Aldar Properties PJSC (ALDAR) Earnings Call Transcript & Summary

Good morning, good afternoon, and welcome to the Aldar Properties' 9M 2023 Financial Results Conference Call. My name is Charlie, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to our host, Faisal Falaknaz, Group Chief Financial and Sustainability Officer at Aldar Properties to begin. Faisal, Please go ahead.

Assalamu alaikum. Good afternoon. Thank you all for joining the call today for Aldar's financial results for the first 9 months of 2023. I will start with a short summary of our financial and operational performance, accompanied by slides, which you can see via the webcast. If you are joining through the conference call, you can access the full presentation on the IR section of our website. I would like to begin with the key highlights for the first 9 months of the year on Slide #3. Aldar delivered an excellent set of results on the back of exceptional sales performance, continued execution of our revenue backlog and meaningful contributions from our recurring income portfolio. In the 9-month period, we achieved revenue growth of 21% year-on-year to AED 9.8 billion with EBITDA rising 37% to AED 3.5 billion. Net profit increased 41% to AED 3.0 billion. On the development front, we witnessed record sales and revenue backlog. And as a result, we are revising our guidance upwards for fiscal year 2023, which I will come to at the end of this presentation. Particularly notable is the growing and strong demand from overseas and expat buyers, a trend that highlights Abu Dhabi and Aldar's continued global appeal, which we expect to grow further as we launch our first developments in Dubai and Ras Al Khaimah. As for Aldar investment, contributions from recent acquisitions and strong operational performance have driven cross-portfolio growth, the ongoing execution of our transformational growth strategy, backed by a disciplined approach to capital deployment, SG&A spending and geographic expansion continues to positively impact the bottom line. Moving on to Slide #4 for more detail on Aldar development. We are now operating at an elevated and sustainable scale with quarterly sales trending upwards since early 2022, recording AED 19.4 billion in group development sales and a development revenue backlog of AED 29.1 billion year-to-date. Overseas and resident expat buyers collectively accounted for 60% of UAE development sales, a significant contribution to our total year-to-date UAE sales of AED 17 billion and growing UAE development revenue backlog of AED 23.6 billion. Most notably, UAE sales to overseas buyers during the first 9 months reached AED 4.6 billion, representing an increase of 160% on sales to the same segment in 2022, reflecting Abu Dhabi's position as a premier investment and lifestyle destination. In Egypt, we saw healthy demand for SODIC's recent launches, which witnessed price appreciation in both U.S. dollars and Egyptian pound terms. In Egyptian pound terms, SODIC sales are up 67% year-on-year, driven by strong demand for projects across SODIC's main markets. We maintain our long-term commitment to growing our platform in Egypt and SODIC continues to pursue growth, expanding its land bank with the addition of 2 new plots and entering into a new partnership with Nobu to bring the international brand to 2 of its projects. Overall, the Aldar development platform continues to go from strength to strength and will continue to drive earnings growth as we deliver on our plans for enhancing scale and geographical diversification. Turning to Aldar investment platform on Slide 5. The business is producing strong performance across the diversified portfolio, driven by increasing rental rates and high occupancy. Moreover, the strategic acquisitions made in 2022 have stabilized and proven to be highly successful, surpassing our initial underwriting expectations and significantly contributing to the bottom line. Adjusted EBITDA for Aldar investment for the first 9 months was up 39% year-on-year to AED 1.6 billion. I'd like to take a moment to focus on our commercial portfolio, which is performing exceptionally well, driven by robust demand for prime Grade A space from GREs and international corporates. We have reached near full occupancy on the ADGM office towers and are seeing strong preleasing activity for Al Maryah Tower with 40% of space booked ahead of our scheduled opening in Q1 2024. Beyond Al Maryah Island, we have also witnessed strong leasing activity in HQ and international towers. Meanwhile, the retail portfolio continues to benefit from robust consumer confidence, which has supported high occupancy and solid leasing activity. Tenant sales and footfall in our flagship Yas Mall were up 26% and 33%, respectively, from a year earlier, while occupancy has reached 99%. The hospitality business continues to recover well from the pandemic slowdown with occupancy increasing and average daily rates up 46% year-on-year. Aldar Education reported a 17% increase in the number of enrolled students driven by soaring portfolio of managed schools and complemented by the acquisition during the year. Lastly, on principal investments, which houses our Aldar Estates business, adjusted EBITDA for the first 9 months doubled to AED 124 million, supported by contributions from the Basatin acquisition as well as the strategic merger with Eltizam. Turning to Slide 6. So far this year, we have made a number of significant announcements. I will give you a quick update on those announced