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

Okay. Good afternoon, everyone. I am Mike Garcia, Head of Investor Relations. Welcome to our briefing on Ayala Land's performance for the year 2022. We thank Asten for hosting us in their new modern office at the Ayala Triangle Tower 2 and we thought this was an excellent opportunity to show you 1 of our latest developments in the Makati CBD. Joining us this afternoon are members of Ayala Land's management committee led by our President and CEO, Mr. Bobby Dy; our CFO and Treasurer, Mr. Toti Bengzon; Residential Business Group, Ayala Malls Head, Ms. [indiscernible]; President and CEO of [indiscernible]. And members of the management team and the finance group are also in this meeting as well as friends from Media. We have on the call, 101 participants in today's presentation and a copy of the press release are available at ir.ayalaland.com.ph. Our CFO will present our financial and operating results followed by a Q&A. But before we start, allow me to share a few reminders for virtual participants. [Operator Instructions] And to start our briefing, let me turn over the floor to Mr. Bengzon. Thank you.

Thank you. Thank you, Mike. Allow me to share with you the financial performance of the company for 2022. After which I'll turn over the floor to our CEO, who will talk about the prospects that we see in 2023. So our financial highlights are as follows: the company bounced back in 2022 on the strength of a reopened economy. Our total revenues registered PHP 126 billion, which is 19% higher year-on-year. Our net income amounted to PHP 18.6 billion, a robust 52% growth from 2021. We generated PHP 5.3 billion in the fourth quarter. That's NIAT and that was 45% higher than last year. Our CapEx reached PHP 72.4 billion to support our residential and commercial project buildup, while we maintained a net gearing ratio of 0.76:1. as we manage our debt and liquidity tightly to support our balance sheet. Turning towards our segment revenues. We recorded PHP 81.2 billion in property development, 7% higher year-on-year led by solid commercial lot sales. We achieved PHP 26 billion in the fourth quarter, which is 6% more than the same period last year. With resilient demand amidst a higher interest rate environment, we registered PHP 104.9 billion in reservation sales, which is 14% higher than last year. Fourth quarter sales alone jumped by 24% to PHP 27.6 billion. Meanwhile, our commercial leasing revenues accelerated by 62% to PHP 33.4 billion with normalized small rents and foot traffic, the contribution of new office spaces and higher hotel room rates. We posted PHP 10.1 billion in the fourth quarter alone, which is 57% more than last year. Mall footfall and tenant sales already exceeded pre-COVID levels in the fourth quarter, reaching 108% and 110%, respectively. This significant improvement brought the average footfall and tenant sales to 87% of our pre-pandemic levels. Moving on to our income statement. Real estate revenues amounted to PHP 123 billion. This is 20% higher, led by solid commercial lot sales and commercial leasing in the recovery. Interest and other income came in at PHP 3.5 billion, up 10% from higher equity earnings from associates and joint ventures and interest and investment income. Equity in net earnings of associates and JV companies jumped by 70% to PHP 1.4 billion due to higher revenues from our Fort Bonifacio Development Corp entities, Ortigas Land and our joint venture with Royal Asia. These are the corps in [ Arcilo ] subdivision. And it was helped by the absence of losses from Qualimed's operations since our sale of QualiMed in 2021. Interest and investment income climbed by 5% to PHP 387 million on higher interest earned from installment sales, yield from our short-term investments and cash deposits. Other income, which is composed mainly of marketing and management fees amounted to PHP 1.7 billion. This is 20% lower than the PHP 2.1 billion in 2021, which, if you recall, included the sale of our 39.2% interest in QualiMed. Expenses totaled PHP 98.4 billion, 15% more than last year since operations have normalized. Our real estate expenses reached PHP 77.1 billion, up 17% while our GAE increased by 11% to PHP 7.3 billion. Nonetheless, our profitability margins remained healthy as we grew our revenues higher than expenses. Our GAE ratio settled at 5.7%, while the EBIT margin stood at 33.1%, better than the 6.2% and 31.5% posted in 2021, respectively. Interest expense, financing and other charges totaled PHP 14 billion. This is 6% more due to the higher discounting costs on our accounts receivables portfolio sales as well as the interest expense on the higher average debt daily balance. Netting out expenses from revenues, income before tax grew by 39% to PHP 28.2 billion. We have an income tax provision of PHP 5.6 billion. And as a result, our income before noncontrolling interest totaled PHP 22.5 billion or 44% more than last year or the prior year. After we net out noncontrolling interest, which grew by 14% to PHP 3.9 billion, net income attributable to ALI equity holders grew by 52% to PHP 18.6 billion. Let me run you through a breakdown of our revenues. Solid commercial lot sales and commercial leasing recovery boosted our revenues. Property development revenues increased by 7% to PHP 81.2 billion. Residential revenues reached PHP 63.5 billion on construction progress and bookings, but were slightly below the previous year, mainly due to stretched payment terms. Meanwhile, our office for sale revenues declined by 16% to PHP 3.2 billion on account of the full completion of Alveo's Park Triangle Tower at BGC as well as moderate take-up on remaining inventory. Revenues from commercial and industrial plus surged by 75% to PHP 14.5 billion due to strong investor demand in Arca South, Nuvali and our Broadfield estate. In commercial leasing, revenues accelerated by 62% to PHP 33.4 billion with normalized small rental risk and foot traffic, the contribution of new offices and higher hotel room rates. With foot traffic and resurgence in mobility, shopping centers and hotels and resorts revenues more than doubled to PHP 16.1 billion and PHP 6.2 billion, respectively. Office leasing grew by 13% to PHP 11 billion primarily coming from the revenue contribution of our One Ayala East and West Towers. Moving on to services, composed primarily of MDC, APMC as well as our power service companies and Air Swift. Total revenues amounted to PHP 5.7 billion (sic) [ PHP 8.4 ], 32% higher than the previous period. MDC posted net construction revenues of PHP 4.2 billion. This is 8% higher, owing to external projects. While APMC, our power service companies and Air Swift, the combined revenues accelerated by 72% (sic) [ 70% ] to PHP 4.2 billion due to higher Air Swift patronage, parking usage and retail energy demand. Summing up our top line, real estate revenues amounted to PHP 123 billion, this is a 20% growth from the prior year with interest and other income of PHP 3.5 billion. Total revenues grew by 19% to PHP 126.6 billion. Moving on to our margins, starting with the property development business. The average gross profit margin of our horizontal residential projects stood 46%, 2 percentage points higher than the previous year due to high-margin projects such as Avida's Averdeen Estates in Nuvali, Alveo's, the Residences at Evo City Phase 2 in Cavite, Ardia Phase 3 in Vermosa, Cavite and Corvia in Alviera, Pampanga. Our gross profit margins for vertical residential projects stood 35% while office for sale margins increased by 13 percentage points to 49% from the higher selling prices that we were able to get