Aldar Properties PJSC (ALDAR) Earnings Call Transcript & Summary

Hello, everyone, and welcome to today's Aldar Properties 9 Months 2024 Financial Results Call. My name is Seth, and I'll be the operator for your call today. [Operator Instructions] I will now hand over to Faisal Falaknaz, Group Chief Financial and Sustainability Officer to begin the call. Please go ahead.

[Foreign Language] Hello, everyone. Thank you for joining us on this call to discuss Aldar's financial performance for the first 9 months of the year. Aldar has continued its strong growth trajectory, and the company is now operating at significant scale across our core businesses. We continue to set new records in development sales, while higher recurring income has been driven by organic growth and the contribution of recent acquisitions. Importantly, we are also taking confident steps into a new phase of expansion through the wide-ranging partnership with Mubadala and implementation of our development to hold investment strategy, what we call D-Hold. Financially, Aldar has delivered a very strong performance year-to-date, leading to an upward revision of guidance on key metrics, which I will detail at the end of this presentation. Group revenue was up 69% year-on-year at AED 16.5 billion for the first 9 months, with EBITDA rising 55% to AED 5.4 billion. Net profit increased 52% year-on-year to AED 4.6 billion in the 9 months period. This incorporates an overall effective tax rate of 3.9% following introduction of corporate income tax in January. Aldar Development has leveraged its market-leading franchise to deliver exceptional growth. The business has successfully launched 8 new developments this year, while effectively executing on a sizable revenue backlog. Aldar Investment continues to excel as an active asset manager, while expanding and diversifying its high-quality asset base in the context of a robust macroeconomic environment in the UAE. We are also seeing solid demand across all real estate asset classes, which is driving rental rates higher. Key acquisitions over the last 2 years are also making a meaningful contribution to the bottom line. Turning to Slide #4 and further detail on the performance of Aldar Development. The platform has been operating at an elevated run rate this year as it delivers against a growing development pipeline, which was supplemented by 3 new launches in the third quarter in Dubai, Saadiyat Island and Yas Island. Group sales rose 24% year-on-year to AED 24 billion in the first 9 months with the UAE accounting for just over AED 20 billion of sales, an increase of 19%. Group development EBITDA increased 72% year-on-year to AED 3.2 billion for the 9 months period. We have seen continued strong demand from overseas and expatriate buyers, who have accounted for 76% of total UAE sales year-to-date, supported by Aldar's growing international sales network. Acceleration of project delivery resulted in robust cash collection of AED 7.2 billion in the 9 months of '24, and we expect full year '24 cash collections to reach between AED 8 billion to AED 9 billion. On the international front, both – SODIC and London Square continued to scale up. In Egypt, SODIC significantly ramped up sales activity in the third quarter, achieving record sales of AED 2.3 billion this quarter, up 70% year-on-year. This brought 9 months total sales to AED 3 billion, an increase of 28%, and the company's revenue backlog now stands at AED 6.3 billion. While London Square continues laying solid foundations for future growth, having completed the acquisition of 10 land plots since the beginning of '24 and having announced its first development launch since our acquisition. At the group level, the development backlog now stands at over AED 48 billion, providing strong revenue visibility over the next 2 to 3 years and will continue to grow strongly beyond those levels. Turning to our Aldar Investments on Slide 5 and 6. The platform is pursuing a strategy of expansion and diversification while also benefiting from strong tenant demand across all segments. Nine months 2024 revenue increased 24% year-on-year to just shy of AED 5 billion with adjusted EBITDA increasing 23% to nearly AED 2 billion. The D-Hold strategy to develop prime assets for retention and income-generating portfolio continues to expand. You will find full details of our expanded AED 9.35 billion pipeline on Slide #6. The pipeline to be delivered over the next 3 years comprises AED 5 billion of commercial retail, hospitality assets in Abu Dhabi, AED 1 billion in logistics across Abu Dhabi and Dubai; AED 1.6 billion on the commercial tower adjacent to the DIFC in Dubai; AED 1.75 billion from the recently announced JV with Expo City to develop and own 6 mixed-use buildings in Dubai. The deal pipeline is additive to Aldar's ongoing acquisition strategy and is expected to significantly boost recurring income streams and long-term capital appreciation. On Slide #7, you will see further detail on the performance of each segment within Aldar Investments so far this year. The investment properties portfolio continues to perform very well, supported by increased scale through active asset management and a successful leasing strategy. Adjusted EBITDA for investment properties increased 8% year-on-year to AED 1.3 billion in the first 9 months, while occupancy at 95% across the portfolio. The