since our last call. On the development side, we entered into a partnership with Nikki Beach that will see 3 branded residential buildings built on Al Marjan Island, in close proximity to the Rixos and DoubleTree Hilton hotels that we acquired in 2022. Following our previously announced JV with Dubai Holdings, we are excited to launch our first residential development in Dubai, which will be branded Haven and offers 2,428 residential units available to buyers of all nationalities. Construction of the first phase is due to begin in 2024, with handovers expected towards the end of 2027. We also announced the acquisition of FAB Properties, further expanding our Aldar Estates platform following our strategic merger with Eltizam and other recent acquisitions. Turning to Slide 7. We remain in a strong financial position with AED 3.9 billion of free cash and AED 5.9 billion of committed undrawn facilities. Furthermore, during the first 9 months, we signed AED 1 billion in new bank facilities and issued a $500 million inaugural Green Sukuk in May. Our robust balance sheet and liquidity places Aldar in a strong position to continue pursuing our growth agenda and expansion strategy over the next coming period. Turning now to Slide #8. I would like to spend a few minutes discussing progress to date on our growth and expansion strategy and our plans moving forward. Over the last 2 years, we have established a strong track record of executing against our transformational growth agenda to enhance scale and asset diversification. On development, we have grown our sales to resident expats and generated sizable streams of overseas buyers through the development of our international brokerage network. On the investment front, we have expanded our commercial portfolio, specifically in Grade A assets through the landmark acquisition of the 4 office towers in ADGM. We have also taken additional steps to diversify our sector exposure through our investment into logistics, which we identified as a target growth segment. And finally, as it relates to geographic expansion, we have entered into new markets across the UAE, in Egypt, and the wider Gulf region. These have been significant milestones on Aldar's journey to become a leading regional real estate developer, operator, and asset managers. Moving on to Slide #9. As you can see, we have established an operating model designed to deliver sustainable growth. Going forward, we will continue to build scale across these platforms, focusing on enhancing sector and geographical diversification. This will include investing in new growth sectors and achieving synergies across the businesses and markets. Turning to Slide 10. We will continue to take a disciplined approach to capital deployment, which has brought us success in the recent years. We seek to ensure the business adapts to and takes advantage of emerging trends such as e-commerce, supply chain resilience, digitized economies, aging populations, and winning cities. For example, we are exploring opportunities in segments such as student accommodation, retirement living, warehousing, self-storage, data centers, and last-mile logistics. Moving on to Slide 11. To pursue these opportunities, we are starting to look beyond the UAE and this region into international markets with a focus on Europe. The idea is to export our franchise and expertise, adding resilience and additional revenue streams to our platform. We also bring new offerings back to the UAE market. Our expansion plans are currently in progress with the relevant and necessary market research and feasibility studies underway to gauge potential organic and inorganic market entry avenues. Moving on to Slide 12. Our preferred geographic expansion approach is to enter new markets through partnerships by establishing joint ventures with reputable and established entities similar to our Dubai holding JV or through active long-term strategic investments by taking a controlling stake in strong operating platforms with an existing track record as we did with SODIC in Egypt. This approach allows us to enter these markets in a derisk, phased, and considered manner by working with likeminded partners. I would now like to give you a quick update on our progress on sustainability since on our last call. If you can turn to Slide #13. Our continued progress on sustainability has driven improvements in our ESG ratings during the year, including both the MSCI Index and Sustainalytics Index. Aldar was ranked 11th among the 104 diversified real estate firms by Sustainalytics and in the top 7% of 237 real estate companies surveyed by Dow Jones. On Slide #14, we look towards the rest of the year. Given our strong performance this year, particularly in development, we are revising part of our guidance, we are now expecting 2023 group sales to reach between AED 22 billion on AED 24 billion. Accordingly, we are also revising guidance for group revenue backlog to a range of AED 31 billion to AED 33 billion. Meanwhile, the rest of our guidance remains unchanged. In summary, we continue to demonstrate operational and financial strength while achieving accelerated growth, both organically and through strategic acquisitions. While we remain cognizant of uncertain global macroeconomic and geopolitical environment, the company is well placed to benefit from the UAE strong economic fundamentals. That concludes the summary of our year-to-date '23 performance. And I'll now hand over to the operator to open the floor for questions.

