Aldar Properties PJSC (ALDAR) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Aldar Properties H1 2024 Financial Results Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I'll now turn the call over to our host Chief Financial and Sustainability Officer, Faisal Falaknaz. Please go ahead.

Hello everybody, thank you all for joining us on this call to discuss Aldar's financial performance for H1 2024. As the UAE continues to provide a conductive macroeconomic environment for the sector, Aldar has delivered strong year-to-date growth driven by solid demand across all real estate asset classes. Revenue was up 73% year-on-year at AED 10.9 billion, while EBITDA rose 61% to AED 3.9 billion and net profit increased 57% year-on-year to AED 3.3 billion. Please note that, the overall effective tax rate was 4.1% in the first half, following introduction of corporate income tax in January. Our 2 core platforms, Aldar Development and Aldar Investment, have achieved significant scale and diversification over the last 3 years. In the first half of the year, Aldar Development recorded strong performance driven by ongoing recognition of its sizable revenue backlog, which has reached a record AED 39 billion. Since the start of the year, the business has been operating at an elevated run rate as it effectively develops and delivers against the growing development project pipeline of the last few years. The platform is well positioned for sustainable growth. We continue to extend our market leadership as the UAE's leading destination builder, diversifying our target customer segments and product offering, as well as building further scale in our home market and internationally through strategic land bank replenishment. Aldar Investment also recorded strong performance driven by organic growth complemented by prior year acquisitions, which are delivering meaningful returns. The business continues to excel as an active asset manager and benefits from a high-quality asset base, with strong positioning in the context of a thriving UAE market. We remain focused on key growth drivers, executing against our develop-to-growth strategy, diversifying and expanding our portfolio through disciplined, capital deployment across target markets, and implementing our asset repositioning and optimization strategy. Turning to Slide 3. Aldar Development sales continued their strong momentum, rising 21% year-on-year to AED 14 billion in the first half, driven by 5 new project launches and strong inventory sales. EBITDA increased 77% year-on-year to AED 2.2 billion in H1, as mentioned earlier, the business is maintaining an elevated run rate since the start of the year. Acceleration of project delivery resulted in a robust cash collection of AED 4.4 billion in the first half, and we expect full year 2024 cash collections to reach between AED 8 billion to AED 9 billion. Demand has been particularly strong among overseas and expat buyers with sales to this demographic, doubling year-on-year to AED 10.2 billion in the first half, or 79% of total UAE sales. Given trends seen in H1 sales and the profile of upcoming launches, such as Al Fahid in H2, we expect demand to be well-balanced between UAE nationals, resident expats, and overseas buyers in the second half. On the international front, both SODIC and London Square are making strong progress on implementation of their growth strategies. With the economic situation stabilizing in Egypt, SODIN ramped up sales in the second quarter, and the development backlog now stands at AED 4.2 billion, with an average duration of 32 months. London Square is laying solid foundations for future growth, having completed the acquisition of 7 land plots since the beginning of 2024. Group development backlog now sits at AED 39 billion, providing strong revenue visibility over the next 2 to 3 years. Given the pipeline of new launches, we see group backlog progressively moving towards the AED 50 billion mark. Turning to Aldar Investment on Slide 5, disciplined expansion and diversification over the last couple of years delivered revenue and adjusted EBITDA growth of 30% and 20% year-on-year respectively. The platform is executing against its comprehensive develop-to-hold strategy to deliver diversification, scale, and earnings growth. To date, Aldar has committed a total of AED 7.6 billion towards a pipeline of develop-to-hold assets. This includes the initial AED 5 billion in Abu Dhabi that spans the commercial, retail, and hospitality segments which was announced at the start of the year, the recently announced commercial entry into Dubai with the development of an iconic office tower on Sheikh Zayed Road. This alone is a commitment of AED 1.6 billion. I will share further details on this announcement later in the call. And the AED 1 billion commitment in logistics across Abu Dhabi and Dubai to develop built-to-suit facilities, drive expansion of existing assets, and develop a logistics park through a partnership with DP World, which I will also share further details later on the call. The D-Hold strategy complements Aldar's ongoing strategic expansion, repositioning, and optimization initiatives which comprise the following, a retail redevelopment program for Al Hamra Mall in Ras Al Khaimah, which has now been completed, and Al Jimi Mall in Al Ain, which we expect to conclude by the end of next year. A hospitality transformation program where we will be conducting major refurbishment work on some of our hospitality assets to capitalize on the growing demand for premium hospitality experiences in Abu Dhabi amid rapid expansion of the leisure and tourism sector. This redevelopment work will ultimately drive higher future income and align with our resort destination focus. And finally, with Greenfield expansions in Aldar's