commercial portfolio is now 97% occupied with strong demand for Grade A space driving increased rental rates. Adjusted EBITDA for the segment was up 26% year-on-year to AED 549 million in the 9 months period. Excluding the gain on the commercial asset disposal recognized earlier in the year, adjusted EBITDA rose 15%. The ADGM towers, International Tower, Aldar HQ and 6 Falak are now essentially fully occupied, while Al Maryah has reached 88% occupancy, up from 83% at the end of Q2. In retail, Yas Mall continues to perform very well with occupancy at 96%, tenant sales up 8% year-on-year and footfall 16% higher. Logistics, which is becoming a key focus of growth and diversification, achieved a 25% year-on-year rise in adjusted EBITDA to AED 45 million, driven by positive contributions from the acquisition of 7 Central in Dubai. Aldar continues to pursue growth through its partnerships with DP World and the expansion of our Abu Dhabi Business Hub, which is set to be completed by the end of 2024. The hospitality and leisure portfolio experienced a 4% year-on-year decrease in adjusted EBITDA due to a one-off income recognized a year earlier. Excluding this, adjusted EBITDA was up 4% year-on-year with occupancy at 73% and RevPAR up 10% year-on-year. Performance was supported by key assets in Aldar Investment, which are continuing to exceed expectations with the portfolio set for further growth as Aldar pursues a AED 1.5 billion redevelopment plan to reposition a number of assets into luxury resort-focused destinations. Therefore, further excluding the impact of assets under development, adjusted EBITDA was up 12% year-on-year. Aldar Education recorded a 49% year-on-year increase in adjusted EBITDA to AED 210 million for the first 9 months of the year, excluding the reversal of a provision taking Q3 2024, 9 months 2024 adjusted EBITDA rose by 40% year-on-year. The student body now exceeds 36,000 students with recent acquisitions, higher enrollment in operated schools and tuition fee increases, all providing solid contributions to the bottom line. In addition, the education portfolio saw the opening of 2 new greenfield schools in September 2024, with construction of another underway on Saadiyat, which is expected to open in time for the next academic year. Meanwhile, Aldar Estates adjusted EBITDA increased 120% year-on-year to AED 251 million, primarily due to the series of strategic mergers and acquisitions completed last year, leading to the creation of the region's leading integrated property and facility management platform. On Slide 8 and 9, you will see details on the recent announcements we have made in the third quarter. Most notably, Aldar announced an expansion of our longstanding strategic partnership with Mubadala. Through a series of joint ventures, we are bringing together AED 30 billion of prime Abu Dhabi real estate, leveraging our expertise in real estate development and asset management and Mubadala's institutional strength and prime land bank to unlock opportunities for significant value creation. The partnership brings together Abu Dhabi's premier shopping destinations, Yas Mall and Galleria Luxury to a new platform where there is a considerable opportunity to drive value through consolidating ADGM's real estate ownership under one platform, unlocking efficiencies and synergies across the enlarged portfolio, controlling Abu Dhabi's luxury retail segment, particularly in the context of Saadiyat growth coming online next year. The combined EBITDA of these 2 assets is just shy of AED 500 million with meaningful potential arising from cost and revenue synergies. This is, of course, still subject to due diligence and closing, which we expect to happen in early next year. Moreover, Aldar is also acquiring sustainable mature residential and commercial income-generating assets in Masdar City, which is expected to close by the end of this year. Worth noting that we are underwriting these Masdar assets, in line with our over 7% threshold. Considering the initial cost of AED 7 billion, this JV should contribute north of AED 220 million EBITDA, out of which we receive 60% and grow over time and to an even more meaningful yield on cost. The partnership will also open up the opportunity to develop strategically located islands adjacent to Saadiyat Island and Yas Island. We are also expecting these deals to close by the end of this year. And finally, we are also creating a new logistics park close to Zayed International Airport, which will be launched in phases over the next 10 years with the first phase coming online in 2028. We have also announced AED 1.5 billion investment program to transition of our Abu Dhabi hospitality portfolio into the luxury bracket. This includes transforming the 6 Yas Plaza Hotels into an integrated resort and upgrading the Eastern Mangroves, Nurai Island, W Hotel and Tilal Liwa assets. Together, we see the Mubadala transaction and the hospitality program driving the next phase of real estate market development in Abu Dhabi, enhancing the Emirates appeal as a business and lifestyle destination. Furthermore, our Dubai footprint also continues to grow. We have recently announced a 50-50 JV with Expo City to develop and own 6 mixed-use buildings as part of the Dubai South master plan. In terms of the asset composition, this is expected to be 48% commercial, 28% retail and 25% residential. We