[Operator Instructions] Our first question comes from Nida Iqbal of Morgan Stanley.

Congratulations on the good set of results. I have a few questions. Firstly, on the strategy side. Thank you for the color in the presentation on the new international strategy. Can you maybe give us some indication in terms of the sort of capital deployment and timing around that in terms of expansion into Europe that you're thinking about? Secondly, on the development side of things, year-to-date growth has been very impressive in terms of backlog and sales. Have you seen any signs of a change in demand more recently over the last few weeks? How do you see the outlook for the coming quarters? And what do you think are the key risks to the very strong momentum that we've been seeing in property prices in the UAE? And then finally, just on the same topic, overseas demand, of course, is very strong. Can we get some color on the nationalities that are driving this and if you're seeing any changes here?

Okay. On the strategy, so as you know, we don't give guidance on timing. Given the disciplined approach we put out -- we put in terms of putting out capital. We will only transact on things if those deals are going to create value to our shareholders. But we are advancing quite well. We have a decent pipeline of opportunities that we are looking at. The way I would look at it is, every year, we announce guidance in terms of what will our deployment quantum be? For example, for this year, the guidance was AED 5 billion, which translates to AED 7 billion to AED 8 billion of purchasing power. The UAE market will always be our focus in terms of deployment. The international strategy will be ancillary to that. And then going forward, as our development backlog continues to churn profits out, we will recycle those profits as we always do, and put it back into the recurring income business. But again, our focus will continue being the UAE with an ancillary focus on other regions internationally. Moving on to the second question, which is on the signs of demand. We haven't seen any weakening as of yet. Actually, as we speak, we have launched our Dubai project today, our first. This is as part of the JV with Dubai Holding, which is the Haven or Jinan project, which covers 2,400 units almost. We are seeing very, very strong demand, both from Dubai, from Abu Dhabi. Our call centers have actually broken down after we got a lot of calls from our brokers. So we expect this launch to be extremely successful. And we expect to get more international and more residential demand. That's a trend I've been highlighting over the past few quarters. Now as we enter into Dubai and go on to Ras Al Khaimah, you're seeing that demographic shifting in that area. And one great thing that the team have been doing is growing our international brokerage network so that we can continue sustaining this momentum of sales. In terms of risks going forward, I don't have a crystal ball. I don't think anyone does. Nobody knows what could go wrong. But I'll tell you what makes me sleep at night. The fact is that the UAE has implemented very strong structural reforms, which will carry forward. The population is no longer transitory. The performance of our recurring income portfolio, for example, is evidence of the benefit of those reforms and the resulting strong macroeconomic backdrop. The other thing is we are pushing our payment plans. So for example, our launch in Dubai is starting at 60-40. A few years back, we were somewhere between 30% during construction, 70% at handover. We have completely flipped this. We can go up to 70%, 80% during construction. And what this means is we get to collect a lot more buyer equity before we actually award the project, which means this reduces our probability of default risk. If you look at our balance sheet, we continue to maintain a very disciplined debt policy, 35% LTV on the investment side, lower than 10% on the development side. On the overall company, you're talking about 28% LTV, extremely conservative. We have $6 billion about of untapped facilities that we can get into. We have a very defensive recurring income portfolio that has been tested during COVID. And so for those reasons, we are very confident that if there is any downturn, we can easily weather it out.

Our next question comes from Harsh Mehta of Goldman Sachs.

Harsh, I didn't see a revisal of the share price, the target. I'm joking.

Just a few questions from my side. So first is, in the press release, there's a comment by the Chairman that you're looking for potential international expansion with focus on Europe. So just wanted to understand what kind of investments, whether on the development side or on the investment property side, and in terms of size and quantum and which markets within Europe, specifically are you looking at? And then the second question is on the group presales, they have been extremely strong, reaching AED 19.5 million in the first 9 months. When we compare this even with the upgraded guidance, it basically implies between AED 2.5 million to AED 4.5 million for the fourth quarter. And this looks very low compared to what you've done in the past 2 quarters and compared to AED 5 million in the fourth quarter. And seasonally, fourth quarter is the strongest. You've also launched in Dubai. Lagoons is doing very well as we see from the third quarter performance in terms of sales, and there's still a lot over there to sell. So how should we think about this upgraded guidance given it looks like extremely low when we compare it with the trends quarter-over-quarter and even year-on-year? And then the last one is in terms of the new launches, in the third quarter, there was just one new launch compared to 10 launches in the first half itself. So was it just because of seasonality or there was an intention to clear off inventory and then look at the market and then restart the launches? So that's it.

