Ayala Land, Inc. (ALI) Earnings Call Transcript & Summary

Okay. We have a very good turn out today. Thank you, everyone, for attending. Good afternoon. I'm Mike Garcia, Head of Investor Relations. Welcome to our briefing on the first half results of 2022. Joining us this afternoon are members of Ayala Land's management committee, led by President and CEO, Bobby Dy; our CFO and Treasurer, Toti Bengzon. We also have the President and CEO of MDC, Mr. Dante Abando; Residential Business Group Head, Mean Dy; Estate Group Head, Robert Lao; and President and CEO of APMC, Mr. Laurent Lamasuta. And we also have members of the management team and the finance group present. We have on the call around 30 callers or participants. And we would like to remind everyone that today's presentation and a copy of the press release are available at ir.ayalaland.com.ph. Our CFO, Toti Bengzon, will present our financial and operating results, followed by the Q&A. [Operator Instructions] And to start the briefing, let me turn over the floor to Mr. Bengzon. Thank you.

Thank you, Mike. Good afternoon to everyone. Thank you for joining us as we present the financial performance of the company for the first half of this year. Allow me to start with our performance highlights. Total revenues registered at PHP 53.3 billion, 9% higher year-on-year due to improved operations of the various business segments. In the second quarter, as local economic activity progressed under the least strict alert Level 1 classification. Our second quarter revenues reached PHP 28.7 billion. This is 18% higher than the second quarter last year and 17% higher than the first quarter of 2022. Net income totaled PHP 8.1 billion. This is a 34% year-on-year improvement. PHP 4.9 billion was generated in the second quarter, 51% higher than last year and 55% more than the previous quarter. CapEx reached PHP 30.2 billion. This went to the buildup of our residential and commercial projects. And our net gearing ratio stood at 0.77:1 as a result of our ongoing thrust to manage debt and liquidity tightly and to maintain the strength of our balance sheet. On segment revenues, we recorded PHP 34.1 billion in property development revenues, similar to the number we showed in the first half of 2021 as solid commercial lot sales cushioned lower residential bookings. Property development revenues in the second quarter reached PHP 18.3 billion. This is 2% higher than last year and 15% higher than the first quarter of 2022. Sales reservations totaled PHP 49.3 billion, a 2% increase year-on-year given the impact of Omicron in the first quarter of 2022. Nevertheless, second quarter sales improved as we generated PHP 25.2 billion, 28% higher than last year and 5% more than the first quarter of 2022. Meanwhile, Commercial Leasing garnered revenues of PHP 14.6 billion. This is a 54% recovery from a year ago driven by higher mobility. We posted PHP 8.1 billion in revenues in the second quarter. This is an 87% jump from last year and 26% higher than last quarter. Mall footfall averaged 87% and tenant sales were at 82% of pre-COVID levels in the second quarter. In the month of June alone, footfall registered at 93% while tenant sales reached 89% of pre-COVID levels. Moving on to our income statement. Real estate revenues amounted to PHP 52.3 billion. This is 12% higher year-on-year driven by the strong recovery of the retail and tourist segments and solid demand for commercial lots. Interest and other income came in at PHP 1 billion, 55% lower year-on-year due to the higher other income earned from the QualiMed sale in February of last year. Breaking down the interest and other income, equity and net earnings of associates and JV companies increased by 1% to PHP 534 million as contributions from our joint venture with Royal Asia, this is the Shangri-La Group, for our Ciela development. And FBDC companies were offset by lower revenues from our Alveo Federal Land JV due to sold-out inventory. Interest and investment income increased by 10% to PHP 128 million due to interest earned from advances to JVs and yields from our cash deposits. However, other income amounted to PHP 359 million, 78% lower than the PHP 1.3 billion in the first half of 2021. This was a period where we sold our 39.2% interest in QualiMed to Ayala Corporation. Expenses totaled PHP 40.5 billion. This is 3% more than the same period last year, in line with reopening and expanding of our business units, operations. Real estate expenses amounted to PHP 30.7 billion while general and administrative expenses came in at PHP 3.3 billion. Both items increased by 5% from the previous year. With higher revenues, the GAE ratio settled at 6.2%, better than the 6.5% in the first half of last year. Our EBIT margin stood at 36% from 33.5% in the earlier period. Interest expense, financing and other charges totaled PHP 6.5 billion, 3% lower than last year as a result of our debt refinancing initiatives. Netting out expenses from total revenues, income before tax grew by 31% to PHP 12.8 billion. This increase translated to an income tax provision of PHP 2.6 billion. Income before noncontrolling interest totaled PHP 10.2 billion, 38% more than last year. Netting out noncontrolling interest, net income attributable to ALI equity holders increased by 34% to PHP 8.1 billion. Strong retail, tourism recovery and solid demand from commercial lots boosted our revenues. Property development revenues totaled PHP 34 billion, similar to the previous period. Our residential revenues declined by 9% to PHP 27.4 billion primarily owing to a longer booking period from stretched payment terms and an increase in cancellations. Office for sale dropped to PHP 1.5 billion, posting a 28% shortfall from the previous period due to full completion and sold-out inventory of Alveo's Park Triangle Tower at BGC. Meanwhile, revenues from commercial and industrial lots more than doubled from last year to PHP 5.3 billion on solid demand at Arca South, Nuvali and Vermosa. As local economic activity progressed under Alert Level 1, the commercial leasing segment grew by 54% to PHP 14.6 billion. Shopping center revenues totaled PHP 6.9 billion due to higher basic rent and tenant sales. Office revenues increased by 12% to PHP 5.4 billion, owing to the contribution of our newly completed offices. For hotels and resorts, revenues grew by 91% to PHP 2.3 billion, coming from increased guest patronage and room rates as a result of the resurgence of domestic tourism. Moving on to our services business -- businesses composed primarily of APMC and MDC. MDC posted net construction revenues of PHP 1.6 billion. This is 15% lower than last year as external contracts during the period were completed. APMC, together with our power service companies at AirSWIFT, had combined revenues which accelerated by 67% to PHP 1.96 billion on higher AirSWIFT patronage due to more local flights and the higher usage of our car parks across all our developments. Summing up the top line. Real estate revenues amounted to PHP 52.3 billion. This is a 9% growth from the same period last year, combined with interest and other income of PHP 1 billion, total revenues grew by 9% to PHP 53.3 billion. Moving on to margins, starting