Aldar Properties PJSC (ALDAR) Earnings Call Transcript & Summary

Greetings. Welcome to Aldar Properties' Fiscal Year Fourth Quarter 2022 Financial Results Conference Call. [Operator Instructions] At this time, I'll turn the conference over to Greg Fewer, Chief Financial and Sustainability Officer. Mr. Fewer, you may now begin the presentation.

Thank you, and good afternoon, good morning, everybody. Thank you for joining the call today to discuss Aldar's financial and operating performance for the fourth quarter and full year 2022. Just before I start, I would like to introduce 2 very important people. The first is Faisal Falaknaz, the new Group Chief Financial and Sustainability Officer for Aldar. Per the announcement we sent out several weeks back, I'll be moving on. Faisal will be taking over the position. Faisal has a day job right now. So he's in the room today to welcome and introduce himself to everybody, which we'll do at the end of our call, and I'll take us through the results. The second and more important person that we're joined today by our Group Chief, Talal Al Dhiyebi, who will start the call by making a few opening remarks, and we have allowed for about 45 minutes. So if time permitting, he'll be here to answer your calls if we get through our materials fast enough. So without further ado, I'll just pass over to Talal.

Good morning, good afternoon, everyone, and thank you for logging on to our full year '22 results. I want to start by thanking all of you for attending today and for the support that we've received from the shareholders over the years. It's been another incredible year for Aldar across a lot of our businesses. But most importantly is that we have continued to deliver our promise of growing transparently and all the plans that we have communicated in the past, and we'll continue to create value and reward our shareholders. From sales -- from a development perspective, which is a core part of our business, our discussion over the years is how we continue to monetize our land bank, understand customer needs and really benefit those sales channels much better than we have done in the past. Over 14 or 15 years, we were averaging just short of $1 billion of annual sales. 2021 saw a doubling of that previous average to just shy of $2 billion, AED 7 billion. I'm very pleased that in 2022, we doubled that number to AED 14 billion, of which AED 11 billion came from our core market in Abu Dhabi. So stopping and recognizing the increase in sales and the performance of the company, but understanding how the market is performing, but also the reform that we've seen across the UAE and in Abu Dhabi in the last 18 and 24 months, everything from the social reform to the legal reform, the company's law, the freehold ownership, the Golden Visa, the way our wise leadership dealt with the situation on the ground during COVID, both from a health perspective, but also from an economic perspective, we continue to benefit from and reap the benefit by seeing this increased performance. It's seeing the increased attractiveness of Abu Dhabi as a place where people want to come and work, live, visit, retire. So -- and that's clear in that AED 11 billion sales number. More importantly as well was our ability to penetrate international sales. So other than non-national, but resident sales, for the first time, we were able to attract quite a significant number of international sales to the tune of AED 1.7 billion, which on some projects, like Saadiyat Grove reached as high as 40% international buyers. So the museums, the theme parks, everything that used to be dream and a promise, people are starting to see that as a reality is now being converted on the ground. The bridge of the AED 11 billion to AED 14 billion came from Egypt, which is a core market that we announced in the past. Again, in our first year of operation, we've