from limited -- in our limited inventory. Commercial and industrial lots, margins were steady at 70%. And on the commercial leasing side, shopping centers' EBITDA margin improved to 65% from 39% due to normalized trends and higher occupancy, while office EBITDA margins declined by 2 percentage points to 91% due to the newly completed buildings' start-up operations. And the overall EBITDA margin of our hotels and resorts portfolio significantly improved to 24% from higher occupancy and average rental rates. Finally, the overall EBITDA margin for our Construction and Property Management businesses stood steady at 11%. Turning over to the operating statistics of our businesses, starting with property development. We received a demand amidst a higher interest environment. We were able to register PHP 14.9 billion in reservation sales. This is 14% better than the prior year. Fourth quarter sales jumped by 24% to PHP 27.6 billion. ALP's [ Ciela ]in Carmona, Cavite; Avida's Serin East Tower 4 in Tagaytay City and Patio Madrigal in Pasay City; Amaia Skies Cobalt Tower 3 in Quezon City; Alveo Astela Towers in Circuit Makati. These were the projects that received most demand during the period. We launched 30 projects worth PHP 91.4 billion for the year. This is 21% higher than our launches in 2021 worth at PHP 75.3 billion. In terms of the mix of launches, 58% for horizontal projects while 42% are vertical. 24% of our sales reservations are PHP 25.5 billion originated through our digital selling channels. On the sales breakdown by nationality, 66% sold to local Filipinos, 1% higher than last year. However, it was the sales to overseas Filipinos and other nationalities, which surged by 59% and 39% year-on-year, respectively, and they accounted for 22% and 13% (sic) [ 12% ] of the total. Next slide, please. We launched 2 new estates last year. In November, we launched the 92-hectare Areza in Lipa City, Batangas. This is going to be the new downtown of Lipa City. Areza is our first estate in the province of Batangas. The state is easily accessible to the STAR toll away, and will host the new 5-hectare Lipa City Hall. It will also have a 1.4 hectare fresh market and a 1.6 hectare trading center for the Department of Agriculture. The estate will have a total debt cost or the development cost of PHP 10 billion for its initial pace. We also started selling commercial lots, 69 commercial lots, of which 1/3 have already been sold. These lots range in size from 500 to 1,000 square meters and are priced anywhere in between PHP 65,000 to PHP 67,000 per square meter. In December, we launched the 83-hectare Crossroad estate in Plaridel, Bulacan, dubbed the cornerstone of Central Luzon's Progressing East. We have allocated PHP 5.2 billion in capital expenditures just for the first phase. Crossroads is close to Malolos City and the NLEX Balagtas exit and will be 40 minutes away from the planned New Manila International Airport. We launched quite a number of commercial lots for sale in December, lot prices ranging from 300 to 1,200 square meters with a price of anywhere between PHP 75,000 to PHP 80,000 per square meter. Turning over to our leasing businesses, starting with malls. Mall footfall and tenant sales exceeded pre-COVID levels in the fourth quarter, reaching 108% and 110%, respectively. This significant improvement brought the average footfall and tenant sales to 87% of pre-COVID levels. Our total malls GLA now stands at 2.1 million square meters. Average occupancy rate for all our malls is 81%, while the lease out rate for our small portfolio is about 90%. Total GLA currently under construction is 243,000 square meters. And this year, we will open 44,000 square meters at the One Ayala Avenue and another 43,000 square meters at Ayala Malls Vermosa. For office leasing, BPO and headquarter tenancy remains stable. Our total gross leasable area stands at 1.36 million square meters, with the average occupancy for all our offices at 88%. Our pipeline stands at 160,000 square meters. And for this year, we look forward to opening our headquarter building at One Ayala Avenue. This is the third tower of the mixed-use development and we hope to open it by the fourth quarter of this year, total GLA of 12,000 square meters. Breaking down our GLA by tenancy, BPOs occupy 72% of our portfolio, 10% by headquarter type tenants, 4% dedicated to our co-working spaces and the remaining and only 2% accounted for by POGO. Hotels and resorts, our higher room rates boosted performance. We now have a total of 4,058 rooms in our portfolio and occupancy and room rates have improved significantly. The average occupancy for all hotels was at 59%, while it stood at 29% for our resorts portfolio. So that's an increase of 6 percentage points and 12 percentage points, respectively. Total hotels and resort rooms in the pipeline stands at 1,504 with openings this year to include our 350-room Seda Manila Bay located in the Ayala Malls Manila Bay Complex. Our ancillary leasing formats continue to strengthen the leasing portfolio. ALLHD, Ayala Land Logistics Holdings Corporation has a GLA of 309,000 square meters for industrial spaces composed of factory buildings and warehouses, and this is a pickup from the 224,000 that we started with in 2022. Our cold storage facility, ALogis Artico now has 10,300 (sic) [ 7,300 ] pallet positions, and we have another 3,000 at ALogis Artico in Cebu. The total occupancy for our warehouses stands at 77% with a lease out rate of 78%. For the flats, we have a total bed count of 2,032 rooms with a partial opening of our newest branch in Sacred Heart Makati in San Antonio Village. This added 32 rooms and 60 beds, and this complements our existing facilities, like Amorsolo, Makati and BGC. For Clock In, we have a steady seat count of 1,411 seats, occupying 6,473 square meters. Occupancy for our flats in the fourth quarter alone reached 97% while for Clock In, it's now at 55%, up from 26% in the second quarter of 2022. Total capital expenditures amounted to PHP 72.4 billion: the breakdown, 50% for residential projects, 11% on our commercial leasing projects, 19% for land acquisition, 16% went to the continuing development of our estates and 4% for other general uses. Our debt portfolio, we have 90% locked in fixed rates, an average borrowing cost of 4.4% with an average maturity of 5.3 years. 97% of our debt is contracted on a long-term basis. And despite the higher interest rate environment, we managed to reduce our borrowing costs through our refinancing initiatives. Our balance sheet stands strong with a net gearing ratio of 0.76:1. Cash stood at PHP 12.5 billion, total borrowings of PHP 236 million, an increase of 6% from the previous year, while stockholders' equity ended at PHP 293.7 billion, which is 9% higher year-on-year. Current ratio of 1.77:1 and a net gearing of 0.76. Our interest coverage ratio is 4.5x, well within the standard in force prescribed base for investment-grade companies of 4 to 6x. Just to summarize our performance in 2022. Total revenues 19% higher year-on-year; net income of PHP 18.6 million, 52% higher from 2021. CapEx of PHP 72.4 billion. This is about PHP 8 billion more than what we spent in the previous year. Our net gearing ratio has been managed at 0.76:1. Our segment revenues: on the property development front, this is 7% higher year-on-year. And our commercial leasing revenues accelerated by 62% to PHP 33.4 billion as we saw normalized small rents and foot traffic and this is supplemented by the contribution of our new office spaces and higher hotel room rates. Now let me turn you over to our CEO for his outlook after which we can have the Q&A. Thank you.