with our Property Development business. The average gross profit margin of horizontal residential projects was 43%. This is 4 percentage points lower than last year due to the lower contribution of high-margin projects that came from ALP and Alveo. The average gross profit margin of office for sale projects increased by 6 percentage points to 41% from higher selling prices of our limited inventory. On the commercial leasing front, shopping centers EBITDA margin improved to 59% from 45% as operations improved due to higher foot traffic and tenant sales. Office EBITDA margins were steady at 92%, while the overall EBITDA margin of hotels and resorts significantly improved to 21% as mobility and domestic tourism increased. Finally, the overall EBITDA margin of our service businesses were steady at 10%. Let's move on to the operating statistics of our businesses, starting with property development. Sales reservations amounted to PHP 49.3 billion, 2% higher year-on-year. PHP 25.2 billion was generated in the second quarter, which is 28% higher than in 2021 and 5% more than the first quarter of this year. Sales were led by products such as ALP's Ciela in Carmona, Cavite; Avida's Patio Madrigal in Pasay City; Alveo's Corvia in Alviera, Pampanga; and Amaia Skies Cubao Tower 3 in Quezon City. 37% of the pickup came from our horizontal projects. We launched a total of 12 projects worth PHP 34.9 billion, of which PHP 17.9 billion composed of 5 projects were released to the market in the second quarter. It is also worth noting that 22% of our sales reservations or PHP 10 billion originated from our digital selling channels. Total and booked revenue stood at PHP 174 billion. This is PHP 7 billion more than the PHP 167 billion that we ended 2021 with. And this will continue to support the growth of our property development revenues in the coming years. In terms of sales breakdown by nationality, local and overseas Filipinos accounted for 88% with the balance of 12% from other nationalities. Sales from local Filipinos, which comprised 66% of the total, amounted to PHP 32.8 billion, 12% lower. But sales from overseas Filipinos, which represented 22%, amounted to PHP 10.7 billion, a 52% growth year-on-year. Sales to other nationalities amounted to PHP 5.9 billion, up 44% year-on-year. Moving on to our leasing business, starting with the malls. With the continuing opening of the economy, mall foot traffic and tenant sales averaged 87% and 82% of pre-COVID levels in the second quarter, respectively. In the month of June, footfall and tenant sales reached 93% and 89%, respectively, showing that the strong recovery for malls is underway. Total malls GLA stands at 2.13 million square meters. The average occupancy rate for malls is 79% while the total lease-out rate for the portfolio is at 85%. Total GLA under construction is 286,000 square meters. We opened the Ayala Triangle Gardens retail area with 7,000 square meters of GLA in June, and this is already 85% leased out. For office leasing, BPO and headquarter tenancy remains stable. Our total GLA stands at 1.36 million square meters. Average occupancy rate for all offices is 84% while the total office pipeline stands at 157,000 square meters. Breaking down our GLA by tenancy. BPOs occupy 68% of the portfolio, 10% by headquarter-type tenants, 3% with our -- by our co-working spaces and 2% POGO. Hotels and resorts, we see a strong recovery of domestic tourism, which drove improved operations. We have total of 4,028 rooms in our portfolio while occupancy and room rates have both improved. Average occupancy for all hotels was 53% and 27% for our resorts. Total hotels and resorts in the pipeline stands at 1,552, and we will open 24 rooms in our Hatch Hostel in Sicogon by third quarter of this year. Our new formats continue to complement our commercial leasing businesses for industrial spaces. All HC has a GLA of 288,000 square meters. And it's complemented by our ALogis Artico, which is our cold storage facility with a total pallet position of 7,300. Total occupancy stands at 85% and the lease -- total occupancy stands at 85%. For The Flats, total bed count is steady at 1,972 between our Makati and BGC facilities. while for Clock In, seat count is steady at 1,411 seats, occupying 6,473 square meters of gross leasable space. CapEx for the first half amounted to PHP 30.2 billion. More than half or 54% was spent on residential projects, 10% was spent on commercial leasing projects, 6% on malls, 3% on offices and 1% on hotels and resorts. 15% was spent for the development of our estates and 15% was used for land acquisition with 6% being allocated for other general purposes. We have a well-managed debt portfolio with 84% locked-in fixed rates, an average borrowing cost of 4.2% and a maturity of 4.6 years, 85% of which is contracted on a long-term basis. Now last July 4, we successfully listed our largest bond issuance to date, a PHP 33 billion bond with 2-, 5- and 7-year tenors. After that issuance, our debt portfolio improved further with 99% contracted on a long-term basis and 98% locked in fixed rates. The average maturity is also lengthened to 5.1 years. Finally, our balance sheet stands strong with a net gearing ratio of 0.77:1, same as where we ended 2021, cash and cash equivalents of PHP 15.5 billion. Our debt increased by 4% to PHP 231 billion while stockholders' equity also increased by 4% to PHP 281.5 billion. Our current ratio stands at 1.58:1 and a gearing of 0.77:1. To summarize our first half performance. Total revenues of PHP 53.3 billion, 9% higher year-on-year due to improved operations of the various businesses in the second quarter as local economic activity progressed under the least restrictive alert level. Second quarter revenues reached PHP 28.7 billion, 18% better than the second quarter last year and 17% higher than the first quarter of 2022. Net income totaled PHP 8.1 billion, a 34% year-on-year improvement. PHP 4.9 billion was generated in the second quarter, 51% higher than last year and 55% more than the previous quarter. CapEx reached PHP 30.2 billion. Our net gearing ratio stood at 0.77:1. For segment revenues, PHP 34.1 billion came from property development, similar to the first half of 2021 as solid commercial lot sales cushioned lower residential bookings. Property development revenues in the second quarter reached PHP 18.3 billion, 2% higher than last year and 15% higher than the first quarter of 2022. Sales reservations, PHP 49.3 billion, 2% higher year-on-year given the impact of Omicron in the first quarter of 2022. Nonetheless, second quarter sales improved as we generated PHP 25.2 billion, 28% higher than last year and 5% more than the first quarter of 2022. Commercial leasing revenues of PHP 14.6 billion, a 54% recovery from a year ago driven by higher mobility. PHP 8.1 billion of the revenues were generated in the second quarter, a 87% jump from last year and 26% higher than last quarter. Mall footfall averaged 87%, tenant sales 82% of pre-COVID levels in the second quarter, while in the month of June, footfall came in at 93% while tenant sales reached 89% of pre-COVID. Now before we go to our Q&A, allow me to hand over the floor to our CEO for a few key messages.