doubled more than double the sales performance out of SODIC to help reduce the impact of, obviously, the macroeconomic challenges that are there and an area that we're going to continue to enhance performance over the coming period. Our property development segment, which is very unique to have in a development business that's typically cyclical, where a lot of people will say that, yes, in 2021, we heard that this was a post-COVID sales period. We've seen increased performance in '22 and with these international sales. But what makes our development business even more resilient is the fact that we have this extremely unique and perpetual relationship with the government to deliver services on their behalf. And this is where we export our project management services to them, off-balance sheet are $150 million worth of net fees every year, which helps just improve the profile of our earnings within what typically is a more cyclical sector. Turning on the other side, in Aldar investments, our biggest -- it was our biggest year of deployment with $2 billion across pretty much all of our asset classes from retail to hospitality and very interesting things like entering a new market, which was [indiscernible]. And most notably, our biggest acquisition of 5 prime office towers, which have performed very well since acquisition and cemented us as the landlord of choice within that sector. We enjoy 90% occupancy across all of those key sectors. And then the core businesses that we're now focusing on, whether it's hotels or schools or our property and facility management businesses have all continued to prosper and grow in terms of contracts awarded, in terms of revenues, EBITDA and margins, which is quite a sustainable story looking at all of that together. Two last points before I turn back to Greg. One was post-full year, we took a very strategic move to enter into Dubai, which is probably one of the most lucrative and attractive real estate markets. We're very proud of the partnership that we announced with Dubai Holdings, 3 beautiful sites that are going to penetrate the Dubai market in an area that we see the most attractive from a customer sales perspective, being the single-family homes and low-rise, low-dense multifamily homes and over AED 20 billion of GDV that we hope to add with those 3 developments and very exciting times ahead on that and also the acquisition of another beautiful island in between Yas and Saadiyat that are continuing to prosper. So again, very clear, well-articulated strategy. And our last point, which Greg is going to allude to more, which I want you to focus on is all the enablers that we talked about from our people that are in the core of everything that we do and we continue to attract and have the most talented resource pool across any other business that's out there, which allows us to do more M&A deals than anybody else out there in the region, allowed us to transform and extract more value out of our current assets, Yas Malls that we announced in the past. Our sustainability, which is another core area, and Greg has been instrumental in launching our Net Zero Carbon Plan, which, as you'll see, is more than just the document that we're hanging on a wall. But it's a clear and one of the most detailed plans than any real estate player announces out there, something that we take core to everything that we do from a procurement and a supply chain perspective, to ways to our ongoing assets and every part of the business that we do. So those key enablers continue to feed and allow us to deliver these exceptional results, and we continue to reward our shareholders accordingly. So I'm going to cut it there, let Greg walk you in more detail into the numbers. And then we'll share with you our more ambitious plans and some of your questions about where we expect to grow next. Thank you very much. Greg?