have been highly active in Dubai and now benefit from meaningful and diversified footprint across real estate assets, which comprises; one, our Dubai holding residential development portfolio partnership; two, a sizable logistics portfolio across 3 locations between Abu Dhabi and Dubai; three, our entry into the Dubai commercial market with construction of an office tower adjacent to the DIFC and acquisition of 6 Falak and Dubai Internet City. Moving to Slide #10 and our key balance sheet metrics. Aldar maintains a conservative leverage and high interest coverage profile along with strong liquidity. As of the end of September 2024, the company had AED 18 billion in free and unrestricted cash and undrawn committed bank facilities. We continue to actively manage our liabilities to achieve strategic and financial objectives. As at the end of September 2024, we have repaid and cleaned up all our senior secured facilities in the UAE and the U.K. We are 100% senior secured in the UAE and the U.K. providing significant balance sheet flexibility, while we continue to have AED 200 million unsecured debt in our SODIC business, Year-to-date, Aldar has raised AED 3 billion in senior unsecured financing. The 5-year revolving credit facilities have improved liquidity and extended the average debt maturity to 5.2 years. Looking ahead, we continue to maintain a disciplined approach to capital deployment to ensure value and strategic alignment. I also wanted to highlight that we are -- that we were affirmed Baa2 stable for Aldar Properties and Baa1 stable for AIP by Moody's in August. We target these ratings -- we target these rating levels better, and we continue to prudently manage our liquidity, capital structure, financing and investment policies to at least maintain these levels. Lastly, on Slide 11, I wanted to note that we have made a change to our LTV calculation methodology in Q3 2024 without changing the thresholds for our 2 business segments. We continue to manage our investment business at less than 40% LTV and our development business at less than 25% LTV, which is consistent with the target credit ratings. Our previous policy was implemented a long time ago. Since then, Aldar has evolved in terms of scale, presence and size of operations across investment, development and project management platforms. This change, which encompasses our total asset base and foreign operations, gives a better reflection of leverage across the group. Turning to sustainability highlights on Slide 11. Aldar continues to make solid progress on sustainability and in particular, our commitment to achieve net zero by 2050. This involves building green up, more sustainable places, meeting global standards such as LEED, Estidama and Fitwel on new developments. In that context, our Athlon development in Dubai was awarded UAE's first lead platinum certification for community planning due to its focus on sustainability, including energy efficiency and water conservation. Moreover, we achieved this certification for 11 assets within our portfolio, and we aim to complete lead certification for 900,000 square meters of our portfolio by the end of 2024. From a community perspective, Aldar contributed AED 1 million to our partnership with Dubai Cares, which provided 10,000 children from low-income families in the UAE with essential school kits in August. I would like to conclude on Slide 13, where we set out revisions to our full year 2024 guidance in light of the strong performance so far this year. We are revising guidance for the group's adjusted EBITDA to a range of AED 6.8 billion to AED 7 billion from the previous range of AED 6.2 billion to AED 6.5 billion. For development, our guidance for sales remains unchanged between AED 29 billion and AED 31 billion. However, Aldar Development's EBITDA is expected in the range of AED 4.3 billion to AED 4.5 billion, above previous guidance of AED 4.1 billion to AED 4.3 billion. For Aldar Investment, we are updating our guidance for adjusted EBITDA to a range of AED 2.5 billion to AED 2.7 billion from the previous AED 2.3 billion to AED 2.5 billion. Just a final note on guidance. Backed by the strong market conditions and backdrop, which we expect to continue in 2025, we have garnered significant momentum over the year and have clear visibility on not only what the final quarter of 2024 is shaping up like, but also on the momentum and the activity that we are taking into 2025. With that being said, over and above these revised numbers, we expect to see an uplift of over 35% on the group adjusted EBITDA guidance for fiscal year 2025. We will be back at full year results with further refined and granular guidance. In conclusion, Aldar's core businesses remain well positioned for sustainable growth. On the development side, we are delivering effectively against the AED 50 billion backlog while carefully calibrating new launches to target customer segments and replenishing our land bank. Aldar Investment plans to invest further income-generating assets and new growth sectors while maintaining a disciplined approach to capital deployment to ensure value and strategic alignments. The D-Hold strategy is key to leveraging the strengths of the entire organization to create substantial shareholder value. With that, we would like to conclude the presentation and open the floor for questions. Thank you very much.