Thank you, Toti. Good afternoon, everyone, and thank you for joining us today. I just want to put things a little bit in perspective and then step back a little bit. From Toti's presentation, as you know or as you could see, with the reopening, normalization of mobility and people pretty much getting back to their pre-pandemic lives, we've seen a much stronger recovery in the first half as well as in particular the second quarter of 2022. Given that things are really starting to normalize, I just wanted to step back and really have some sort of an assessment in the state of our business model as well as the state of our various businesses. And from there, we can now map how we move forward. As you know, Ayala Land, we're primarily a community builder through our estate development. We started here in Makati in 1948 with 1 estate. Today, we have 47 estates all over the country, mixed-use estates, commercial estates, tourism estates, residential estates as well as industrial estates. We've seen through our history several cycles or ups and downs, several crises over the years, from the debt crisis of the '80s, the Asian financial crisis, the global financial crisis, and most recently, the COVID-19 crisis. Throughout these crises, there's one thing or one conclusion that we could grow, that our estate business model is resilient. In fact, during this particular pandemic, what we've seen, basically our people, businesses preferring to locate, live in our estates, in a complete community where all your needs are met, whether it be basic necessities, health care, education, work and leisure. We've also seen given the strong preference for estates that land property values have basically held up. In fact, in many cases, in many of our estates, property values have actually increased. So again, one conclusion is we feel that moving forward, estates, which is our principal platform for development, will continue to be relevant. As you know, when we develop these estates, we master plan it and do 2 things: One is we put in our own products, whether it be residential, malls, hotels, offices, warehouses, et cetera, but also invite third-party locators through the sale of commercial lots. So let me just make a quick assessment of the state of each of those business segments. I'm not going to dwell on many of them because the results basically speak for themselves. So for example, number one, in the commercial leasing business, we basically have a few formats. The malls, I'm not going to dwell on it, obviously, severely affected during the lockdown but now coming back quite strong. Offices. The offices primarily were largely resilient during this crisis, okay? We did not see many departures of BPOs or traditional corporate locators. What we saw was basically a contraction of one particular segment, which is POGOs. But otherwise, what we're seeing is, particularly in the BPO segment, continued strength. In fact, surprisingly, we see expansion going on. And I was talking to the industry just a couple of weeks ago, and they're anticipating further expansion moving forward. For hotels and resorts, the recovery is basically coming along. Domestic tourism, I think, is largely back. International travelers are about half of where they were pre-pandemic. So we expect this to continue moving forward. So on the commercial leasing business, I guess one conclusion is basically, it is now on its way to full recovery. Now let me talk about our development business, primarily, I think residential, which I know many people have questions in this particular segment. I have actually been quite pleased with how our residential portfolio has performed during this last couple of years. Now that may come as a surprise given that we're only doing 2/3 of where we were pre-COVID, okay? Now why is -- why am I pleased? Okay. First, the residential development business, as you know, is largely cyclical, okay? We've had a phenomenal run from -- coming from the global financial crisis of 2008 till the lockdown in 2020, unprecedented. If you look at our own performance in 2009, we were only selling about PHP 500 million worth of inventory per month, so about PHP 6 billion per year. The first half results, despite uncertainty in the market, interest rate increase, we are doing over PHP 8 billion per month or 2/3 of pre-COVID. In previous crises that we've seen on residential, we've seen significant contraction. I don't know if many of you were here at the time, but I was already with Ayala Land, like in the Asian financial crisis. The demand largely collapsed. Same thing for a couple of quarters during the global financial crisis, the market largely collapsed. I think Jojo, you were already probably here at the time. So you've seen those situations, okay? So -- but I'm older than you, Jojo. So the fact that the market continues to be there, okay, it tells me the demand that happened during -- or the sales that happened during the '08 to 2020 bull run is not largely speculative, okay, that it is real demand. And right now, the temperate demand that we're seeing will now allow the market all the inventories that has been built during this particular period. We're also seeing property values basically holding up. Again, that's a sign of a very robust situation in this particular segment. Now having said all of that, my expectation over the -- maybe the next 6, 12 months or over the next year, will continue to be tempered demand for residential until we see some of these macro issues and global uncertainties resolve, inflation, higher interest rate levels, geopolitical tensions, supply chain issues. All of these issues obviously will affect global growth, could affect our growth in the Philippines and therefore will have an impact towards residential demand. But by and large, as I've said, I've been very pleased on how the market has held up, both in terms of demand as well as property values. I'm very pleased with how our own portfolio has held up during this particular period. One thing I want to note, and this was highlighted in the second quarter review, which is one of our development products, which are commercial lots. Commercial lots are actually doing quite well. We're seeing strong demand for commercial lots. So that tells us also that investor appetite continues to be there in the market. Industrial park lot sales also continue to be good. And the logistics-based warehousing, in particular, cold storage continues to be quite strong. So moving forward, for us, I expect that we'll continue to develop and prime up our existing estates. We will also continue to introduce in other parts of the countries new estates. Our asset buildup for commercial leasing will continue, malls, hotels, offices. We'll continue to invest in industrial parks as well as logistics and also now look for new potential opportunities as the new administration rolls out its 8-point social economic agenda. So in summary, before I open up to Q&A, the reopening economic recovery has been good for our business as evidenced by our first half results. We expect continued growth recovery in the second half of the year. Our business model of estate development through our various product offerings remain largely intact and will still be the basis of our growth initiatives moving forward. We continue to look for new opportunities as the market evolves and allocate capital where it would be most productive. So again, thank you for -- thank you to all for joining us today. I'll now open it up to Q&A.