Education business, with 2 new schools opening at the start of the '24-'25 academic year, as well as a third school in the following year. On Slide 7, you will see further detail on each segment within Aldar's Investment. The investment properties portfolio continues to perform very well, supported by active asset management and a successful leasing strategy driving higher occupancy rates. Adjusted EBITDA for investment properties increased 19% year-on-year to AED 852 million in H1, with occupancy at 94% across the portfolio. The commercial portfolio stands out, with H1 adjusted EBITDA increasing 35% year-on-year, largely supported by a one-off gain from the strategic disposal of a legacy asset in the first quarter of the year. Excluding this one-off gain, the portfolio adjusted EBITDA was up 17%, while the overall investment properties adjusted EBITDA was up 12% year-on-year. Continuing on commercial, amid strong demand for premium Grade A office space, rental rates have increased and occupancy across portfolio now stands at 97%. Al Maryah Tower, which opened in March this year, is operating at 83% occupancy. In retail, Yas Mall has reinforced its status as the premier retail and entertainment destination in Abu Dhabi, with occupancy of 95%. Tenant sales rising 8% year-on-year and a 16% increase in footfall in the first half of the year. The hospitality and leisure portfolio experienced a slight decrease in adjusted EBITDA, due to a one-off income recognized a year earlier. Excluding this, adjusted EBITDA was up 8% year-on-year, with occupancy at 73% and RevPAR up 10% year-on-year. Aldar Education has recorded a 25% year-on-year increase in adjusted EBITDA to AED 116 million in H1. Enrollments were up 27% in the first half at Aldar-owned and operated schools. Meanwhile, Aldar Estate's adjusted EBITDA surged 160% year-on-year to AED 155 million in H1 following transformational M&A activity last year. The business now manages 158,000 units and holds contracts valued at over AED 1.9 billion. On Slide 8, you will see some details on the recent announcements we have made in July. As part of our previously announced AED 1 billion logistics commitment, we have signed a strategic agreement with DP World. The agreement will see Aldar Develop a Grade A and LEED certified logistics park spanning 144,000 square meters in GLA within National Industries Park in Dubai. Catering to the strong demand we continue to see, the Logistics Park will comprise 3 buildings that can be modified to become single or multi-tenanted facilities, offering flexibility for third-party logistics, e-commerce and retail tenants. You will also have seen our recent announcement on Aldar's entry into the Dubai commercial real estate market. We see this as an exciting opportunity that complements Aldar's growing presence and growing brand in the Emirates of Dubai. We have acquired an exceptional plot of land on Sheikh Zayed Road adjacent to DIFC to develop a Grade A Office Tower incorporating a luxury boutique hotel and branded apartments. The tower will have a leaseable area of 88,000 square meters and is scheduled for completion at the end of 2027. In addition, Aldar has also completed the acquisition of 6 Falak, a fully occupied Grade A office building in Dubai Internet City. Together, these 2 strategic commercial investments involve a total commitment of AED 1.8 billion and add to our growing offering in the Emirates of Dubai. Moving to Slide #9, you will find our key balance sheet metrics. Aldar maintains a conservative leverage profile with strong liquidity. As of the end of July, the company had AED 3.6 billion in free cash and AED 7.6 billion in undrawn credit facilities. We continue to actively manage our liabilities to achieve strategic and financial objectives. This year, Aldar has secured AED 3 billion in senior unsecured financing. The 5-year revolving credit facilities have improved liquidity and extended the average debt maturity to 5.4 years. In May, Aldar issued a second USD 500 million 10-year Green Sukuk and tendered to buy back the 2025 Sukuk. The issue, which achieved the tightest credit spread ever priced by Aldar, supports our sustainability goals and also helps to extend our maturity profile. Furthermore, in Q2, Aldar refinanced London Square's debt with a new larger unsecured loan at more favorable rates and conditions. Looking ahead, Aldar plans to invest further in income-generating assets and new growth sectors while maintaining a disciplined approach to capital deployment to ensure value and strategic alignment. Turning to sustainability highlights on Slide #10, as you know, Aldar took the strategic decision to commit to achieve net zero by 2050, and we are focused on making steady progress towards this ambition. We are also driving improved energy use across new developments. Aldar received the highest sustainable urban design rating in Abu Dhabi, the Estidama Pearl 5 for the sustainable city in Yas Island, and all developments launched in H1 achieved Pearl 3 rating. Meanwhile, the Athlon development in Dubai was awarded the UAE's first LEED Platinum Certification for Community Plan and Design. I would like to conclude on Slide 11, where we reiterate our guidance for full year 2024 guidance, which we had revised at the end of Q1. Our strong trajectory this year means we are very much on track to meet guidance for adjusted EBITDA in the range of AED 6.2 billion to AED 6.5 billion. For development, our guidance is for sales of between AED 29 billion and AED 31 billion, and EBITDA of AED 4.1 billion to AED 4.3 billion. For Aldar Investment, our guidance for adjusted EBITDA is in the range of AED 2.3 billion to AED 2.5 billion. With that, we would like to conclude the presentation and open the floor to questions. Thank you.