[Operator Instructions] So our first question comes from Haidar from Arqaam Capital.

[Foreign Language] Remarkable performance across all businesses. I'm looking or trying to aggregate all the CapEx program that you have committed to between developed to hold Mubadala, Expo redevelopment of hotels. You would get to above AED 20 billion in CapEx over the next years. Should we expect like an equal deployment of CapEx over the next 3, 4 years? Or will the certain year be heavier than the others? And what would be a typical target of CapEx spending in any given year in the future? That's my first question. I have a second question, if you want after your answer.

Yes, I'll start with the first one, Mohamad. So we don't usually give explicit guidance on CapEx. But I'd say we share a lot of detailed information in terms of the capital commitments, which you should look in line with our debt policy. The other thing, I think, is -- our backlog is growing significantly. And between '25, '26, '27, there's going to be a significant windfall of profit that's going to be released from that backlog, which we are going to take and then recycle; and two, our Aldar Investment business, which is obviously a little bit more capital-intensive versus development, which is typically mostly funded through the off-plan sale mechanism.

Excellent. It's clear. And given that the LTV is adjusted now, and it looks low for Aldar Investment, 23%. Should we expect it to gradually ramp up towards where it was before, 35%, 40%...

So we will not increase LTV for the sake of increasing LTV. I think the strategy that we want to follow going forward is a deflated balance sheet, so whenever we have cash, we will pay down debt, which should save us a lot of money in terms of interest costs. And whenever the opportunities come up, if you look at our debt facilities that we have raised, we have a lot of optionality there through the RCFs that we have secured. So we can pay down, draw back as needed to fund the business plan. So that's going to be the strategy.

That's clear. So I mean, for future CapEx deployment, should we now expect like 25% of the CapEx to be debt funded or 40%? Is it going to be in line with the guidance or in line with the actual one?

So for the investment side, we can fund up to 40% in aggregate. And then for the development side, we can fund up to 25% in aggregate. Obviously, on a project by project, it varies. It depends on the level of cash we have every quarter. So you'll see that LTV going up and down, but it's not going to be constant. If we have a lot of cash, we're going to pay down debt.

Our next question comes from Taher Safieddine from JPMorgan.

Congrats on again solid set of results. Just two questions from my side. Specifically, I'm interested on the Q3 numbers. Just on the development front, is there anything to be concerned about, given that there is a significant drop in the property development and sales margin during this quarter? Or is this just a function of lower land sales? So this will be the first part of my question on the development. And the second part is just in terms of outlook for new launches. We know that there's Al Fahid, you still have a master plan in Dubai. Where are we in terms of time line on new launches within these projects? Is it still on track for something before year-end? That would be my first question on the development side.

