U.S. Markets closed

Edited Transcript of ALDAR.AD earnings conference call or presentation 12-Nov-19 12:00pm GMT

Q3 2019 Aldar Properties PJSC Earnings Call

Abu Dhabi Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Aldar Properties PJSC earnings conference call or presentation Tuesday, November 12, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Greg Fewer

Aldar Properties PJSC - CFO

================================================================================

Conference Call Participants

================================================================================

* Marc Hammoud

JP Morgan Chase & Co, Research Division - Analyst

* Stephen Bramley-Jackson

HSBC, Research Division - Head of Real Estate, Europe

* Taher Safieddine

Citigroup Inc, Research Division - VP

* Zohaib Pervez

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's Aldar Q3 Results Investor Conference Call. I must advise you that this conference is being recorded today, Tuesday, November 12, 2019, 3 p.m.

I would like now to hand the call over to our speaker for today, CFO, Greg Fewer. Thank you. Please go ahead.

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [2]

--------------------------------------------------------------------------------

Thank you. And before we start, apologies to everybody for some of the technical problems we had commencing this. Of course, this call is transcribed and will be available to anyone who wants to have the full audio and transcription post the call.

Good afternoon, and welcome to Aldar's Q3 2019 Results Call. As mentioned, I'm Greg Fewer, the Chief Financial Officer of Aldar.

Before we open the floor for Q&A, I'll just give you some brief remarks about our performance during the quarter and year-to-date, at which point we'll break for questions.

So kicking off with our financial performance. In the third quarter of 2019, we reported a 7% increase in revenue to AED 1.6 billion and a 14% increase in gross profit to AED 662 million for the quarter. These increases were mainly driven by the development business, which recorded a 20% increase in development revenues year-on-year. We saw higher revenue recognition on key development projects under construction, including revenue catch-up on the sale of inventory units and growth in our development management fees.

In the third quarter, off-plan development sales were up 272% to AED 1.1 billion, and year-to-date, they were up 128% to AED 3 billion on the back of strong demand for recent launches and inventory sales across projects under construction.

Our third quarter 2019 Asset Management net operating income was up 4% to AED 397 million. This was mainly driven by new asset additions from earlier in the year, most notably the Etihad assets and our extension of the Al Jimi Mall in Al Ain as well as strong growth from our adjacent business sectors, which include Aldar Academies, Khidmah and Provis. This growth was partly offset by the sale of our Al Murjan Tower and some softer like-for-like performance across the existing portfolio, including Yas Mall, where it's still ongoing the final renewals in its 5 year lease-up from the opening in November of 2014.

Net profit for the third quarter was AED 387 million, reflecting lower other income recorded this quarter relative to last quarter, following the completion of the government infrastructure handovers that have largely completed to date.

Our balance sheet remains robust, and debt levels are well within our established debt policies with a 37.5% loan-to-value across our Asset Management portfolio and 10% loan-to-value across the Development Management portfolio.

In the third quarter, we saw an uptick in our development management loan-to-value, which is very much in line with our previous guidances. As expected, there is additional working capital required currently as new projects launched, still access escrow after 20% completion. And our other projects, notably Mamsha, Jawaher and Yas Acres start to approach handover.

Our development revenue backlog grew marginally quarter-on-quarter to AED 4.6 billion, giving clear visibility on future committed revenues and earnings. Across our development pipeline, we sit at 80% sold. However, it's worth noting that the hugely successful perfect 10 promotion we ran in September will feature predominantly in our fourth quarter development sales.

Q3 2019 Asset Management net operating income was supported by a resilient portfolio occupancy, which remains at 90% across our investment properties, that include retail, residential and commercial properties.

Hospitality also saw a strong performance with year-to-date occupancy at 75% versus 71% in the same period last year. We also outperformed the occupancy of the wider Abu Dhabi market, which also was 71% for the first 9 months 2019. And following significant changes over recent years, Aldar Academies and Khidmah and Provis are now meaningfully contributing to the Asset Management performance. And over the coming period, we'll be enhancing our disclosures to reflect this.

As we head into the final quarter of 2019, we remain on track to deliver on our ambitious guidance of AED 4 billion in off-plan development sales for 2019 and AED 1.7 billion in Asset Management net operating income.