Thank you, Bobby. First, we'll entertain questions from our live audience. First question from Mr. Carl Sy.

I have a couple of questions, mostly related first to the residential business. So it was mentioned that there were cancellations in the first half. And I'll start off by asking, I guess, detailed questions on can you give us some numbers on revenue reversals in the first half or the second quarter.

I'll pass it on to Toti on the specifics on the revenue reversals.

Carl, in terms of cancellations, I would say that the cancellation values that we recorded in the first half are basically aligned or close to the cancellation numbers that we experienced in 2019. I think, perhaps, it's now higher in -- if we look at -- I'll just talk about our estimate for the full year. It's probably going to be about -- anywhere between 10% to 12% higher than the cancellation values that we recorded pre-COVID or in 2019.

And let me clarify, the 10% to 12% higher is an absolute number?

It's an absolute number. So that's in terms of values. If you look at -- the other way we look at it would be in terms of number of units or number of buyers. In terms of number of units or number of buyers, it's actually lower than 2019 levels. But I guess the relevant number for you since you're tracking revenues is the values, so about 10% to 12% higher.

And are there -- for these cancellations, are there any noticeable patterns, whether by brand, area, horizontal or vertical?

Maybe on -- for that question, I'll pass it on to our Residential Business Head.

In terms of the segment, I think it's really the middle income that we can expect to feel the brunt of, I guess, the situation. So it's really in the middle income segments where majority of the cancellations are from. Also, in terms of product, we see more of it in the verticals. The horizontals are quite resilient.