Okay. So let's take the first one. I assume you're referring to the drop in PDS from Q2 to Q3. That's a function of a few things. So we have a lot of handovers that have been happening this year. I think we've handed over somewhere around 800 units, I think. And as you get closer to the completion of those developments, then obviously, the progress slows down and then they get replaced by new awards of new projects. So that's one component. The second component is usually when you have handovers, and we've seen that more prominently last year, is we sometimes have cost provisions that get released at the end of the project because those are no longer needed. So they end up giving you a higher margin. And then the last thing is the point you noted as well, which is the land. I think last year, if memory serves me correctly, we sold somewhere around AED 700 million to AED 800 million of land plots. Year-to-date, I think we've done AED 150 million or AED 200 million. So yes, though we have significantly lesser land sales today, but no -- the answer is, there should be no concern of our PDS. As you've seen, we have revised the guidance for development. And I think we said for this year, the average run rate for the whole development business is around AED 1 billion, which we've more than exceeded. And the most important note, which was the point I made during the script, which is, next year is going to be even significantly stronger than this year. So I wouldn't -- the message I always give you guys is don't focus too much on the period itself, you should look at the trend. And the trend is trending very positively upwards. On the launches -- on the second part of your question on the launches, we were planning to launch Fahid the end of the year. We are now looking at Q1 end launch for Fahid. And then for Dubai, I can't remember what we told you guys, but the plan for the third master plan in Dubai is also to be launched towards the end of Q1 of next year. We do, however, have a number of very big launches happening before the end of the year, predominantly focused on the Saadiyat cultural district. The most notable one probably is the Mandarin branded residents that we announced, I think, a week or 2 weeks ago, and we feel very confident about hitting our sales guidance this year.

Okay. Very clear. Just maybe a follow-up question on the recurring portfolio. I just want to understand, I know that you have a guidance and you've also upgraded your EBITDA guidance on the recurring portfolio. But maybe two questions. How should we think about growth moving into 2025? I mean there's a lot of M&A that has been serving you well. There is also like-for-like growth, but now you're moving into a heavy CapEx pipeline, right? There's significant amount of projects in the D-Hold pipeline, and there's also the Mubadala JV. So maybe just help us understand how should we think about the growth trajectory in terms of the recurring portfolio, assuming no new deployment just in terms of what we have, should 2025 be a similar year to 2024 and then we pick up significantly in '26 and '27 as the new projects come through? Or am I missing something here?

I think you have to be a little bit more granular about it. Like if you look at the existing residential portfolio, that's going to be steady state. Now last year, we had the termination of the Rayyana bulk lease, which impacted the performance of resi in Q1 and Q2. Now those units under bulk were around 420 units, I think, of which more than 90% are now leased again. So it's taken us almost less than a year to fully lease that up, which is why you see the performance of resi in Q3 considerably catching up. And then you'll see steady state going forward, okay? You're not going to see double-digit growth on the resi portfolio. On the commercial portfolio, upside is going to come from 2 areas. So you have the assets that are still not fully leased. For example, A&T Tower, it's still 88% leased. But then the most important thing is as the leases roll over, we are pushing rents up. And I think that will give us still a good room for growth on the commercial side of the portfolio. Retail has been going transformation. So other than the leases renewing and you being able to capture higher ERVs through the better sales that we've been delivering, Al Jimi is going to start kicking in next year and hopefully contributing back again to that portfolio. So the portfolio's performance today has been dragged probably by Al Jimi mainly. Hospitality, again, transformation there. We've been taking some rooms offline. But the impact on the portfolio, as you've seen, has not been that significant because of the higher ADRs and the occupancies that we've been able to achieve. But on that AED 1.5 billion repositioning capital, we expect to make IRRs at least north of 13% to 15%, I would say. And this is an incremental IRR on the additional EBITDA that those capital investments will generate. Now logistics is going to grow significantly, but that's going to be off a much smaller base compared to the other assets. And then we have the acquisitions on top that we are closing with Mubadala between the end of the year and next year, which are really going to start contributing to the bottom line. I'd say more predominantly on the Masdar side because that's the fully stabilized recurring portfolio that we're acquiring.