[Operator Instructions] Our first question today comes from the line of Steve Bramley-Jackson with HSBC.

Good set of figures. Well done. I've just got a few questions, if I may. The first, your property development gross margins, they seem a little light compared to what we were expecting, and indeed, I think, perhaps, based on what you've been guiding towards previously. What should we think about the sort of gross margin trajectory of the development business? That's my first question. Would you like me to ask them individually or give you all the questions in one go?

Let me jump right into it. So last year, we had a decent amount of land sales that came in that are very margin accretive. So land sales typically have margins around 60%, 70%, 80% plus. Year-to-date, we've had very limited plot sales or land sales, but those should expect to pick up towards the latter end of the year. But like you said, the guidance is probably in line with where our guidance is at. However, we are very focused as a group, not only to improve our top line by constantly pushing our prices at every launch. You look at our recent Dubai launches, so the one we did back in May, Athlon, followed by the apartments recently, we pushed prices by around 5% to 10% compared to the previous ones. So that should help accrete the margins going forward. But most importantly, we're very focused on optimizing our costs. So we are very, very laser focused on making sure that we maximize our margins without obviously affecting the customer experience in the end.

Yes. Yes. All right. That helps. My second question was on the tower in the hotel development, which is on the edge of DIFC. I was curious, but I see you've clarified it in the presentation. I wondered whether it was a development contract, but you, I think, state that it actually bought the plot. One thing I was curious about is I'm one of the architects that's been working on the scheme, but I didn't know who was doing it. So have you actually owned the site for quite a while or did you wait to take ownership and once you get the planning. Can you just give us a little bit of a sense as to whether you've had the site for a period or indeed whether you've got other sites actually already under your control in Dubai?

So we bought the plot last year and we disclosed it in the financial statements. I think we bought it for around AED 270 million. We believe that cost basis today is very attractive for a very prime plot such as that. It is facing Sheikh Zayed Road and facing the DIFC on the other side. I would guess that, if we put it out in the market today, we can probably sell it for twice the price, but we're not traders. We think this is going to be a very prime offering in the onshore market. So this is not free zone. However, in close proximity to the free zone for corporate tenants, Grade A blue chip corporate tenants to occupy a state-of-the-art facility that's going to have very efficient floor plates, high sustainability, credentials, and more importantly, it's a live-work offering where the luxury hotel and the branded residence is a very limited component, but complementary to the overall offering. So there's going to be a boutique luxury hotel at the top, and you see that in the picture of the tower that we put out. We're looking at keys somewhere between 150 to 200 keys between the branded residence and the luxury hotel component, which is going to have obviously an extensive F&B offering as well. We think this is going to be one of the most exciting commercial office offerings to Dubai when it comes online in 2027, and we're expecting to make yields, if not in the high-single-digits, probably in the low double-digits most likely.

All right. So that's return on investment, is it?

The yield on cost, yes.

Yield on cost?

Exactly.

Absolutely. All right. And then just my last question, a bit of a modeling question really, but you still appear to be doing very well on your tax rate, sort of half the going rate in the UAE, and yet one of your peers is paying a substantially higher tax rate. Will this, when I say normalize, will it move towards the sort of, the normal tax rate by the end of the year, or for some reason are you able to keep your tax cost at sort of half the going rate?