Maybe, Carl, if I can just add because obviously, this is an elephant in the room because I've seen some of the reports people writing about this thing. Actually, I've been quite pleased with the level of cancellations that we've had. I don't see it as being alarming at this point. And I think a big part of that really also is because of the portfolio that we have. I think, as you know, we sell a lot of product in the high-end market, wherein we actually get significant down payment as well as amortization. So the back-out rates in general have been manageable so far. Now what I would expect as the economy gets better, then I hope that, that situation holds. So as I said, it's not -- there's an increase. Yes, there's an increase. Is it alarming? The answer at this point is no.

Okay. And I guess related to what you just said, Bobby, and to what Toti mentioned on, let's say, the out of 10% to 12% higher than 2019 levels. So I'm not certain if that means we should be expecting a lot more still to come in the second half or if, in fact, let's say, you've actually diverged a lot of the amounts that are past due and then there'll be very, very few left. So how should we think about the future in respect to cancellations?

The 10% to 12% number I gave you is an estimate for the full year, not just the first half because as far as we're concerned, we're already looking into the next 6 months. So the 10% to 12% higher than 2019 is a full year to full year comparison, right? Now going forward, as the CEO has said, I guess if things get better, the economy continues to improve, then perhaps we can see an improvement in cancellations. If things for some reason get worse, then you could also see it increasing. But suffice it to say, Carl, what we're saying is it's manageable. It's not something that is giving us sleepless nights. And we attribute that to the fact that we've been servicing the higher end of the market. We've been demanding larger or higher down payments. Therefore, the market that we largely service has been, I guess, for lack of a better term, has been less [ card ] during the pandemic. So this year, 10% to 12%. Next year, we'll see. But we think it's manageable.

And on larger down payments, do you mean that you've started to tighten payment schemes again?

I'd also like to add, Carl, because this is a very important point. And I think I alluded to it during my short brief a while ago, because in previous crises, you actually probably saw a higher level of cancellations for a couple of things: One is if there's not much at stake, not much equity there; or two, people are leverage; and three, this is very, very important, when you see a collapse in property values. We are not seeing a collapse in property values. In fact, in many cases, as I've said, it has held up. That's why people, when they look at their situation, if I could continue to pay for it, I'll continue to pay for it because I'm not losing money of it. And again, this is not just, I think, in particular in the Philippines. You see it also in other markets. Whenever property values go down significantly, that's when you're going to see a lot of cancellations. And the fact that we've not seen that here, I think it's because the property values have largely held up during this period. In fact, in some cases, in some of our projects, have even increased, as I've said also a while ago.

And I'll just ask -- could I ask for the unsold inventory levels as of the first half?

Between 20, 21 to -- about 21, 22 months is our inventory level.

Do we have a follow-up question? Go ahead, [ Janine ].

Just a few follow-ups on the cancellation point. We just wanted to understand what the base is as compared -- when you say it's 10% to 12% higher, could you give us an idea as to what base maybe as a percentage of the presales at least to January 2019 will be good? And then we also would like to understand what buyers are exactly canceling. I understand middle income is one point. But are you also seeing some backhauls from -- like maybe of Chinese buyers that bought into the market in 2018 and 2019? And the third point -- third question is on the unsold inventory. Are you revisiting your launch target because of this?

I'll take the first question and then I'll pass on the next 2 questions to Mean. So the value, the 12% higher is the -- this is the cancellation, the actual cancellation number that we recorded in 2019 and actual -- the forecasted cancellation value that we expect to record in 2022, okay? So it's anywhere in between, we think, 10% to 12% higher than that number in pre-COVID.

Sir Toti, do you mean residential revenue reversals or just on gross resales?

This is on gross -- on bookings.

On revenue bookings?

Gross bookings and then cancellations equals net bookings.

Your second question was on the Chinese cancellations. We were never really -- I guess the sales to the Chinese market was -- compared to our competitors, was never really a big part of our portfolio even in the past. So today, we are finding some cancellations, but it's less than 15% of what's been canceled. And you had a second question. Do you mind repeating it?

[indiscernible] Your plans on relaunches?

On the relaunches -- on new launches? So we launched PHP 35 billion in the first half. In the second half -- I think the budget for the full year was PHP 100 billion. But currently, the second half target is PHP 45 billion. The difference really is coming from a high-end vertical project that we would like to book build first to see if we will proceed with the launch. So it's ready. The project is ready, but we want to make sure that we will have a robust takeup.

Go ahead, Jeanette.

I have 2 questions. First one is actually on the commercial lots. I noticed that you had a very robust revenues from sale of commercial lots. Could you help us understand, let's say, the current inventory of lots that you can still sell, how much -- maybe ideas or numbers of how much more you can sell moving forward?

Actually it's part of our product inventory, Jeanette, because in all our estates, we're now selling commercial lots. So as we keep on introducing new estates, expect that commercial loss will be part of it. So it's not like we have a limited number because each estate actually has an allocation for commercial lots. In this particular case, as reported, the sales came from 3 estates, Vermosa, Nuvali as well as Arca. As we introduce new estates, expect that there will be commercial lots that will be sold. So it's hard to -- it's not a finite number that I could tell you. We only have X amount. As you know, we have 12,000 hectares of inventory. As we develop that, there will be commercial lots there.