Okay. And just on this topic, the final question, is there any more details you can give us on the Mubadala JV in terms of economics, NOI yield on the different parts, at least for the retail and the Masdar assets because...

I will give you any detail you want, but you have to be specific with your question because we've tried to have share a lot of information...

Retail, retail?

So what is your question on retail?

I mean how should we think about this new retail? Because you're merging assets, it's not a simple math in terms of acquiring. I mean you're contributing some assets, there is also the premium destination being contributed by Mubadala. How should we think about the NOI yield for this new retail merged entity? How should we think about it?

So let me start macro. So macro, it's a strategic partnership, okay. The whole 4 legs of this transaction combined is going to be very profitable for Aldar. And the strategic angle from that is we have been pushing for consolidating real estate. The pitch for Mubadala has been, you provide institutional strengths. You have a lot of assets that are key for the growth of Abu Dhabi as a leading destination globally, and we are the real estate experts that can extract the value out of that, okay? And we've seen more alignment happen on that over the past few years. Starting with the acquisition of ADGM, AMT, et cetera, et cetera, okay? So that's the big picture. Now going macro on retail. Strategically, we have no luxury footprint in our portfolio, and we will have luxury footprint coming into our portfolio with the launch of the growth. It does not make sense to compete. It makes sense to consolidate the market because what we have seen historically is if all the big mall operators start competing against each other, it becomes a game of giving very generous CapEx to all the tenants, a lot of rent concessions and the assets don't end up being that profitable in the end. So there's a very strategic angle about consolidation. Then there's a synergy point of view. Why have 2 teams operate to different assets? Let's combine them, and there's a lot of synergies that's going to come out of it. So I spoke about the revenue synergies, but there's considerable cost synergies that is going to come out of this. Now on the NOIs, I'd say combined between those assets, you're probably looking at AED 500 million of NOI, okay? We are still early stages in terms of closing this retail deal, the first leg we're going to close is the Masdar deal. The second leg we're probably going to close is the retail deal towards the beginning of next year because like you said, that's a little bit more complicated. And I think the point that we clarified on the last call is we said, headline 60-40 JV. But this JV is not going to be 60-40 because as you previously noted correctly, Yas Mall is significantly larger in value compared to Galleria. Therefore, we will be the majority owner of this JV. We will be the asset manager of this JV. We will consolidate this JV. And there will be upside through repositioning those assets. I would say that those assets today are not generating 7% yield on the valuations that they have today because with retail, it takes time for the rent to stabilize. When a valuer looks at the value of an asset, he looks at the future rents and he sees the upside, the under rental that is in the leases based on the sales capacity of that mall. So we will come with further details in terms of what you guys should model on a forward-looking basis, but I would say those are the high-level details that I can share today.

[Operator Instructions] And just another question here from Mohamad Haidar at Arqaam Capital.

Faisal, just a quick clarification. For 2025, we're expecting 35% growth to the group EBITDA or the development EBITDA?

Group. So we don't want to jump the gun. We usually provide guidance at full year results. But we did want to give you guys a little bit of indication because we are very confident with the potential of the platform. So directionally, we are telling you that the guidance for this year will be at least 35% higher than the guidance that we have provided for this year.

[Operator Instructions] And then we just have a follow-up here from Taher Safieddine at JPMorgan.

It's me again. So just to be clear on Mohamad's question. So next year, we're talking about 35% growth in group EBITDA, yes, year-over-year?

Yes, at least. You forgot the at least.

Okay, so at least, all right. I'll keep that in mind. And in terms of just -- I mean, clearly, this now a new focus on deleveraging the balance sheet as cash flow comes through, just to think about it and try to put it in perspective, this doesn't change anything about the progressive dividend policy that you have in place, right?

Sorry, Taher, I missed that question. You said the debt policy.

No, the dividend -- the progressive dividend policy, that doesn't change, right, even if you're looking at deleveraging the balance sheet as cash flows come through?

No, no. That does not change. Absolutely not.