[indiscernible] in Asten. [indiscernible] show case [indiscernible] the beautiful office of Asten. But actually, for you guys have to take a look at our latest from our latest developments, which is the Tower 2 office tower and there's a retail -- underneath this tower, which we've opened a few months ago. In about a couple of years, we will be opening the new Mandarin Hotel. So hopefully, after the briefing, we'll have a chance to go around. Now for 2022, as Toti has reported, we are very, very encouraged, okay, with the solid performance that the group has basically achieved. And this is really at the back of, I think, the very strong bounce back of our economy. I think the economy grew by 7% last year. The increased mobilization that now with a total reopened economy, that's allowed normalization and people going back to their pre-pandemic lives. And of course, the continued patronage of our customers. With that, we've now seen sequential improvement from 2020 of PHP 8 billion in net income, PHP 8.7 billion net income, PHP 12 billion last year and now at PHP 18.6 billion. Let me just take you back to 2020 for a minute. And when the pandemic happened, we were very worried because -- that this pandemic practically -- all our business lines were impacted and frankly didn't know whether there was going to be some permanent impairment in some of those businesses. In previous crisis, property development, typically, what happens is the demand typically drives up and property values also come down quite a bit. I think in this particular crisis that we saw, when I refer to previous crisis, it's primarily the Asian Financial Crisis in '97. And again, for about 3 to 6 months, the Global Financial Crisis. Today, what we saw during this particular crisis is demand actually did not completely dry up. Over the last year or 2, we were basically achieving about 2/3 of where we were pre-pandemic. And it's very important. Equally important, property values health, okay? In fact, in many cases, we've also seen property values actually increase. Thus the appetite, investor confidence continues to be there. So when we now look at 2022, you look at property development, we're really seeing some very positive signs in terms of recovery, sequential improvement, and you have to be able to continue that heading into 2023. The mood of our commercial businesses, which is supposed to be what we call our recurring income businesses, primarily the malls, offices and hotels. Again, during the pandemic, 2 out of 3 of these engines basically grinded to a halt. You look at the malls, given restricted mobility, there was hardly any business going on. Hotels, again, given the travel restrictions, there was also hardly any business going on. Worse for the malls, there was a talk about all this e-commerce basically taking over this particular space. Now fast forward 2022, with the reopening, we've seen how the malls can really come back strong. You saw the fourth quarter data. Footfall now in December was 108% of pre-pandemic and 110% or 110 index compared to pre-pandemic for [ merchants ]. So highly high encouraging that there was no permanent impairment or permanent disruption in the malls business. The office business, also, there's a lot of concern because of work from home, okay. So people are talking about are people going to be coming back to the offices and whether offices are now going to be empty moving forward. Now I know we've seen this in some cities that are actually hurting like San Francisco, I understand it's a fairly huge vacancy because the tech company is not coming back as well as there are all ongoing layoffs. Now our own experience here in Ayala Land, no, we did not see actually any of our major clients reduce their space requirements. In fact, what we've seen over the last couple of years, is increasing take-up. In fact, we opened this particular building. We opened One Ayala. We opened a tower, a couple of towers in Cebu. And the take-up has been actually quite good. On hotels and resorts, obviously, we find tourism, basically at a very, very low level. The results obviously hurt in 2020, 2021. But now we're seeing improvement also in those particular product lines or those particular resorts. For hotels because of domestic travel, which has now exceeded pre-pandemic, we're actually seeing fairly good occupancies now across all our city hotels, so what we call the brand Seda, which are Seda hotels. So in summary, 2022 actually has been the -- it's been a fairly positive year for us. And despite all of these things that are going on for the last 3 years, we've kept our balance sheet very stable and now has a capacity to be able to make the investments necessary for us to continue our growth. So just really thanks to Toti and his team that we're able to keep that within the 0.7 to 0.79 level. As well as take advantage of the low interest environment last year to still be able to achieve a, I think, a 4.4% weighted average cost of debt with the maturity of over 5 years. So moving on to 2023, what are we looking at? I think in the Philippines, we are actually in a very good place, okay? You see a lot of talk about inflation, interest rates and how that this will affect a lot of economies, okay. But I think in the Philippines, what we're seeing is, yes, we're seeing inflation, we're seeing increase in interest rates, and yet, the economy continues to move forward. In fact, I think now the third-party institutions are projecting a GDP growth rate of anywhere from 6% to 7%, which really means a lot of economic activity and a lot of opportunities for us, in particular, Ayala Land to be able to continue our expansion in our various product lines. So what do we have lined up for the various product lines that we have in the coming year? So for estate development, we basically lined up 4 new launches. So that base will increase the number of estates from 49 to 53, I think by the end of the year. In addition to that, we will continue in terms of our own investments either in launching new residential or new