Balwin Properties Limited (BWN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Balwin Property Results presentation for the 6 months ending the 31st of August 2021. Thank you. I'm Steve Brooks, the CEO of Balwin Properties, and I'm going to give you an operational overview of Balwin Properties. Operational highlights. Just to give a quick summary and introduction of what we do, Balwin has 3 brands. We have the Green brand, the Classic brand and the Signature brand. We're exceptionally proud of these three brands. And these 3 brands operate in 4 geographical areas. We operate in Pretoria or known as the Tshwane area in Gauteng, Joburg, the financial capital in Durban, up the North Coast, Umhlanga and the Western Cape or the Western Seaboard. Those are the 4 geographic areas that we operate in. And our vision is to have all 3 brands in all 4 areas. The Green brand is our latest creation, which is phenomenally -- phenomenal growth, and it is trading below 1 million. Then the classic brand takes over from -- there's a slight overlap, but basically from ZAR 1 million to ZAR 2 million, and the Signature brand is our aspirational brand, which is above ZAR 2 million. We have phenomenal sales in the last 12-month period. We have over 5,000 sales. Please don't get confused with that number because that is obviously sales into the future as well, but it shows an incredible appetite for our product, and we also now are completely online with our sales. It's something that I initiated in lockdown, and we're extremely proud of our digital platform, and our vision and dream digitally is to be right to the cutting edge, so the client is the whole experience, all the way through to registration on a digital platform. We're extremely proud of our BEE transaction. Regi Kukama, I've courted Regi for 5 years since listing. I promised shareholders that we would be doing this transaction. We have successfully done the transaction and already, myself and Regi, have a great working relationship, and we're looking at some extremely exciting ventures going forward, and we welcome Regi to our team. He attended the first Board meeting yesterday and already is adding great value. One of the biggest drivers this year is sustainable buildings. We have a vision to make -- make every single apartment EDGE Advanced, which is the highest EDGE certification that you can get in the world. We also -- any building that we do on mine systems must be 6-star graded, a 6-star grading is a very difficult grading. Our latest head office that we've just purchased was a renovation, and we have finally achieved a 6-star rating. We have 8 buildings that are 6-star rating, and we're very, very proud of that achievement. Presales going into the future. We have extremely high number of presales, which shows great appetite for our product in all 4 areas that we work. We're at 2,846 apartments sold for the future. We have an exceptional pipeline. The pipeline is important. As you all know, zoning is a very, very difficult process, and it takes time. So you need to have a deep pipeline. Otherwise, you will have a knee-jerk start-stop of your construction and start-stop of your supply, and therefore, you will have inconsistent business. So we have a big pipeline of 56,313 apartments across 29 developments, and we feel that is an absolute superb pipeline. I also like to measure us internationally. A few years ago, we won our first international award, which was a massive achievement. I was in Dubai to collect the award. And I sat there and I thought, I don't understand how we can compete in the world arena. And the next thing my wife said to me, please put your jacket on Steve because they're calling up Balwin. It was an incredibly power proud moment. Our first international award was fortified in the Western Cape. And subsequent to that, we have won an enormous amount of international awards. And this year, we have won 7 international awards, and we are hoping for the best social housing in the world in February. So fingers crossed guys. I hope we win that, which will be a tremendous accolade for South Africa for Balwin and for our Green brand, which is eventually going to be the biggest brand in our stable. As we know, we've recovered from a COVID pandemic, which is rock the world. We have had superb management through COVID. We have obviously our condolences to all the people that have passed. We know some near and dear friends that have passed and our sincere condolences. But even during this difficult time, the appetite for Balwin apartments has been phenomenal, and we thank all our clients for that. Our Green Collection is increasing, and I still think the biggest growth will be in our Green Collection because that is the -- just to repeat, that is trading below ZAR 1 million and superbly done by Boogertman Architects and winning awards left, right and center. So we really believe we've cracked it with a Green brand. Continued strong demand for sales, very strong 1- and 2-bedroom apartments in certain areas, and then quite against the trend, strong growth, particularly on our Thaba development for 3 bedrooms, which shows that families and especially because of our Montessori School on our developments that families are looking to move into Balwin apartments. Presold for the future. We've got a huge amount of apartments presold, and that obviously is not recorded in revenue. The sales graph, just remember, this is gross sales. So we'd like to keep ourselves nice and optimistic. The average sales is over ZAR 400 a month, which is phenomenal. We do have a cancellation rate, and we try our best to keep our cancelations. Our target for cancellations is 15%. In some areas, it's tracking and now there is slightly higher. That is a basic summary from me of the operational overview, and I'd like to hand over to a superb team of financial people, headed up by Jonathan Weltman.