Thank you very much for your time and very pleased now to open the floor for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

[Operator Instruction] First question from Stephen Johnson (sic) [Jackson] from HSBC. Please go ahead.

--------------------------------------------------------------------------------

Stephen Bramley-Jackson, HSBC, Research Division - Head of Real Estate, Europe [2]

--------------------------------------------------------------------------------

Stephen Bramley-Jackson from HSBC. Greg, I've got a couple of questions really just around your development pipeline. So when we took a look back at your Q2 numbers from a point of view of units sold and, therefore, sales value, it looks as if the numbers in the Q3 on several schemes are lower than they were in Q2. So Nareel, I think, is one that stands out the most, but there are several of your schemes where the Q3 sales numbers have reduced. Can you just explain what's happening here? Are these cancellations? Is this normal? Is it abnormal?

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [3]

--------------------------------------------------------------------------------

Well, I mean -- so what we experienced this quarter were a few cancellations on sales in existing projects. So what happens for those who were -- for example, at Nareel, where we would have, under IFRS 15, recorded the revenue, and on completion we had a receivable outstanding, and we had a customer who didn't complete the transaction and the accounting that unwinds that is that you take a receivable and you move it into inventory for sale again. So -- and that's same as sales [increase]. We've just adjusted those numbers to recover that.

--------------------------------------------------------------------------------

Stephen Bramley-Jackson, HSBC, Research Division - Head of Real Estate, Europe [4]

--------------------------------------------------------------------------------

Right. But is this the first quarter you've seen this happen? Is this an evolving trend? We haven't looked back at the other numbers yet, but it was the first time we'd sort of hit on it.

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [5]

--------------------------------------------------------------------------------

Yes. I mean it did hit this quarter. I think the majority of it came from one project, which was Nareel, which -- that's a special project, which is a little bit different from all our others that involve large pallet slots and a very important [client piece]. So not really broadly representative of the broader market.

--------------------------------------------------------------------------------

Stephen Bramley-Jackson, HSBC, Research Division - Head of Real Estate, Europe [6]

--------------------------------------------------------------------------------

Right. And just did you get any insight into why the cancellations occurred? Did you get any insight into that or they just cease and they just come through?

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [7]

--------------------------------------------------------------------------------

Yes, they just come through, especially and particularly with Nareel. It's a different market.

--------------------------------------------------------------------------------

Stephen Bramley-Jackson, HSBC, Research Division - Head of Real Estate, Europe [8]

--------------------------------------------------------------------------------

Okay. And then one thing again that I noticed isn't included on Slide 10 of your Q3, but you've put it on Slide 11 in your Q2 was the value of completed stock inventory. Can you update us on where that stands at the end of Q3, please?

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [9]

--------------------------------------------------------------------------------

So the value of updated stock inventory on completed would be -- I'm just getting the number out now. About AED 800 million. So that would have been augmented by these cancellations that I've referred to.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Next question from Taher Safieddine from Citigroup.

--------------------------------------------------------------------------------

Taher Safieddine, Citigroup Inc, Research Division - VP [11]

--------------------------------------------------------------------------------

Couple of questions from my end. First, just on the development business. I mean, clearly, off-plan sales momentum has been very solid. Congratulations on that. I want to get some color on the general dynamics in Abu Dhabi. I mean what's your market share? Is there anyone else? Are you seeing any major competition in terms of new launches within Abu Dhabi? And number two, within the 9M number, can we get some color on how much of that was inventory sales, meaning, unsold units of previously launched projects? That's my second question within the development business. And then just on the Asset Management portfolio, can we get an idea on how much is the like-for-like drop in the first 9 months or Q3? And just any update on the uptake within Al Jimi Mall extension in terms of rental rates would be helpful.

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [12]

--------------------------------------------------------------------------------

Okay. So 4 questions there. So the first one, just on the general market and market share, I mean, look, we remain the dominant player here. I don't think the extent of our dominance really has changed that much since the beginning of the year. We have seen a couple of subdevelopers launch in areas like Saadiyat, but not at a level that would really move -- that would really impinge on our dominance. So we've always kind of said we feel like we're about 80% plus of the off-plan market in Abu Dhabi right now, and I don't think that number has -- or that sentiment or that general position has changed.