Typically, for an estate, how much is allocated, let's say for...

It depends.

Is there a range?

No, it depends. I mean it really depends. We master plan each estate independently. We look at the market. We look at the highest and best use and from there, determine allocation.

Okay. And then my next and last question is actually on malls. Given that your tenant sales already reached close to 90%, just curious where rent discounts are right now? And what is your expectation in terms of rent discounts unwinding for the rest of the year?

I think Toti is dying to answer that question. So I'm going to pass it on to him.

Elaine, why don't you give them the good news? [ Ms. Elaine Alsoon ], our CFO of our malls business.

The good news, starting July, we've actually reinstated 100% basic rent. So that will continue for the rest of the year, 100% last month.

Any more questions from our live audience? Okay. Maybe let's entertain the questions from our participants on the call. We have a question from Mr. Ralph Fausto. What is the outlook for returning to the normal payment terms from its current stretched payment scheme?

As I've said, there's a current market environment that we're facing. So we will basically look at how things evolve. When the macro issues get resolved, demand increases, when that happens, then we'll start tightening up the payment terms. But right now, based on what we're seeing, expect that to be the kind of payment terms that you're going to see for the rest of the year -- sorry, and that's primarily for verticals. The horizontal product will be basically back to normal, which is basically pre-COVID. You want to add anything?

The second question was about cancellation. So I hope we were able to address that earlier. Let me move on to Grace Gabrito of Metrobank. On -- she has a question also on cancellations, which was addressed earlier. But she asked a question on demand from local Filipinos, which has been down quarter-on-quarter. But we see increasing demand from OFWs. Do you expect this trend to continue? Are there significant differences in the price point preferences of local Filipinos and OFWs that could impact margins?

The OFW market actually accounted for quite a substantial share of our takeup this year. International, which is OFW and others, other nationalities accounted for 35% of our share. OFW grew by 52%, about PHP 10.7 billion from OFWs. So we have been seeing a very strong demand from OFWs. The products that have been very popular with OFW market are our Avida and our Amaia, so that's really where bulk of the demand is coming from. Is there additional?

Would you like to add anything? I guess it's okay. The next question is from Mr. Ruben Estrada of ING. With interest rates increasing, do you anticipate a commensurate increase in mortgage lending rates? And how do you feel this will affect residential sales moving forward?

Well, clearly, if mortgage rates move up, then that certainly will impact on the middle income and affordable segment because these are the 2 -- these are the segments that require mortgages. So that would impact on our Avida, Amaia -- and Amaia branch basically because they are the ones that require mortgages. For Avida, maybe 80%, 90% of our buyers in the Avida segment require mortgages, while for Amaia, 100% will need a mortgage. Now we haven't seen the increase in mortgage rates. We have 12 partner mortgage banks. They really haven't increased rates since the BSP started hiking. 5-year fixed rate continues to be at 6.5%, 10-year fixed at 8.5%, then the 20-year fixed is around about 10%. We haven't seen it increase. But having said that, we've modeled on our own the impact of a 200 basis points hike in mortgage risk. And what we've seen is that for every PHP 1 million mortgage loan, 200 basis points increase translates to an increase in your monthly amortization by only about PHP 1,000. So for an Avida buyer, he will require a PHP 5 million loan. So his monthly amortization increases by PHP 5,000, which we think for that segment should be affordable. So what's critical -- and we've seen this time and time again. What's critical is not so much the interest rate of the mortgage -- that the mortgage banks charge as it is the tenor. The tenor matters a lot. The fact that they continue to extend longer tenors, even if the rates go up, the impact to the monthly amortization, which is as you know, is what determines affordability for the middle market. The monthly amortization will remain to be, we think, affordable even if rates go up by 200 basis points, which we haven't seen as yet.

Mike, I understand there are many questions on cancellations. So I've asked Mean also to provide a commentary on the cancellations just so that we're all on the same page. As I've said, it's a manageable level. I think Mean will give her own take on this thing.

So clearly, that is a number that we closely monitor beginning after the pandemic with the Bayanihan Act being lifted. That is something that we've really given a lot of focus to. And that's why I think, at this point, we are in the middle of the year, we have some visibility of what else is likely to happen towards the end of the year. And that's where Toti is getting the values. We feel it's going to be not that much higher than what we faced in 2019. As of now, so if you compare the first quarter and the second quarter, we're also seeing some slowdown already in the cancellations, so the first quarter more than the second quarter. Of course, we have to see what is in store for us for the second half of the year. So I can only tell you what has been happening so far. And we're hoping that we've stabilized and the rate begins to taper down already. But again, we're not really finding a whole lot of inventory coming back to the market for us. But we are keeping a close eye on it.

We see Danielo Picache's hand raised. Go ahead, Danielo.

Can you hear me?