commercial assets in these estates and continue the [indiscernible] for us to be able to realize appreciation in the land bank that we currently have. In property development, again, given what we're seeing in the market, we're now preparing to launch about PHP 110 billion in residential projects in terms of value. Now that is an increase from, I believe, PHP 92 billion last year. So close to about 20%. If the market comes in stronger than anticipated, we're actually prepared to launch up to PHP 130 billion in product so based on our own planning parameters. In the most, again, given the strong footfall, merchant sales now, we expect to continue to increase the occupancy and out rate of our malls. In addition, we actually have new mall openings coming up this year at both One Ayala as well as Vermosa. And again, given that we don't see any permanent impairment or disruption of mall business, we're also planning to break ground in new areas, new expansions for more business. For offices, which I have mentioned, which has been quite stable. The BPOs actually continue to expand the projection by IBPAP, which is the industry association, is to increase employment by 1.1 million during the BBM administration. Now that's coming from 1.4 million workers during the -- when Duterte administration ended. So that's about 12% to 13% increase in terms of head count, just being anticipated. So that means more office takeup. So there is currently, as you know, an overhead of about 18%, I think, in the Greater Metro Manila area. So we're expecting that with the new demand coming up, that should be -- that should reduce but we're also seeing that in certain areas that there are opportunities to be able to introduce new product. So that's something that our team is working on. So expect that we will also be launching new office towers in various locations. Our own situation, as reported awhile ago, I think we are about 88% occupying all our offices and buildings. So we expect that the [indiscernible] the industry, and we expect to increase that again this coming year. For hotels and resorts, as I mentioned, Seda, basically we're getting close to pre-pandemic levels because of the domestic tourism or domestic travel that has now exceeded pre-pandemic. But now with international travel also coming back so we expect our resource to be able to pick up as well. And we also have, I guess, new rooms to be opened this year. That's Seda in Manila Bay as well as additional rooms in Seda Nuvali and a new hotel in [indiscernible]. And then finally, on real estate logistics, we feel very, very good about the space. As you know, we've been growing our warehouse spaces quite rapidly as well as our cold storage. We expect that, that will continue. In addition, we will be breaking ground this year on our data center that will be located in Biñan together with our partners FLOW out of Singapore. So for CapEx for this year, so we're glad to spend about PHP 85 billion this year. That's up from PHP 72 billion in '22, that was about from 18%. Close to half of it will be -- sorry, about 39% of it that will be in residential. The estate development will be 16%. The leasing businesses will account for about 15% and land acquisition will be a little bit over 20%. Again, because of our outlook, our intent to be able to expand their footprint around the Philippines. So that's for 2023. But when we look at this, basically, you look at it more on a medium to long term because a lot of the investments, you won't be able to realize till 3, 5 years, even longer. So it's important that we have a perspective of what our outlook is here in the Philippines. And as you know, practically all our investments over the last few years, have really only been here in the Philippines because of our belief that the country will continue to grow. And there are basically a few pillars that will drive this growth. I think first is we continue to be a highly consumer-based economy, over 70% of our GDP is consumption-based. So that kind of provides some sort of an insulation in terms of volatility in terms of the country's growth rate. Secondly, OFW remittances continue to be very, very strong. I think you've seen the recent data, I think we achieved about PHP 36 billion in 2022. Again, despite fluctuations in the various economies where the Filipinos have been deployed, the remittances year in, year out, despite crises and booms just continue to increase year in, year out. So we expect that, that will continue this year. I talked about BPOs a while ago. And as I mentioned earlier, I think the projection by IBPAP is about a 12%, 13% headcount growth year in, year out. And then finally, as you know, we have a very, very young population base, and that will continue to drive, I think, consumption and growth in the Philippines. And what they're projecting now is our demographic sweet spot will last until 2050. And because of that, we also expect that urbanization will continue to increase, okay, which is where Ayala Land, us, we play in terms of our estate development. In Europe, we primarily concentrate in urban locations. So that should bode well for the company. So finally, we believe that because of all of these things that I talked about in terms of our outlook, not only 2023 but also beyond 2023 here in the Philippines, that we are well positioned. As you know, we are a community, primarily a community developer. Wherein we take relatively large parcels of land, we master plan it, and we're now putting our various complementary businesses. That is highly synergistic, that adds value not only to the people who actually patronize our product, that's a better place to live, work, but also in terms of our own holdings in those particular locations, whether those be commercial assets or our own land bank. So with that, I'll end my presentation. In summary, we feel very, very good coming into 2023. Expect us to continue to invest in all our business lines that will drive the growth not only 2023 but also beyond 2023. So thank you, and good afternoon to everyone.