In terms of inventory for the quarter. So we've recorded for this quarter just over AED 1 billion in overall sales with about just -- let's say, about half and half was inventory versus new launches.

In terms of Asset Management then, so you talked about -- I'm sorry, just on inventory, what I meant, including DWIP for some projects just under handover. On Asset Management, like-for-like, we're still seeing that mid-single-digit like-for-like declines. So I would be factoring out of that number things like our resi portfolio, where we have upwards-only leases on half the portfolio, which remains one of our most important attributes. But on the resi portfolio exposed to 1-year renewals in our prime destinations, we're still seeing some single-digit year-on-year price declines.

And then you asked about the uptick at Al Jimi Mall, which has been very positive. So Jimi Mall is operating now at 95% occupancy, and we've got great established Tier-1 rates in the new extension line shops and large space users and F&B, all in the main category ranges that we'd be expecting to see sort of AED 1,700 a square meter for the large space users, slightly more for the line shops. And then for the large anchors, obviously, slightly less than that. But we're very happy with the way Jimi Mall has opened. And with the kind of foothold that we're seeing in that location, we've always thought that it was a great location and probably a precinct that's underappreciated. It's a very interesting and very affluent consumer.

--------------------------------------------------------------------------------

Taher Safieddine, Citigroup Inc, Research Division - VP [13]

--------------------------------------------------------------------------------

Okay. Just a follow-up. You're stressing more and more on the adjacencies, especially the facilities management at Provis and now the schools. You've talked about enhancing disclosure. Clearly, this has been a very strong performer within the Asset Management portfolio. Is there any idea or color about maybe spinning off this business or looking into some -- certain capital allocation? I mean, clearly, it's a high cash-generative business, especially the schools are looked at as lucrative and very sizable size. I mean this puts you at one of the bigger players in Abu Dhabi and the U.A.E. with 22,000 students. I mean is there anything you can share with us in terms of how you're thinking about this adjacencies segment?

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [14]

--------------------------------------------------------------------------------

Yes. Look, I mean, the narrative there for a long time has been they're very valuable businesses, noncore. We had a lot of low-hanging fruit that we wanted to fix up as management. And I think we're very much slightly past the 50% stage in terms of achieving those operational things that we wanted to achieve. And so we've got new management teams in both those entities, and they're producing exceptionally good results at just over 50% through the initiative, let's say, program to achieve and to monetize some of those low-hanging fruits. So I think that I would say there's nothing in the immediate pipeline to be talking to you guys about in terms of monetization events. I would characterize these as having very identifiable growth opportunities within the gross profit line that we've -- that the new management teams there have shown a strong track record at achieving. And of course, if someone comes in and says, "Look, I'm willing to pay for all that right now, and then some. Every asset has a sale price." But we're very happy, and I have great confidence in what the management teams there are doing, and we'd love to see them continue to see those optimization programs come to fruition.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Next question from Marc Hammoud from JPMorgan.

--------------------------------------------------------------------------------

Marc Hammoud, JP Morgan Chase & Co, Research Division - Analyst [16]

--------------------------------------------------------------------------------

Two follow-ups on my colleague's questions. One is on the development sales for the 9 months. So I can't reconcile to the AED 3 billion. So I'm wondering how much of Reeman I, which was split between Q4 and Q1, did you book in 9 months? And how much ad hoc land sales did you have in 9 months? And the second question is on the Asset Management business. How much contribution did we have from the acquisitions and from Jimi Mall in terms of absolute amount in NOI terms, please?

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [17]

--------------------------------------------------------------------------------

Okay. So the first question was on Reeman. So we had about -- so in Q4 last year, there was about AED 800 million of that project that straddled the year-end, then -- which would mean we have about AED 650 million in the 2019 numbers. And in terms of overall land sales, we'd be looking at about AED 100 million for 2019. So hopefully, that would reconcile with the AED 3 billion.