Loud and clear. Go ahead.

Yes. Just a quick follow-up on the cancellations. You just mentioned that there was an improvement quarter-on-quarter. Maybe you can provide some numbers, i.e., whether 1Q was something like PHP 20 billion, in the second quarter, cancellations were down to PHP 15 billion, something to that effect?

Danielo, 1 quarter [Foreign Language]. We already gave...

I don't want to -- it's a bit -- it could be dangerous to extrapolate based on 1 quarter, okay? So we also don't want to tell people, hey, it is getting better. But we know that there will still be some that will be coming in. What we're hoping for is it maintains its level. No doubt, cancellations will happen. But as I've said, so far, we've not seen it to be alarming, especially as I compare it to previous crises for the reasons also I stated a while ago now on how property values are holding up. People are not overly leveraged or leveraged at this point and also our portfolio.

So Danielo, notwithstanding the slight improvement, we're already preparing for the worst. So I'm estimating 10% to 12% more than what we experienced in 2019.

Just a quick breather on those cancellation questions, we have a question from Mr. Joseph Sinay of T. Rowe Price. Can you help quantify the impact of longer payment terms to revenue recognition versus pre-COVID levels?

So on verticals -- so horizontal, we didn't really change it much from pre-pandemic. On verticals, the payment terms are about 12 to 18 months longer on average. So that should answer that question.

If I can just add to what Mean said, there's a couple of things that are -- that's leading to longer revenue recognition. So Mean has mentioned the biggest factor, which I think is the stretched or the lengthened payment terms. But there's -- I would say the other thing that impacts is an accounting rule last year. They excluded land in the percentage of completion calculation. So as you know, land accounts for anywhere in between 10% to 20% of our project cost. So because this new accounting rule was passed, you can no longer include land in the POC calculation. So that's like 10% to 20% of your project costs that you could have recognized almost immediately once you launch. So that's been -- that's an accounting rule that's been implemented in 2021, then as Mean has mentioned, stretched payment schemes and then what also has affected revenue recognition or cancellations that you see. So that's affecting everybody in the real estate industry.

As a follow-up to that, we received a question from [ Swan Tan ] of Goldman. Can you share what's driving the cancellation in middle class segment?

I guess what's happening in the macro economy is affecting the middle class income with maybe inflation, increasing interest rates, slowdown in the economy. Most susceptible to perhaps any volatility in the economy is really this middle income segment.

Thank you, Mean. I hope that addresses your question, [ Swan ]. I see Danielo's hand is raised. Danielo, would you have a follow-up question?

Yes. Sorry, just 2 quick follow-up questions. On the revenue recognition, I'm just curious as to whether the launch of more horizontal projects in recent years would also sort of quicken revenue recognition for the total residential book given that horizontal tends to have a shorter turnaround time? And the second question is on residential launches. Just curious as to whether you remain confident that you can hit your previous guidance of close to PHP 100 billion.

Danielo, this is Toti. I'll take the first question then I'll pass the second question to Mean. On the first question, yes, your revenue recognition will be faster in horizontal definitely. But compared to before, it's not as fast because the land has now been excluded. So definitely revenue recognition on horizontal projects, faster than vertical. But it's not as fast as what we used to see in the past because of this new accounting rule.

So on launches, first half was PHP 35 billion. Second half, we expect PHP 45 billion. That's a total of roughly PHP 80 billion, slightly lower than the PHP 100 billion originally projected. And the difference is really a high-end vertical project that we want to book-billed first. So if we do get a good reception from the market, then we will launch it. But that's the dependency. Horizontal, vertical. So on the first half, horizontal is 43%, vertical is 57%. But for the full year, that's assuming the PHP 80 billion, it's now 65% horizontal and 35% vertical.

And maybe you'd like to add the locations of these projects? Bernadette Ocampo of BPI is asking the locations.

So our horizontal launches will be -- actually in our estates -- hillside, I think we will continue to have in Alviera, but mostly in our Nuvali. Mostly, it will be in our estates, the horizontal projects.

Thank you. And the last question is from RJ Aguirre.

Can you hear me now?

Go ahead.

Yes. Just an update from discussions mostly on residential. But first, I'd like to look into the financing side of things. Aside from the bonds that you did earlier this year, what other financing options will add into the near term and for what allocation would that be? Maybe for CapEx, debt payment or refinancing? And are you still selling securities receivables to banks? And what rate are they currently fetching if ever?

R.J., in terms of any debt capital markets initiatives, we're done for the year. That's why we did the jumbo issuance. So we're pretty much covered for the entire year. In terms of our sales, we did about a little less than PHP 5 billion in the first half. We'll see how things evolve. There's been a bit of an increase in discounting rates. So it's no longer slam dunk than it used to be. In the past, those discounting rates were significantly lower than equivalent borrowing rates. But there's been a move up on the discounting rate. So it's -- we're almost indifferent to doing an AR sale versus borrowing from the market. But for the rest of the year, we're done with the financing from the debt capital markets. If ever we just need to fill in some requirements, it will be on a short-term basis. And for the AR sale program, we'll see how fixed turn out for the rest of the year. We haven't firmed up any portfolio for sale in this quarter just yet.