Thank you, Bobby, and take you, Toti, for the presentations. [Operator Instructions]. Okay, we'll take questions first from our live audience. Carl Sy.

With respect to reservation scales [indiscernible] did very well in the fourth quarter. I was wondering if you could tell us whether the projects or perhaps the type of project, whether more vertical or horizontal was sold for ALP in the fourth quarter?

Just as [indiscernible] I think what the boost in residential [indiscernible] good take up across all the market segments. Now if you look at it, I think during the initial phase of the pandemic, what we've seen is the higher-end brands were actually affected quite a bit. But we're now seeing that come back in 2022. As you know, also during the initial part of pandemic, what we've seen was more movement on the horizontal product rather than the vertical. In 2022, we've now seen vertical primarily on the higher end now start to come back. If you look at our launches in 2022, 58% I think were horizontal and 42% were vertical. So the movement in reservations is in line with the launches that you basically had in 2022. On your specific question on the ALP vertical, maybe I'll pass it on to [ Miann ].

The launches specifically, I think you were asking about the fourth quarter. The fourth quarter launches were largely horizontal, largely in the South, although we did have a brand-new project in Bulacan for ALP that also did particularly well. Last year, there was just 1 vertical launch for ALP, Parklinks Tower, the second tower in Parklinks.

Got it. And let's say with respect to reservation sales still, I can ask for that with respect to the OFW component, is that also heavily American in the second half or was that much more broad based or for your foreign sales to foreigners was heavily American?

The U.S. is the biggest market, the U.S. whether the OFW or so-called American and all those Americans, they are actually ex-Filipinos. There are also Filipinos or those Filipinos who are married to Americans. So there's always a linkage. We don't get many foreigners in -- no affinity really or family here in the Philippines. So if you look at that number, Carl, that American there, yes, it's primarily still, I think Filipino, by distant.

With respect to the OFW sales, are you saying mostly still coming from U.S. as well? Got it. And for the OFW market and maybe if it's different from the foreigners, what's the in-demand product? Is it vertical? Is it an Avida, Alveo?

It's basically a lot of vertical. Avida and Amaia is what we're seeing. You do get some of the higher end brands, but this is primarily on the Avida, Amaia.