And then your second question was on Asset Management, and just looking at the overall contributions from first, Negan. So look -- so the first comment on Negan is, we're definitely operating well above our initial NOI underwriting case, let's say, for the TDIC assets that we acquired. I think when we first bought those, we were underwriting AED 121 million of annualized net income, and we're on pace for annualized net income of around, say, in the AED 140 million range, which kind of puts the overall yield on that accreting from AED 7.5 million, AED 7.6 million that we bought it at to about AED 8.5 million. So we're really happy with the stuff there. The thesis was really about commercial entity acquiring and managing assets that were run by the government, and that thesis has proven out quite a lot.

In terms of Al Jimi, I mean, that's 95% leased, just getting those entities up and running. On a year-to-date -- on an annualized basis, we're going to be looking at about AED 90 million.

--------------------------------------------------------------------------------

Marc Hammoud, JP Morgan Chase & Co, Research Division - Analyst [18]

--------------------------------------------------------------------------------

AED 90 million, 9-0?

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [19]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Marc Hammoud, JP Morgan Chase & Co, Research Division - Analyst [20]

--------------------------------------------------------------------------------

And what about the Etihad? If you can remind me also when the acquisitions actually start with Etihad, which month?

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [21]

--------------------------------------------------------------------------------

Yes. So with Etihad coming in from March, and on an annualized basis, that's just over AED 100 million of incremental NOI.

--------------------------------------------------------------------------------

Marc Hammoud, JP Morgan Chase & Co, Research Division - Analyst [22]

--------------------------------------------------------------------------------

All right.

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [23]

--------------------------------------------------------------------------------

And, sorry, just to clarify on Jimi, that was -- we brought about AED 19 million that you're seeing in the numbers right now, the year-to-date, on an annualized basis, that's going to be more like AED 38 million to AED 40 million.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Okay. We don't have any more questions for the moment. (Operator Instruction] We have a new question from Taher Safieddine from Citigroup.

--------------------------------------------------------------------------------

Taher Safieddine, Citigroup Inc, Research Division - VP [25]

--------------------------------------------------------------------------------

Yes. Just a follow-up question. As we're getting closer to Q4 and looking at how the business is doing, I mean, clearly, the development business has been growing and the Asset Management business, again, is also in a stabilization mode, growth mode. Is it safe to assume that the dividend should be higher than last year, just doing the calculation and looking at your dividend policy without just any speculation? But is it wise to assume that we are on an upward trend in terms of dividend distributions?

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [26]

--------------------------------------------------------------------------------

Well, look, so I'll reemphasize your very helpful comment about not speculating. And so I will definitely not speculate and preempt the Board other than we've got a pretty transparent policy on -- the basis on which we pay that dividend. And we're seeing steady progress in the majority of that cash generation coming from the Asset Management business. And as you've said, that's a pretty steady business. So look, I think we stand by that transparency, we stand by the quality of the numbers that we show you guys, ladies, around how to make your predictions for that dividend. It's not -- of course, it's not only the formula. The formula has ranges in it. So there's sentiment, and there's signaling and other things that go into that dividend recommendation. So again, I really don't want to preempt a lot of that very important input that goes into that other than we value the stability in the business. We see good stability in the development management business, too. A good barometer for how we look at the health of that business is the revenue backlog. We're adding sales at the same pace that we're recording those revenues, just to give a barometer for the predictability and health of that. And you hear us talk a lot about fiscal stimulus in our market. That generally gives us more reasons to feel positive than not. So look, at the moment, it's precise and as vague as I can be at the same time, but I hope that helped answer your question somewhat.

--------------------------------------------------------------------------------

Taher Safieddine, Citigroup Inc, Research Division - VP [27]

--------------------------------------------------------------------------------

Okay. Yes, that's fine. Just a follow-up question again. Maybe it's the same question every time, but Aldar Investments, I mean, is there any visibility change in terms of how you're thinking about the business in terms of changing in the capital structure and so on? I mean is there any update from last quarter or still looking at a challenging maybe market for IPOs or whatnot? Just in terms of some color on that.