Okay. Just elaborating on our international strategy. So I'll start with that. The strategy is very much aligned with our strategic growth plan program that we announced about 3 years ago, which was focused on geographic and sector diversification. So this is us going into the second phase of that strategy. The other reason for going out internationally is we've been very keen to grow our alternative real estate asset exposure. And the markets there in Europe have a lot of depth and breadth. So it gives us the opportunity to be able to achieve that scale in a faster manner. The sectors we'd be looking at would be logistics, self-storage, student accommodation, senior living, even credit, in line with where interest rates are at today, real estate credit. And then lastly, that also covers a development component to your point. So we'd be looking at residential development opportunities, but those that would align with our sales strategy here and have synergies with the customers that we sell to. So we want to have an international sales network where we can offer property in Dubai, in Abu Dhabi, in Ras Al Khaimah, in Egypt, and in the new markets that we are looking at. And I'd just like to highlight that the approach is going to follow a very similar approach to what we did previously in Egypt, where we took control of a platform and in Dubai, where we went into the market with a very well-known partner on the ground, which is Dubai Holding. So same thing we'd either get a majority control of a platform and grow from there or depending on the sector, we will partner with JV partners to enter into those asset classes. In terms of our development sales, so if you take the higher end of that guidance, you're looking at about AED 5 billion additional sales. I think we just want to take a very cautious approach to how the markets play out. We don't want to get ahead of ourselves. Internally, obviously, we are setting more aggressive targets for ourselves. And lastly, on the launches. I'd say part of it is driven by seasonality. Summer is probably not the busiest of seasons when it comes to sales, even though we had one of the strongest quarters. And the last thing was us just getting ready for those launches. Q4 is going to have the launches of Dubai, which is happening today and tomorrow. And then Ras Al Khaimah will follow very quickly with a number of new launches happening in Abu Dhabi before the end of the year.

Our next question comes from Taher Safieddine of JPMorgan.

Congrats on a solid set of numbers. 2 questions from my side. The first one on the development side. With this revenue backlog and the average duration of 29 months, is it fair to assume that we could see revenue recognition scaling up towards the AED 9 billion plus into next year? If I just do a rough math. So there could be a strong growth in the development sales portfolio in terms of revenue recognition. And I think the other question within that is, how should we think about the EBITDA margins with your entry into Dubai, Iraq? Is it a different margin profile? Is the 34% EBITDA margin sustainable in your view for the property development sales segment in the UAE? So I think that's the first part of the question. Now the second question is really on the recurring portfolio. This equity deployment of AED 5 billion has been there since the beginning of the year, yet we still haven't seen any significant deployment year-to-date. I just want to get maybe your view. Should we expect something to happen in Q4 on this equity deployment? And does this target include the recent talks about entering into Europe? Or we're still talking about UAE and neighboring countries?

On the revenue recognition, Taher, the guidance for next year. So we don't, as you know, provide guidance, but maybe that's something we will look at for next year. We'll take that into consideration. But if you take the existing backlog back solve, like you said, for the 2-3-year period recognition and assume the 35% margin that we generally guide on, you will see that the numbers will be significantly higher than where they are today. On the EBITDA margins the range we typically give, like I said, is 30% to 35%. We've had some increase in construction costs, which was more than offset by increase in prices. You're right, in Dubai, we do have the land cost, unlike our projects here in Abu Dhabi, but we're still achieving very good margins given the higher property values in Dubai. And then lastly, if you remember in the previous quarter, we did the accounting change where we are now pushing the direct marketing costs above the line, above GP. And therefore, after taking all of that into consideration, just to be conservative, I would model the GP margin towards the lower end of that 30% range. And then moving on to deployment. So yes, we haven't deployed that AED 5 billion, but we still had a busy year. We announced the acquisition of Fahid. We announced the JV with Dubai Holding at the beginning of the year. We announced the JV with Mubadala in terms of the new commercial office towers on Al Maryah. We announced the merger with Eltizam. We announced the acquisition of 2 schools, one in Dubai, Kent, one in Abu Dhabi, Virginia with the expansion of the Cranleigh brand into Bahrain and then lastly, the acquisitions of Basatin. So we've been quite busy. But yes, we haven't deployed a significant amount of that AED 5 billion. We have a number of opportunities brewing. Our plan is to deploy a significant amount of that AED 5 billion, assuming those deals do get concluded, but the most likely scenario is that part of that AED 5 billion will be carried over into next year. And that AED 5 billion also includes part of the international acquisition strategy that we are looking at.