Morning, ladies and gentlemen. Thank you, Steve, for the overview. I'll delve into the financial numbers now for the 6 months ended. These are some key highlights that we've had over the period. You can see revenue up 41% to ZAR 1.3 billion for the period. Apartments handed over, really driving those revenue numbers to 1,261 apartments handed over. Bottom line, really, that revenue of increase of 41% is carried all the way through to our bottom line numbers. So profit before tax up 44% to ZAR 163 million for the 6 months. And profit for the period as well, up 44% to ZAR 117 million for the period. Headline earnings also up 44% at ZAR 0.245 per share, and net asset value for those who do look at it has increased by 7% to ZAR 0.692 per share, share price still trading as a discount to that net asset value and the net asset value still keeps growing. Delving into the breakdown of what we see in the income statement. Really revenue. The driver of the 41%, as I mentioned, is the 1,261 apartments. We've seen that grow from 896 in the comparative period. And really, it's the sustained demand of our product, the 1 and 2 bedrooms still featuring very strongly at 80% of that revenue number. And the real growth we've seen has been in our Green developments. The Classic Collection, which is our core has contributed 65% of the revenue and still maintains that large chunk of our business. But the Green developments as and when those start rolling out, which we've seen in this period, starting to roll out with our first ones in Western Cape with Greenbay in Gordon's Bay region as well as Greencreek in the Tshwane node next to The Blyde, proving very successful. Those who are handed over in this period. And really, those have become a contributor of 30% of the apartments actually sold and recognized in our number for this period. Compared to 15%, so double the number in the comparative period. Again, it only contributed 18% of the revenue compared to 10% on the prior year, and that's just because of the lower rand value for the Green brand apartments compared to our Classic and Signature. Signature is still an important component comprising 17% of our revenue. And again, that's something we do roll out very carefully. Although it's been a tough market, we're still continuing to roll those out with Izinga, the latest in KwaZulu-Natal of those Signature Collection apartments. On to our gross profit. Our gross profit has increased by 36% comparatively to the prior period. The margin slightly diluted at 24% compared to the prior 25%, but that's nothing too alarming. And we'll see that slowly pick up as we move to the second half of the financial year, still well on track for what we're expecting, and we should see a slight uptick in the next comparative period. Gross profit expected to improve as and when we roll through each of those developments. And that's why I say that, that's part of our financial model, as I've mentioned time and time again. Operating expenses, there has been an increase of ZAR 151 million for the period, an increase of 25%. That has been largely driven by 2 things: firstly, comparatively commission-based, which is revenue in nature, which is really not fixed numbers that have grown, but really in relation to revenue, so revenue up 41% operating expenses, ZAR 25 million. And then a portion of that component was really the change in funding that we've had that have contributed. So there has been one-off costs relating to the funding that we successfully raised, which has impacted that increase in operating expenses. And the increase in funding I'm going to touch on now, which has become a key component. Earnings per share increased by 44%, but our funding is now -- we've managed to successfully conclude a relationship with Stanlib to increase funding. They've loaned us ZAR 500 million, which was a successful conclusion that we did in July of this period. And that has enabled us to firstly diversify our base of funders that we've got. And also lower the cost of funding that we're able to achieve. That is 3-year term funding compared to the traditional top structure finance that has come into Balwin. We're still doing that successful relationships with the banks that we still continue to use, but that will lower our average cost of funding and has proved successful that we've managed to do that. And that's enabled us to have the strong cash position that we've got at the end of August, which is the highest for Balwin ever, which is at ZAR 739 million for the period. Again, we continue to invest in our pipeline. There's been an increase in developments under construction, which has increased by ZAR 580 million since the year-end period. taking our developments under construction to ZAR 4.7 billion mark. The main driver of those has really been a few parcels of land, which have been successfully sold, pieces such as Izinga, which have now come online, Thaba Eco Estate in the south of Joburg. And then our Mooikloof Mega City, which is the strategic integrated project, which has now come online and that piece of land is registered, that's driven the increase in our developments under construction. Here, you can see an overview just of the consolidated income statement. You can see the numbers that I've been speaking to, revenue, ZAR 1.3 billion compared to the ZAR 929 million from the comparative period. You can see the increase in gross profit, which I've gone through the operating expenses. You can see the comparative increase there. And then just 1 or 2 items to briefly mention is the interest income that's grown substantially from a comparative, but that really relates to occupational rent which we've reintroduced and collected over the period, and that's why the increase and then