And to clarify, that's for both OFW and foreigner, so Avida and Amaia vertical. And I'll ask this time about the trend going forward. Is that something you expect. First let's say, horizontal -- ALP horizontal continues to be strong. You still -- you still expect to see a lot of sales to, let's say, OFWs mostly that type of product still, is that fair?

Maybe I'll pass it on to [ Miann ].

I think ALP, we are actually quite confident about the vertical market. So they'll have more vertical launches this year. So horizontal will still continue, but I think we're now fairly comfortable that the vertical market for ALP is robust enough. So we'll be launching more verticals. On the OF, yes, that's through the U.S., although some other markets like the Middle East, in particular, has been very strong with OF market, Avida, Amaia, our strong leader brand in those markets. And that will -- we expect that will continue for this year.

And I'll ask this time about cancellations. You had expectations during the second and third quarter briefings about the cancellations. I was wondering if things turned out as you expected and what are your expectations for this year?

I said 12%, right? It was higher, so roughly around 19%. And I think we see, we expect that to moderate already going into the next year, into this year. So that's in terms of cancellation value. Essentially, what we were looking at the first half of the year, it would probably be 12% higher than what we saw in 2019, we ended up at 19% higher than what we had expected. I think essentially, that was the spillover from the previous 2 years. And we remain optimistic that going forward, things will moderate.

And just last 1 for me. What was the unsold inventory level as of [ end of year ]?

24 months by end of the year.

Thank you, Carl. Next, let's proceed to virtual line. We have XT from Goldman Sachs.

I would like to follow up on the cancellation.

Apologies, XT, we are just fixing the audio. In the meantime, if we can ask you to -- is it already working? Okay.

I would like to follow up on the cancellation. Since the year has already ended, do you mind giving us the value of cancellation in 2022? And for 2023, you mentioned moderating. Can you give us a percentage share [indiscernible]?

It should be significantly lower than the 19%.

Let me just add to that. And then the reason we expect that to be lower basically in 2022, the Bayanihan [ more base ] expired that basically allowed people to defer payment. So during the time, we ended up with a kind of like a backlog of people who wanted to cancel. So we had to basically move on that in 2022. Now we don't expect that to happen anymore in 2023. Now with the better economy as well, we anticipate that there's going to be less cancellations just because things have improved domestically.

And just 1 last question from my end. What are the key [ resale ] working out for 2023?

[indiscernible]

Yes. What [indiscernible] that you are looking for in 2023?

Well, it's -- I guess, similar to what you've obviously seen in the market, you see the macro environment and whether the inflation continues to increase and therefore, make an impact in terms of what the interest rate levels are going to be. But assuming that the macro environment remains at current levels, we feel good that it will be a very manageable operating environment.

Thank you. Maybe we like -- we can now move on to Ms. Jeanette Yutan of JPMorgan.

Can you hear me?

Yes, loud and clear.

Okay. Sure. We have 2 questions. First is regarding lot sales. We noticed that for the fourth quarter, it was a record high for ALI. Can you give us an idea how we should think about this trend going forward? Is this largely related to new estates launches? And if not, are you planning to launch more?

For every estate that we launched, there are going to be commercial lots for sale. That's really part of the business model of an estate development. And the reason for that is, number one, we see that there is a demand for investors to basically do their own development inside their estates. The second reason also it helps us in terms of priming. I think when investors come in, we don't have to do all the investments in terms of the development and that basically accelerates the buildup of a community. So that's been a model that we use in Makati and in BGC. So as we launch more estates, expect that commercial lot sales will be part of the product line that we will be offering to our customers.

Next question, it relates to the international sales [indiscernible] with you and those international buyers. How should we think about this trend going forward especially with movements in FX, if there's an impact?

No. We expect demand to continue to grow internationally. That's something that we've seen that many, many, if not all, obviously Filipinos aspire for is to actually own their property here in the Philippines. So that's the trend that I think is here to stay. The deficit in what you're seeing today and maybe back in 2018 and 2019, in relation to international sales, is now the demand from China, particularly from Chinese have basically dried up. So we feel that the demand that we're seeing now is stable in continuing demand moving forward.

And then just 1 last thing. Could you please indicate what was the driver of the higher office occupancy in the fourth quarter, which locations? And when do you expect occupancy to go back to pre-pandemic levels?

Maybe we pass that on to Carol. Yes, maybe Carol.

[indiscernible] driven by our demands from [indiscernible] and expansion of some [indiscernible] and also [indiscernible] coming from great [indiscernible] at beginning of the year is now [indiscernible]

Thank you, Carol. Okay. Do you have any follow-up questions?

I'm good. Thank you.

Thank you. Let's now move on to Mr. Alistair Hall. His question is presales remains robust, but residential bookings seem to be growing slowly, is this the longer booking payment periods? And the second question is [indiscernible], EPS is down to PHP 1.26 per share. Any guidance of when this gets back above PHP 1.5 to PHP 2 per share? First question is on presales, presales remains robust, but residential bookings seem to be narrowing slowly.