Just a follow-up on the international acquisition. I mean, this is the first time we really hear about Europe as a new -- I mean we were used to UAE, Abu Dhabi then you went into Ras Al Khaimah, then you talked about Dubai. Egypt has been there, Saudi has always been maybe talked about as an actual progression. But I mean, why Europe? I mean going into a mature market, which is maybe more competitive, I mean, don't you see a bigger execution risk? I mean you already have a full plate in terms of running through on the development and the recurring portfolio. I mean, don't you see the shift of international strategy as maybe too much to chew at this stage? I'm just trying to think out loud here and hear your views.

So we feel that we've achieved significant scale in our market, both on the development side and on the investment side where we successfully deployed AED 7.5 billion last year. We feel part of that expertise and franchise can be capitalized on if we take it outside our region. Given who our shareholders are, we have a lot of relationships that we can leverage in terms of players on the ground, which can help us get into the areas that we are interested in. And then like I said, part of the strategy is accelerating access to asset classes that we think are not very easily accessible here and are much easily accessible in those mature markets being, again, the logistics, the storage, the student housing and credit and et cetera. Now I've always gotten the question in terms of whether we're going to look beyond the markets that you mentioned. And my answer was, yes, but we're not yet ready. So I think we are ready now. And we consciously decided that we don't want to go to the Far West, which is the U.S., and we don't want to go to the Far East, which is Asia. We decided to go with Europe, given the proximity and given a lot of the synergies that we feel we can recognize across the different asset classes that we might pursue.

[Operator Instructions] Our next question comes from Mohamad Haidar of Arqaam Capital.

A quick question on the development management business. I see that execution is going well, but the new additions are still lower than what's being executed. What's the strategy for this business? Do you think at some point you will be winning again big awards like we saw in 2022? Or we will continue to see this execution exceeding new awards? And then on the hospitality business, I'm not sure if you have the data, but is it possible to get the color on the breakdown of nationalities, who are the main tourists flowing into your hotels?

On the project management side, we had a slight drop in terms of profitability versus last year. But we added, I believe, AED 2 billion of new projects this quarter and AED 3.9 billion, I think, for the full year. Now there's going to be a significant pickup in that. There were some delays in terms of project awards that are going to happen as we speak. And then I think the most -- one of the most important drivers that is going to drive growth on the project management side is the Balghaiylam project. This is a fixed contract project, which generally has a higher profit margin than our usual cost plus projects. This project is expected to have somewhere between AED 800 million to AED 1 billion profit over the next 3 to 4 years. So to answer your question, we're very confident that the project management business will continue doing well going forward. This is just a timing issue today. On the hospitality business, I don't have the nationalities off the top of my head, but maybe this is something my IR team can come back to you on later.

Our next question comes from Jagadishwar Pasunoori of NBK Capital.

Congratulations on a good set of numbers. I'm looking at your guidance for Aldar Investments. I think the guidance is between AED 2 billion to AED 2.1 billion for Aldar Investments in EBITDA. Please correct me if I'm wrong. So far, your 9-month EBITDA is AED 1.6 billion. So if that's the guidance stays the same, then Q4 guidance EBITDA could be like AED 400 million to AED 500 million. I understand Aldar made like AED 580 million in EBITDA in Q3. And usually, Q4 is better because of hospitality. So what am I missing here? Is there any chance for beating your guidance on EBITDA and investments?

We haven't revised the guidance, you're right. But we're confident we would be able to slightly surpass that guidance. So that portfolio will continue doing well. As you can see in the commercial side, we're quite well leased up retail, slightly down because of the Al Jimi repositioning. Residential is almost flat in terms of organic like-for-like. And hospitality, yes, is performing better. But in summary, I think we will be slightly over that guidance.

Okay. Usually, Q4 is better than Q3, right, of the hospitality? Is that right?

That's a fair point, yes.

I know you tried to answer on the European venture that you're talking about. Can you help me understand like what is the exact capital that you have outlined for European investments?

So like I said, we don't give guidance. Yes, we said the UAE will be always our focus as part of the annual…

And that's why [indiscernible] remaining.