So Steve, there's 2 things that's playing into this. Number one is the depreciation deduction, which doesn't appear on the financial statements, but for tax purposes, we get to take depreciation deduction. The second thing is the transition rules for fair value of land. So the land today on the books sits at cost, but for tax purposes, we get to take it on the cost of goods sales at fair value, which reduces our tax bill as well. So that's why you see an effective tax rate that is lower than the statutory tax rate of 9%.

Yes, yes.

I'm sorry, the last one is -- the last one, Steve, apologies, is wherever we operate in free zone, so ADGM, we do not pay a corporate income tax there, so that's also driving the tax rate down.

Right, right, of course. Faisal, that's very helpful.

Our next question comes from Mohamad Haidar with Arqaam Capital.

Faisal, congratulations on the results and thank you for sharing the information on what's been handed over in terms of units and what's been sold. So starting with that point and knowing that you still have land exceeding 9.5 million square meters or gross floor area, can you help us understand how many units can this remaining land produce like in the next 5 or 7 years in both Abu Dhabi and Dubai? That's my first question.

That's a very theoretical question because it depends on master planning all that land bank, which obviously we haven't done it for all the land bank. But rest assured with the current run rate that we're setting at, which is somewhere between AED 25 billion to AED 30 billion, we have land that will keep us going for the next decade at least. Dubai is another story obviously because in Dubai we have to compete for land. The 3 master plans that we have in Dubai holding had a GDV potential of north of AED 25 billion. To date, I think we've sold somewhere between AED 7 billion to AED 8 billion on those already. So we still have some room to go at least for the next 1 to 2 years. We are therefore focused on continuing to replenish land in Dubai, which is a core part of our capital allocation strategy. But then in Abu Dhabi, we have a very strong competitive advantage obviously given our positioning in the market to be able to procure land through various ways. So in Abu Dhabi we're not worried, but in Dubai we obviously have to compete for that land.

That's very clear, Faisal. And moving to Aldar Investments, so we have AED 7.8 billion of committed CapEx on Develop To Hold. And as a general philosophy, should we always expect Aldar to spend another AED 5 billion to AED 6 billion on new acquisitions regardless of what's announced? Do you have this as a general philosophy or you will scale back a bit on investments with what you have currently on hand?

So our capital allocation bucket has a few major components. So the first one, which we spoke about, is land replenishment. The second is Development to Hold, which is the AED 7.6 billion that you referred to. The third is repositioning, which is not significant in nature. And the third is recurring income. The AED 5 billion that we've guided to the market is on the recurring income side of things. And it doesn't mean that every year we'll be spending AED 5 billion. Like we do a cash flow forecasting in terms of how much available cash we have after having done our business plan in terms of how much capital we want to allocate across the various divisions. We remain committed as of now to deploy this AED 5 billion on top of the AED 7.6 billion. So the AED 7.6 billion will be invested over the next 3 to 4 years because it takes time to build out that D-Hold portfolio. So we've been telling the market that we're making good progress in terms of investing this AED 5 billion. And again, we remain to be very, very optimistic that we will invest it. It takes time to get those deals properly priced and negotiated to be in a good position to close. We've had a very good track record in terms of the returns we've made on our acquisitions over the past 2, 3 years. We're very focused on making sure that we maintain that track record and don't get carried away with just deploying capital and destroying shareholder value over the long term.

It's all clear, Faisal.

Our next question comes from Taher Safieddine with JPMorgan.

Faisal, it's Taher from JPMorgan. Just maybe a few questions from my side. Again, congrats on a very solid set of numbers. On the development front, just how are we looking at, level of demand absorption rates in Abu Dhabi and Dubai? I mean, maybe you can share also some color on recent launches in Abu Dhabi. That would be helpful just to understand, the market dynamics. Where are we on that? And I think just to follow-up, is the level that we're talking about today of AED 20 billion -- I don't know, AED 20 billion, AED 25 billion in the UAE, excluding London Square and SODICs, do you think this is sustainable into next year? Or how should we think about the more sustainable rate when it comes to off-plan sales? That would be mainly my first question on the development front.