Thank you, Talal. And we'll move to the presentation starting on Slide 4. So in Europe, exceptional results. Aldar delivered excellent financial performance in 2022, driven by record development, sales and higher income across our expanded investment property portfolio. Full year revenues increased 31% to AED 11 billion with EBITDA up 32% and net profit rising 35% to AED 3 billion. Aldar development, which includes our project management business delivered another record performance in 2022. Group sales doubled to AED 14.4 billion, and revenue increased 38% to AED 7 billion in 2022. This was driven by strong local and international demand for existing inventory and new property launches in the UAE as well as a robust sales effort from our Egyptian subsidiary, SODIC. Indeed the significance of the SODIC platform is growing with the business contributing AED 3.5 billion in development sales in 2022 at AED 1.4 billion in overall group revenues. And very important to highlight here is our group revenue backlog of nearly AED 18 billion. This provides importance and a strong visibility on our future revenue over the next 2 or 3 years, as shown on the S-curve chart at the bottom right-hand side of this slide. This is very important because this illustrates that our revenues will double in the areas in developments that we -- relative to what we've currently produced in the past. It's very important that you take away from this call today, the scale at which we are growing our development and the visibility with which the future earnings will come. Moving on to project management on Slide 6. During the year, our project management business was awarded AED 36 billion of new projects, bringing the backlog for Aldar projects total AED 65 billion. On Slide 7, you'll see that the Aldar Investment segment continues to be another important engine of growth for us. We've seen continued market recovery driving higher occupancy rates across our diversified portfolio, particularly in the retail and hospitality segments. Adjusted EBITDA for Aldar investment was up 34% year-on-year to AED 1.6 billion. And like-for-like occupancy across the investment property portfolio remains stable at 93% at the end of the year. Our retail portfolio has benefited from significantly increased footfall and leasing activity. In particular, at Yas Mall, the redevelopment program has proven an overwhelming success with occupancy now at 98%. Our portfolio has also grown with the addition of a Hamra Mall in Ras Al Khaimah. Hospitality has bounced back strongly supported by a return of travel and tourism and a busy events calendar. Full year adjusted EBITDA nearly tripled, AED 202 million. Occupancy was strong at 72% in 2022, and we expect further improvement this year. Value-accretive additions to our portfolio, such as our investments in Ras Al Khaimah, the Abu Dhabi Business Hub for logistics and the ADGM Office Tower complex at the Maryah Island have contributed to higher income in this business. We're particularly pleased with the leasing activity at Abu Dhabi Global Market towers, where occupancy has increased to almost 90% from 75% at the time of our acquisition, beating our own underwriting case. Our education business also grew significantly during the year, with enrollments increasing 25% to 33,000 students across our network of owned and managed schools. Looking at our balance sheet on Slide 8, we remain in a very strong financial position supported by a prudent and disciplined approach to capital management and allocation. We have a strong liquidity position with AED 6.5 billion of free cash and AED 4 billion of committed undrawn credit facilities, putting us in a strong position to pursue our further accelerated growth agenda. Aldar refinanced AED 1.5 billion of bank facilities due to mature in 2023 and entered AED 1.5 billion of new facilities. The combined effect has extended our weighted average debt duration for the group to 4.9 years with no significant maturities up until 2025. Turning to ESG on Slide 9, where we had a very strong year. Most significantly, Aldar launched in January a detailed Net Zero roadmap, which is one of the most comprehensive plans published to decarbonize the business of our scale and of our type in our region. We have committed to achieving Net Zero across Scopes 1, 2 and 3 by 2050. And we're already working to transform our approach to design and construct, manage our supply chains and manage our owned assets accordingly. In addition, we have increased our exposure to global technology funds with first-time investment in the Fifth Wall's climate tech fund in addition to investments into modern ventures funds and others. This gives us access to a unique global network of sustainability, general investment partners as well as startups while unlocking opportunities to incorporate these exciting opportunities into our own region and portfolio. Reflecting our progress across ESG, Aldar has received higher ESG scores over the last year from MSCI, Sustainalytics, Dow Jones who are the key sustainability rating agencies. On the back of our full year results and in line with our consistent and transparent dividend policy, the Board has recommended a cash dividend of AED 0.16 per share for the 2022 financial year. But always we demonstrate the right balance between preservation of capital to invest in future growth and rewarding our shareholders. And Aldar has a solid track record of doing both, having delivered 10% CAGR growth across dividends over the past decade while deploying and committing over AED 11.5 billion in growth capital over 2022 with a guidance to do more in 2023. In terms of guidance, we remain heavily committed to driving further growth as evidenced by our strong transaction activity so far this year, including entering into the Dubai market through our JV with Dubai Holdings as well as expanding our local land bank with the acquisition of Al Fahid Island. In terms of capital deployment, we again, this year, plan to invest a further AED 5 billion in equity capital, where we already have a very strong pipeline of value-accretive opportunities. With our current leverage policies in place, this equates to about AED 6 between or AED 7 billion to AED 8 billion of total firepower for investment in property style assets. We expect between AED 15 billion and AED 17 billion in group sales in 2023, and we expect to produce a revenue backlog of between AED 21 billion and AED 23 billion by the end of the year. On our project management business, we are targeting gross profit of between AED 500 million to AED 550 million over 2023. And Aldar Investment is seeing strong occupancy and is also integrating new assets into its portfolio, and as such, we are targeting between AED 2 billion and AED 2.1 billion of adjusted EBITDA for the business in 2023. So with that, I would like to pass the call back to the operator. We'll take some calls while we have Talal in the room, and we'll make sure we have some time to introduce you properly to Faisal at the end of the call.