Okay. As a follow-up, on the financing -- sorry, on the payment terms, which are kind of stretched in some projects, are we observing any -- in terms of the working capital? I guess on the project financing side [indiscernible] payment scheme or the payment terms [indiscernible] working capital.

Yes. RJ, over time, so that's also something that we're watching closely and lining it up with our balance sheet. Obviously, these stretched financing terms have a significant impact on cash flow. So the answer is yes. Having said that, we continue to watch it closely and make sure that we only expose ourselves to the level of the strength of our balance sheet.

Actually, my last question is on what you mentioned earlier, Bobby. I know that management sounded optimistic about residential demand. But how do you feel about affordability, considering all the prices have increased in some projects? Even -- and during the pandemic, it didn't really correct that much. Secondary market is a tenant market, but capital values are maintained at levels that are still high. The income, the share of wallet and mortgage rates are all rising in the same direction, especially in Metro Manila. So how do you feel about affordability for your buyers at the moment?

I think, RJ, that's a question really that could impact the middle income. So we really are getting really tight in terms of our cost parameters, construction costs for the middle income. I think when you look at the upper end of the market, the question is do you have the right product for them? Assuming you have the right product, the pricing is not yet in a significant way coming into the picture. For example, over the last 2 years, horizontal products increased prices over the last 2 years, and the demand continues to be quite strong. So I think the question on affordability will come in, in the affordable sector, wherein something that we have to be very, very sharp in terms of pricing as well as our cost structure.

Bobby, and last -- as a follow-up on that answer. Does that change your strategy in terms of product mix, knowing that, that may be stretched -- the payment terms and the affordability may be stretched in the middle income, the Avida, the Amaia and BellaVitas of the world? Does that change your product mix and strategy towards looking into the provinces?

We have to line it up, RJ, as I said, with our balance sheet. So obviously, we see demand across all segments. As we move forward, then we now have to see the exposure that you want to have in each particular segment given the payment terms that we're seeing in each of those segments.

We have a couple more participants. I see Kervin raise his hand. Go ahead, Kervin.

A couple of questions from me. One is on the outlook on the residential margins. So I can see that some of the construction materials that we use are down in terms of prices year-to-date. For example, steel, I think, is down 10% to 15%. So maybe in terms of outlook on the margin side, are we seeing maybe an improvement hopefully going forward from here, whether it be residential or the construction for NPC?

We maintained our current margins. So I think we presented a while ago for vertical, that's about 35%. I think horizontal, over 40%. So we plan to maintain those margins.

On the second question, I see an improvement sequentially on residential presales, right, so I think for the past 4 quarters. So maybe can we just get light if this can continue in the second half in terms of residential demand. And hopefully, that offset the higher cancellation rate for about 10% to 12% that Toti mentioned going forward?

We'll see how the economy, I guess, grows from here on out. We've been encouraged by what we saw over the last 6 months. So we're hopeful. But again, as you know, there are macro challenges. There are uncertainties out there. So it's hard to really make some sort of a call right now. But we're hopeful.

And lastly, on the low end or the Avida side, given that the higher interest rate environment what are we seeing in terms of maybe cancellations there or pickup there in terms of demand? Are we seeing maybe people trying to restructure their payment terms or anything else?

Yes. We have received requests to restructure as well. And we do try to make it work. I think that's also the good thing about having a bigger down payment. People want to stick with it some -- a little bit more stickier. So we do try to accommodate to the extent possible. But yes, we do see that.

We have a question from Richard Laneda. What's the average discount given to tenants in second quarter of 2022?

Mall?

Mall. 25% on the minimum guaranteed? So Richard, it's 25% on the minimum guaranteed rate in the second quarter and 100% or full charging on CUSA. 25% discount on the minimum guaranteed rate. Okay, for June -- so the average was 25% for the second quarter. In June, that discount was reduced to 10%. Then we have a question from [ Swan Tan ]. Do you see any bright spots or levers to pull to help offset top line and cost pressure?

Well, as I said, I think directionally, what we're seeing is sequential improvement. So assuming that the economy continues to improve from here on out and some of these macro challenges somehow get mitigated, then the answer is hopefully we'll get -- demand across the board in all our product segments. And that could offset some of these revenue and then cost issues that are coming up. But again, as I said, I think we are in a good place. And hopefully, the trend continues in terms of economic improvement. If that happens, then I think we will basically ride along that improvement.

And then one more question from Mr. [ Zoren Muski ]. Were the payment terms also stretched for the OFW segment in residential?

It's basically the same payment terms. We don't really make a big distinction.

I don't see any more questions on the line. Any more final questions from our live audience? Okay. I guess we've run out of time. Thank you very much for your strong interest and support and for attending today. If you have additional questions, feel free to send us an email at [email protected]. And a copy of the recording is available on our website for download. Thank you very much.

Thank you, everyone.

Thank you.