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [28]

--------------------------------------------------------------------------------

Yes. I mean, look, I think that's again a common narrative around how we think about that. So just even to repeat words I've used before and that are still relevant and important to be updated today, any time you look at -- we make the point -- premise 1 in our communication on this has always been, the Asset Management business operates independent from the Development Management business and vice versa. So lots of corporate action opportunities would be relevant for us to look at in the right markets. And there are some markets that are better for those sort of opportunities to make sense, and I wouldn't personally characterize this market as necessarily one of those, hence, not a lot of updates from us on that topic to your good selves. So I don't think management's position on that has changed a lot. I think we just continue to stick to the knitting, focused on people, focused on strategy, focused on execution, focused on technology, focused on really doubling down on the strategy of becoming the most efficient and professional platform for property ownership in our region, and that's what the team is working with -- at AIP to do. And then obviously, updates as and when we start to see anything different in our market that would be relevant to update you guys on.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Next question from Zohaib Pervez from Al Rayan.

--------------------------------------------------------------------------------

Zohaib Pervez, [30]

--------------------------------------------------------------------------------

One of my questions is that recently, after the third quarter, you did a sukuk. So what will be the LTV after you incorporate this sukuk? And secondly, this sukuk was done at what 3.875% and then the debt was repaid. So this was done -- if I'm -- please correct me if I'm wrong, but the difference in the profit rate is not different because you buy -- you get the debt borrowing at EIBOR plus 1%, and you got it at 3.875%. So it's because you wanted to lengthen the maturity of your debt? Or is it you're getting more benefit on the cost? And my third question is that 20% to 40% of the development business or the completed projects you give in the dividends, correct? That's as per the policy. So last year, which projects in your list, which is on Page 10, were used for the dividend? And which one will be relevant for this year?

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [31]

--------------------------------------------------------------------------------

Okay. So first question on the sukuk. So yes, we issued a $500 sukuk. 100% of the proceeds of that sukuk were used to repay debt. So the debt numbers that I referred to earlier on the call, 37.5% at AIP, which is the issuer of that -- of that sukuk were being -- that is the position post -- and will be the position post the issuance of that sukuk.

In terms of the interest cost, there's actually very little interest differential between the 2. I mean we have a portfolio of loans. So we would have repaid some of the more expensive facilities, the floating rate facilities, which weren't all at EIBOR plus 1%, which is probably our best and our cheapest facility. But given where EIBOR is at and where some of the higher margins are like closer to 1.5% on some of the other loans, the interest differential was minimal, but of course, the main benefit we got was extending the duration of our liabilities. So with the 10-year space opening up in the sukuk market, we view all our investment properties as really long-term assets that deserve long-term liability. So the bank market is usually always tapped out at around 5 years in duration. We issued a 7-year sukuk a year ago, and to complement that with a 10-year sukuk now just made a tremendous amount of sense.

--------------------------------------------------------------------------------

Zohaib Pervez, [32]

--------------------------------------------------------------------------------

Okay. And...

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [33]

--------------------------------------------------------------------------------

I'm sorry, your final question was on dividend. So our 2018 dividend, so we have projects such as Nareel, Merief and Meera. These are the projects to be thinking about in the 2019, Mamsha, Jawaher and then Yas Acres. And so we've got our famous list of developments that sort of chart that overall sequence over time. The only thing I'd add to that as well is that these are lumpy sometimes and they fall over year-end. So one of the -- it's not 100% formulaic in how it's -- and then there's phased handovers that happen as well. I think the thing I'd point to is that it's dividend formula, it's guidance, it allocates that capital. We have a progressive policy. We're very key in attaching for the market that were progressive into our overall dividend policy. So there's handovers, straddling year-ends and straddling Marchs and Aprils and things like that. We make sure that we -- that we're sensible and progressive in the way that we allocate those -- that capital between the years to achieve our dividend objectives.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Thank you. We don't have any more question for the moment.

(Operator Instruction] It seems that we don't have any more questions. Back to you for the conclusion, sir.

--------------------------------------------------------------------------------

Greg Fewer, Aldar Properties PJSC - CFO [35]

--------------------------------------------------------------------------------

Okay. Thank you, everyone, for dialing in. Apologies again for the technical difficulties getting started. As I said, our team is very happy to send transcript to anyone who would like it after the call. Just e-mail us. And look forward to speaking to you at our year-end. Thank you.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

This concludes this conference call. Thank you all for your participation. You may now disconnect your lines. Thank you.