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

Thank you very much for the call, and congrats on a strong set of numbers. This is Taher from JPMorgan. Just maybe 2 questions. The first one is on the equity deployment. I mean, 2022 was quite an active year in terms of capital deployment. But I mean, clearly, you've spent a lot on the commercial side with the big acquisitions, the big tickets. If I may, within this AED 5 billion equity deployment or Greg, you mentioned AED 7 billion in total firepower, how should we think about sector allocation? Is it going to be in new sectors, or we're still going to be looking at the existing platform that you have today and the recurring portfolio? That's the first part of my question. And maybe just on that, adjusted EBITDA guidance indicates around 25% growth year-over-year, if I'm not mistaken. How much of that is new acquisitions and how much is like-for-like? And the reason I'm asking is because you guys have been very busy in 2022. There are lots of really deals to put through in our models and numbers. So maybe if you can just give us some more color on that. And then maybe I'll go to my second question, if I may.

On the first one, Taher, thank you, it's Talal. So on the AED 5 billion, obviously, it depends on certain opportunities, and we have a big pipeline that we're looking at. It was quite diversified in 2021, as you said, and we got some great assets across predominantly the hospitality side, which opened up a new geography and the office side. We are open to look at different opportunities as they come. So would we do another office deal if the right opportunity came? Yes, we'll definitely look into it. But also what's very important is from an AIP perspective is to maintain that diversity than we had in the past. We were underinvested in the past in commercial. This has just brought us in line by having almost an equal split right now between retail, resi and commercial. That will change from year-to-year with acquisition and payment. We don't think that we're overexposed in any one of those sectors. And when you start to break it down, let me use offices as an example, when you talk about Grade B office spaces or business parks, we still see opportunities over there. Our main focus, however, is in a number of new sectors that we've talked about in the past. And some of that is in nonconventional real estate. What we talked about logistics. So we entered our first deal with the creation of Aldar Logistics when we purchased Abu Dhabi Business Hub. We're still very active pursuers in this field, and we're looking for many more opportunities. Other nonconventional sectors are education. If there's PROPCO/OPCO type structures that are there, life sciences, things like labs, healthcare or other areas or data centers on the real estate side more than on the OPCO side, are key sectors that we're going to continue to look into. We also do see opportunities in specific segments within residential and retail. Some of those will be through acquisitions. Some of those will also be through internal de-hold where our development business will build specifically for the [ REIT ]. Some of that will be in the affordable housing and on the retail side will be in the community retail, where we don't see ourselves building any more regional or super regional malls, but we see a lot of opportunities, particularly within our new developments on a lot of community retail. And so we want to remain diversified. It will change from year-to-year. With the split of where we are at the moment, we like except for obviously the introduction of these, what we are calling nonconventional real estate. I hope I answer that question, and then Greg will walk you through the second one.

And, Taher, so just on the adjusted EBITDA guide. So first observation is we used to guide NOI, we're now guiding on adjusted EBITDA, which includes all the costs of our business. So in that platform that produced $1.6 billion of adjusted EBITDA, about $100 million or so, just under $100 million of costs, one-off nonrecurring costs would have been booked over the course of 2022. Some handover costs that we had giving back some apartments too on those short leases that we had, and some receivable impairments that we took, nothing out of the ordinary, nothing untoward, sort of cleaning out sort of old legacy items. That's like the -- without one-offs, number was more like AED 1.7 billion. So if you take that AED 1.7 billion, the incremental addition from the assets we acquired last year, over and above what we already produced in 2022 since we acquired them, it's around AED 260 million, AED 270 million. So that takes you up to AED 2 billion. So, to answer your question, the vast majority of the guidance of AED 2 billion to AED 2.1 billion is coming from acquired existing assets. And you don't need to believe in an awful lot in terms of like-for-like growth, and there's not a lot of like-for-like growth built into that guidance. And if anything, it's a little conservative because we will be deploying AED 5 billion of equity into new assets. So, those will just add to that performance we'll be able to do there.

So if I understand correctly, this buildup from AED 1.7 billion to AED 2.1 billion will include around AED 260 million to AED 270 million coming in from the pre 2023 M&A, right?

Correct.

Yes.

Correct.

And what was the number, sorry, in 2022? From this AED 1.7 billion, how much were contributed from the newly acquired assets over the years? Do you have a ballpark figure on that?

Yes. Just a little -- almost the same, just a bit less. About AED 240 million or AED 230 million, in that ballpark.

AED 230 million, okay. Sorry, just to leave room for others. The second question is just on the JV with Dubai Holding. Just quickly, I mean, it's quite sizable. So maybe you can just give us some color on the economics. Is it more asset-light where Dubai Holding contributes the land and you handle everything in terms of development and sales and then you share the profits? I think this is really the first question. And the second question within that is, can you be more specific on where were these land acquisitions, if that's possible?