And then the answer is yes. That's primarily because of the stretch payment terms. So we expect that, at some point, there's going to be a catch-up in terms of those bookings. And then in terms of EPS, you actually don't provide EPS guidance, but suffice to say that our posture is quite positive for this year and the coming years. And that's just reflected if you look at the launches that we are planning to have. I mentioned on residential, about PHP 110 billion, that's about 20% increase compared to last year. If you look at our CapEx at PHP 85 billion coming from PHP 72 billion. That's about an 18% increase compared to a year ago. And so that gives an indication of how we are seeing the market moving forward.

Okay. Thank you. We hope that answers your questions Alistair. Let's move on from Mr. [indiscernible]. What is the impact of sales of the proposed luxury tax that is passed?

That's significant. That's a huge fact. But obviously, we're hearing a lot of resistance on that. Because if you look at luxury tax, they basically pegged it at about, I believe, 100,000 per square meter which includes products that are not actually in the luxury category. That's why I think that there's a lot of discussion ongoing on what that -- what the possibly what the right level is, but 100,000, even our own Amaia product investment is already over 100,000 per square meter. So if that passes the answer is it could have significant impact.

Now if the luxury tax is pegged to the selling price of a unit at PHP 100 million, because if you recall, there were 2 things that came out. One was 100,000 per square meter, which looks to me unlikely given that I don't think we can even price our Amaia projects at 100,000 per square meter. So if it's a PHP 100 million per unit or per residential property, that accounts for less than 2% of what we intend to launch and it's less than 1% of our total inventory. So if it's at PHP 100 million, the impact on ALI will be quite negligible. But in any case, I think we got a ways to go on this luxury tax issue. Let's see where it goes. It has been talked about for quite a bit. I don't know if it's going to go through this year.

Thank you for those Bobby and Toti. Let us know if you have any follow up questions? And then now let's move on to Ms. Joy Wang of HSBC. Could you share your thoughts on your leverage ratio and cost of financing as we ramp up CapEx over the next 12 to 24 months?

Well, based on our budgeted CapEx to -- we believe that we will be able to maintain a net gearing ratio of below 0.8 and that's on account of strengthening cash flows from the operating businesses. And in terms of the cost of debt, I think definitely it's going to start moving up. Fortunately, 90% of our debt is locked in on fixed rates. So the benchmark risk moved up by close to 200 basis points. But we don't expect that to feed into our cost of debt immediately, if ever it will be quite gradual given that our average maturity is about 5 years. So you'll see about 20% of our existing portfolio repricing plus any incremental debt that we may need to take on. We expect that our cost of debt could be moving up gradually.

Okay. And in line with that, we did receive a question from Angie from Metrobank.

Can I just add that on that luxury tax, I think the Secretary of Finance, Ben Diokno, I think if I'm not mistaken, came out and basically that the preference of the government is to be able to collect more rather than adding new taxes, right? I think that's a statement that the Secretary of Finance has come out with. So our we're hopeful that in this particular form we're in, it could have an impact on the industry will somehow either be mitigated through what Toti mentioned, if it's PHP 100 million, then it's negligible or somehow gets deferred.

Just going back on the CapEx. The question is, how will the PHP 85 billion 2023 CapEx budget be funded?

Overall, we expect to -- our debt portfolio will probably move up by about PHP 20 billion. So the incremental funding that we've prepared for or that we budgeted for, given the expected inflows from operations is just about a little above PHP 20 billion. So the CapEx of the PHP 85 million will be funded by a combination of primarily from internally generated cash and the portion will be coming from debt. So it's -- I guess I'm disclosing it already. We're looking at going into the market for about PHP 20 billion to PHP 22 billion.

The follow-up question from Angie is noted that the outstanding performance in 2022 was primarily driven by the reopening of the economy after the pandemic. Does the company expect this momentum to persist for the next 3 years?

Well, I think we're back to a normalization. I think we've seen if the economy continues to grow at 6% to 7%. We [ didn't ] expect that Ayala Land, us, in particular, will continue to invest and, therefore, be able to achieve a meaningful revenue and income growth.

[indiscernible] do you have any projections or aspirations as to when ALI can get back your earnings level to pre-COVID levels? And second is what is your projected occupancy for offices this year? Could you provide [indiscernible]

Yes. I think on the first question, we don't provide that detailed guidance. But as I said a while ago, you could see from the way we are suspending CapEx as well as our launches in terms of our own posture. On the office, again, I'll turn it over to Carol.

[indiscernible] What's your projected occupancy for offices this year? Can you provide some details [indiscernible]?

We expect offices to go back closer to pre-pandemic levels [indiscernible] mid-90s back to pre-pandemic levels. Net to rate, we continue to have estimations are anywhere between 3% to 5%. So this year, we achieved 4% [ net ] revenue growth overall.

The next question is from [indiscernible]. Can you talk about your strategy [indiscernible] coverage?

I think AREIT, it's a publicly listed company. I think AREIT is communicated in terms of their own plans in terms of the infusion of assets into AREIT over the next 3 years. And so we're committed to the program. At current levels of interest rates, I think it still makes a lot of sense for us to continue with the infusion.

[indiscernible] from our live audience. Yes, David, please go ahead.