Development, yes. So, what's interesting is that during the first half of the year, we had 5 launches, whereas last year we had 10 launches. Yet this year, our sales were up more than 20%. So, we've been very focused on making sure that we don't build up a lot of inventory. And by inventory, just so that everybody is clear, it's not ready inventory. It's just off-plan inventory that builds up every time you do a new launch. And, again, despite having half the number of launches, we were still able to sell significantly well. So, I'd say the demand in Abu Dhabi continues to be strong. And you have other players today that are competing for that liquidity in Abu Dhabi. You had the Al Hudayriat, for example, by Q Holdings. So, the market, I would say, is maturing. It's a very positive sign. It continues to attract the resident expats and international buyers, which, as you see, made up 79% of our buyer base in the first half. And so, we see that momentum continuing going forward. And in H2, we'll have a much busier calendar when it comes to launches. In Dubai, I would say, the demand also continues to be strong. You guys know the numbers better, but H1 numbers in Dubai are stronger than they were last year. And we tested a new product in Dubai, which was apartments. We've never sold apartments in Dubai. And we were able to sell extremely well, more than a AED 1 billion, in a product that you could argue is extremely competitive. So, we remain to be also very positively optimistic about this prospect in Dubai. Now, on the run rate, we did AED 24 billion in the UAE last year. With the current guidance that we have in place, you can extrapolate and say that, we'll probably be doing AED 27 billion to AED 28 billion in the UAE this year, which is a healthy rate of growth. In terms of guidance for next year, it is very difficult to give that guidance at this point. I think what is better is for us, after we announce Q4 results, we'll have a better direction in terms of where the market is, what is our calendar in terms of launches and the products that we have. But like I always say, we will always capitalize on the strength of the market. As long as the market remains strong, we will dominate and try to capture as much as we can through the product offering that we have readily available.

Okay, very clear. And third, just to confirm, Al Fahid Island and the third launch in Dubai, the third plot with Dubai holding, these are going to be H2 events?

Al Fahid is going to be an H2 event. Dubai, we are working very hard to get it launched before the end of the year. If we don't, it might slip into Q1.

Okay. All right. Okay, very clear. Just moving to the recurring portfolio, just a few questions. Just on this recent announcement for the commercial office, just help us understand why go onshore when the competitive advantage today is all this FDI and new companies opening shops in the UAE and Dubai. I mean, how are you thinking about competing with the likes of DIFC if you're not offering this offshore licensing, which is what really matters at this stage? So maybe your way of -- what makes you that confident that you're going to be able to deliver a solid economics on this Grade A office space despite it being onshore?

I think that's the exact competitive advantage. One, the DIFC is relatively more expensive, probably 60%, 70%, 80% more expensive on a per square meter basis. The point about why didn't we go with free zone, it's a matter of availability. If we could, we would, but obviously, right, we cannot get access to that. We would love to have exposure to both. It's all about diversification. As a landlord, I'd like to offer my tenants onshore, non-free zone licensed office spaces and free zone office licensed spaces. The compelling part of this asset is that you have a lot of tenants, corporate tenants, who have to service tenants in the DIFC that do not have to pay expensive office rents in the DIFC. They can be in very close proximity and service that area. So I think the road connectivity, the connectivity to the DIFC, the specifications of that asset, we are very confident we'll make it very highly sought after. If you look more micro into the onshore market in Dubai, that's a very thriving commercial office market today. However, I think a lot of that market is becoming quite dated, and therefore, you have to become more micro about it. Location and quality of asset is going to make this stand out.

Okay. All right, clear. Just to -- the final question on the recurring portfolio, just on the -- existing, I mean, just if I take a look at the assets, you've clearly put a lot of money and CapEx in the commercial space. You've also now announced a significant uptake when it comes to logistics, right, with a new plan. It just feels that maybe retail or actually residential is a bit left behind. And I think looking at the numbers also, I mean, the momentum from a P&L perspective has been quite weak on the residential leasing when you compare it to the other parts of the portfolio within the recurring segment. Is there anything you can highlight? First of all, are you happy with the performance of the residential portfolio within Aldar's recurring segment, or you think this deserves also, maybe more investment to come through? I just want to hear your thoughts on that.

I absolutely agree with you. I think this was a missed opportunity from our side. We were very focused on selling residential because from a feasibility point of view, it made a lot more sense to sell it than to lease it. And I think we are catching up now. So our residential portfolio is fairly dated. It requires, some refurbishment. But we are working and we'll be announcing in the right time a decent pipeline of residential product that is going to come into the recurring income portfolio. I think last we spoke, we said that, we'd be looking to add between acquisitions and between development to hold, we'd be looking to add somewhere between 3,000 to 4,000 units of additional residential units into the mix.

The leasing mix? Okay.