There are 3 sites, Taher, that are on the [indiscernible] highway, very close to very well-established destinations, everything from the Arabian ranches to the villa to [ Barari ] the prime infrastructure is there in terms of highways and utilities. And as I said, very well established destinations right adjacent to us. The product mix is, I would say, 70%, 80% skewed towards single-family homes and the different things. Will have everything from town houses to villas, to some more premium-type single-family homes over there as well as low-dense apartments. The partnership with Dubai Holdings, so it's been -- it's completely led by Aldar. The lands are being contributed in. There are certain contractual payments that are back ended. And all of the equity funding is going to be provided by Aldar. There are certain preferred returns that we have in there and then certain thresholds beyond which we have a profit share mechanism with them. It is a very attractive market. We're very confident of our ability to go out and not only monetize these properties and deliver a significant amount of profit in the coming years from them and actually produce something that is very different and competitive in those areas. So I'd say from a risk perspective, it's really about believing in what Aldar can do and bring to the table. And within that, one of the differences that we have is because we're diversified, we bring in the resi, and we bring in our knowhow when it comes to managing communities, our schools, our retails, our co-working spaces, all of which we have. And that's really what we think the market relapse is these very sort of sustainable type of communities that are there. So that will be a big part of the guidance when we launch that. So we talked about launching in late Q3, early Q4. That's when we expect to complete the master plans and the approvals on those sites and hopefully go to market within that window. And as we'll be launching those projects, we'll be talking much more about that, unless you have any other specific questions.

Our next question comes from the line of Mohamad Haidar with Arqaam Capital.

Just a follow-up question on the JV with Dubai Holding, please. Is there a downpayment involved in this deal? And this is going to be part of the AED 5 billion equity capital to be deployed this year? My second question, please, is, how should we think of this new partnership with Dubai Holding? Will it be limited to the 9,000 units? Or should we expect more expansions and partnerships in the future?

Okay. So I'll answer your second question, Mohamad. Thank you. And then I'll pass the difficult question to Greg. The first one is on Dubai Holding. Dubai Holdings are one of the most established players that are out there. We have a very close and collaborative relationship with them. We're always looking for opportunities within existing partners and others. But like what we've seen with the Apollo and others, when we're working on them, we like to have these sort of longstanding relationships with people. They're involved in many sectors, which you guys can read about. I can't comment on specific things, but we are looking to do more opportunities with them across, whether it's on land or in some of the other sectors that they're in, and we're also looking for other opportunities in Dubai alongside any other partners or opportunities where we just acquire land or acquire assets. Again, our deployment strategy, we have a clear deployment strategy for our education business, for our property and facility management business. we've actually went in, in the last few years, and deployed and we acquired companies like Asteco and others as part of our property and facility management company. Similarly each of our other sectors, whether it's hospitality or others, may see opportunities that are there, so. And we think that's the real value add is to continue to invest, not necessarily in every single sector that we're in, but wherever we see value for us to be able to go in and create the rewarding value for our shareholders. So I hope I've answered your question. Greg will talk about the deployment on the downpayments.

Mohamad, so in terms of financial impact, I mean, this is the JV that Aldar will control. So we will record the revenue. The assets will be on our books. It will appear on our balance sheet and we'll work through our P&L and our cash flow statement in the same way that any owned project from Aldar would. In terms of some of the -- there is the land acquisition, there's a small down payment upfront. And that's allowed some modest payments required throughout the periods that are very, very backended, so very, very patient. And ultimately what you're seeing is a JV where, between the priority return and the profit share agreement with Aldar will be making the majority of the profits out of this JV. But you will see this on top of -- it will appear in our financials like any other project.

Just from the way we deploy it, I think one thing that makes a lot of difference is when you look at last year, our overall deployment strategy, it was much more skewed towards our recurring income portfolio and getting immediate retirements that are there. But we're continuing to invest in our land, but doing that in a very smart way with very back ended and long payment plans or such as our acquisition of Saadiyat Lagoons, which we announced, I think, maybe 12 months ago or so, which was paid as value at count. I think that kind of sophistication in terms of how we expand both parts of our business, but in a very, very smart and equity accretive way just shows you the kind of discipline that we have within our investment committees, and that will be kind of the same theme going forward.

And just one follow-up on this one. Dubai Holding is known to share the land for 50% of the overall profit of the project. Will it be the case in this JV? Or will Aldar own more than 50%?

To be a very profitable joint venture for Aldar and the first of, hopefully, many more opportunities that -- I think we've given quite a bit of disclosure and stuff so far. Once we announce our projects, we'll be giving you more light and guidance, Mohamad, on those specific projects. But we expect to have very healthy margins on these projects as we go forward. It's not as straightforward as you explained in terms of the way the waterfall structure works. But as I said, we expect them to be quite rewarding for us, and we're very confident in our ability to monetize.

Understood, Talal. And Greg, my final question, when you said the development proceeds, are going to double in the future. So is it going to be like in 2023, it's going to be double what we saw in 2022? Or it's going to take some time to actually reach that figure?