bit here. So the ADR, the breakeven ADR, I don't think we're really running with one of those right now, to be honest. I mean, do you have the question that came up? Was it referring just to the acquired assets? What's nice about those is that they're all through the season profitable. So I think we're going to have to get back to this person on a concept of ADR. It's not a KPI that we're tracking right now. In terms of overall room keys, post acquisition, we're now at 4,200. Historically, we've been in the 3,000 range. But these are big hotels we've acquired in Ras Al Khaimah with Rixos and DoubleTree.

The next question is, what is the target annual ROI for the SODIC acquisition?

Well, so there's 2 ways to answer that. So there's -- we bought the SODIC platform to grow it. So we deployed our own capital. So we're directly and indirectly exposed to about 60% of that overall company. We deployed AED 1 billion. We've made about AED 200 million year-to-date in terms of the contribution that SODIC has made, which conveniently coincides with what many investors going into SODIC might look at it as a [ WAC ], the weighted average term of our money that you want to look at, which is around -- for us, it was in the high teens in terms of overall return on investment. Now the reason we're there is not -- so we're very happy, so they've accelerated their sales and development in excess of the base case that we had when we were going in. And so in 9 months, we've made almost a high teens net income return on our capital deployed. But the real play there is just going to be growth in the land banks that will be contributing into SODIC, and we see a doubling and tripling of overall sales levels in that entity going forward. But maybe to -- if the question was focusing on a target, our return on capital in Egypt, as I said, high teens in pound terms, and we expect to exceed it.

The next question is, what is the average rent per square foot in Yas Mall today?

So net rent across the malls with the -- on the back of the successful leasing program is about AED 1,800 per square meter. And that would be an average running across the big boxes and the small line shops where you might make sometimes half that on big box anchors. And often, you make double that for smaller F&B, let's say, kiosk locations.

[Operator Instructions] Now moving back to the phone lines. Our next questions come from the line of Mohamad Haidar with Arqaam Capital.

Greg, back to Apollo deal, the JV on the land. Is it 51% owned by Aldar and 49% by Apollo?

Correct, correct. So we set up a JV. That JV is owned 51% by Aldar. We control that JV. We consolidate that JV into our numbers and the JV involves the transfer of land into that entity and the sale of lands from out of that entity. And we are the primary and the only real off-taker for the land that come on the back of it or that are sold out of that entity.

And which land exactly was transferred?

It was a real mix. I think -- it's complicated when you look at this transaction, but I think the way we want investors to think about this is about this is non-dilutive equity. This is a very patient investor who came in with long-term capital, gave us $500 million, and we are providing that investor with a structured return on that investment. But we will control the lands at all times. We will develop the lands at any time, whether it's land that we put in. So to answer your question, we put in a mixture of lands all over our portfolio. But because of the very flexible nature of the structuring, if we want to develop any of the land in the JV, we just take it out and swap a new plot of land in. And over the 25-year -- the duration of this JV we've guaranteed the Apollo investor that we will be buying a baseline amount coming out so they have their structured baseline return. But the lands that go in are kind of irrelevant because we can swap them in and out at any time in an unfettered, unencumbered way.