[indiscernible] presales, specifically for vertical management gave their thoughts on the overseas demand, both OFW and foreigners. But could you talk more about the domestic base? What should we expect from the domestic based on buyers? Is it going to be more upbeat? Of course, last year, the growth from OFW and foreigners were really good, but should we expect a more upbeat domestic base of buyers for 2023?

I think that will basically be in line with the kind of economic growth and the wealth generation that's happening in the economy. So the answer is yes.

And then on the -- I think the number was 45% of the PHP 110 billion is on the vertical side. I just wanted to ask for more color that Metro Manila and then middle income -- I mean what segment, what geography are you looking at for that 45% vertical launches?

I think in terms of value, it will be mostly in the premium brands, so ALP and Alveo.

But still some of the -- some middle income launches?

Yes, some Avidas as well.

Next question from Mr. Danielo Picache of Credit Suisse.

Two questions, essentially questions on margins. So for resi, maybe you can update us on your hedging as well as your ability to pass it on to ASPs, say, on the different brands? And for the malls business, I'm assuming that a lot of your tenants are already paying full rent. But given that your tenant sales and your foot traffic are above pre-pandemic, just want to get a sense of how the dialogue in or around rental escalations coming along?

So on the margin, strategy is basically to pass on the increase in cost by increasing our average selling price. So that's been going on for the last few years. So what you've experienced about a 6% increase in ASP. So that's been, I guess, our strategy to be able to maintain the margins. We expect that we will continue to do that this year. So the intent is to keep very stable margins. On the malls, maybe I could pass it on to Chris? Chris is our Head of Malls.

The dialogue in terms of rents, right? Very correct. So generally on the per category, so we'll have to look at it. So there are certain categories that are really doing well, and there are some that still need some, I would say, support, particularly department stores. So -- but generally, the trend is very positive. So this year, we hope to be at 100% pre-COVID in terms of the rent. All are based on contract already, except for very, very few merchants, but this is normal for any mall operations. So there will be some select concepts that need to be -- we need to refresh and put in new concepts. So that's a normal in mall operation.

Thank you, Chris. Thank you, Danielo. We have a question from Mr. Jose Rafael Mendoza from PNB. Any guidance on share buybacks this year? Should share price remain attractive?

We are constantly on the lookout for opportune times to implement a share buyback. So we do have a budget for this year. Last year, we spent about PHP 2 billion. And this year, year-to-date, about PHP 0.5 billion. So again, related to our CapEx -- I mean if you were to ask me, I'd put all the CapEx on buying back our shares. But I'm not numbered here by the operations guys. So we got to fund the operations first and foremost. So the priority is the operations, but we do have an amount. I think I guess, a meaningful amount that we can use for buybacks if the opportunity -- should the opportunity present itself.

And we have a question from [ Gino Rojas ] of Macquarie.

Congratulations Bobby and Toti on a great recovery in 2022. I guess on the risks that you outlined on inflation and interest rates, I recall last time you had modeled say, a 200 basis points decrease in the financing cost. Since there's a lot of debate still on what terminal rates will be, what elevated inflation would be, have you begun to model where sort of maybe a 300 or 400 basis point decrease in funding costs will be? At least in recent memory, a 5-year fixing would cost 5%, 6%. And it's sort of like been stuck there for forever. Now 5-year fixing is about 8%, 9%. I'm just wondering how this affects demand, what would you sort of do to mitigate that?

We actually modeled that we would be borrowing at between 8% to 9% today. And we are going to launch a fundraising initiative. The 5-year rate is at about 5.8%, and the credit spread that's attributable to ALI is quite high, at least that's what we're hearing from our underwriters. So it's looking more like 6.1%, 6.2%. So it's not anywhere close to what we were anticipating at 8% to 9%. So the headwinds that we were sort of preparing for, it looks like they've moderated quite a bit, particularly on interest rates. It's not turning out to be as high as what we had anticipated, fortunate for us and for everybody. It looks like what's been really moving up is the short end. But the 5- and 10-year rate, which is what we monitor closely and which impacts on our business and which impacts on the buyers of our residential products because of the mortgage rate, right? It hasn't moved up to the levels that we were anticipating last year.

Thank you. I don't see any more questions on the line, but maybe Bobby, would you like to share with some closing words?

Well, once again, I would like to thank everybody for joining us in today's briefing. As I mentioned a while ago, were very, very encouraged in terms of our 2022 results. When we look at our outlook for 2023 and beyond, I think with the normalization and the Philippine economy continue to grow at a fairly good blip and I expect us to continue to invest and launch new products across the board, basically in all our product lines. So we could basically continue to be able to serve more Filipinos and thus be able to increase our various businesses. And therefore, register healthy top line and bottom line growth. So again, thank you to everyone for joining us today.

That is the briefing this afternoon on the performance for the full year of 2022. If you have additional questions, please do get in touch with us through investor relations at ayalaland.com.ph and a recording of this briefing will be available on our website, ir.ayalaland.com.ph. Once again, thank you for joining us. We have snacks at the back. So please do enjoy that and have a restful day.