finance costs partly due to the raising of funding that we successfully concluded in July this year. Apartments recognized for the period. There, you can see just a detailed breakdown of the 1,261 apartments for the period. You can see again Waterfall enormously successful that was concluded a number of years ago. We're continuing to succeed in the Waterfall node. Munyaka the latest out of those, Kikuyu almost now come to completion. Polofields is still ongoing, and we're starting up on Polofields village fairly soon. And really a successful node contributing to approximately 25% of the total apartment handed over. Western Cape still continues to be successful, contributing to over 30% of the region there, you can see. And KwaZulu-Natal still in its infancy with only Ballito Hills. But as I mentioned, Izinga coming online, that will continue to grow. And as Steve mentioned at the beginning of this presentation, the intention is to roll out all our brands, so we will be having a Green brand, which will eventually grow into the KwaZulu-Natal region. This is a more detailed breakdown of our income statement. That's just showing the breakdown for the different products that we've got, the Green Collection. You can see just in terms of real house price growth that we've seen compared to the prior period from the 1 bedrooms, 2 bedrooms and 3 bedrooms. You can see the actual average house price growth. And then we've given that breakdown across all the different types of collections. You can see the Classic Collection, quite substantial growth that we've seen on an apartment type basis, particularly in the 3 bedrooms that we saw when the demand for people utilizing all 3 bedrooms, probably due to people also working at home, and we took advantage of recognizing that, and we managed a 16% increase in growth of the house prices over that period. And then the Signature Collection, well, that has been a more difficult area that we have seen over the past period with the pandemic, the higher end of the market has been more difficult, but still an important component. To summarize statement of financial position. There, you can see it. You can see our full balance sheet, the numbers that I really want to touch on is you can see our property plant and equipment, that's gone up substantially. That's the acquisition of the new head office in Gauteng. Coming on to balance sheet, really ZAR 124 million has gone in for an IFRS 16 adjustment, which has come on board in the property, plant and equipment. Corresponding liability. You can see it in our development loans and facilities that's come in there, which has also been the corresponding liability side of that transaction. The other items to point out is obviously the developments under construction, the ZAR 580 million, that I mentioned and spoke about. And then also cash, a key component, which has gone up substantially, partly due to the ZAR 500 million that we borrowed, but the ZAR 739 million is certainly comforting and pleasing to see on balance sheet at period end. We've also managed to decrease our debtors. The debtors number there. You can see, which is just really a timing issue from apartments handed over, and that's dropped from period end and that is a focus on ours to get all apartments registered as quickly as possible to ensure there is no timing delay. And the development loans, which has gone up by the ZAR 500 million from the money that we've borrowed there, you can see growing from ZAR 225 million to ZAR 709 million at period end. This just gives a snapshot of our developments under construction broken down, firstly, by region and then by collection. And you can see there approximately 70% of that still sits in Gauteng, and 66% of that sits in our Classic brand. That will slowly change over time as we roll out more through Western Cape and more through KwaZulu-Natal and also as the Green brand becomes a bigger component of the business. That's it from me. I'll hand back to Steve to take us through what's really important and focus from a Balwin perspective, really important and close to our hearts, which is sustainability, both from our clients and for our business in our country. Thanks, Steve.

Thank you, Jonathan, very concise, well done. The big thing in our business is our Green or sustainable business practices. It's been a driver of mine. I'm also on the Board member on the Green Building Council, which I'm very proud of, and we're putting a lot of energy into this. We want to reduce our environmental impact through innovation of design and building techniques. We really put a lot of effort into our urban design and the new buzzword, which I've created called Community Design. In other words, how do we affect the community at large rather than just coming in there and leaving. So it's a real effort and a change in our business. We've also -- all our apartments are now EDGE Advanced, which is a phenomenal achievement. It really keeps all the architects and all our professionals and construction team on their toes, and we're very proud of that. We have 1 of the highest registration of EDGE Advance in the world, and we will continue doing this giving our clients an energy saving of approximately 40%. All our lifestyle centers and any ancillary buildings that we do must on my assistance be 6-star graded and we must really be innovative and watch that our costs still sounded control. And we are achieving that very successfully, and we have a high number of 6-star Green rated buildings in the country. Looking forward into the future. One of the biggest drivers is our Green brand. That is the largest sector in our business, trading below ZAR 1 million. And we believe that, that is 1 of the biggest growths in this country. Balwin cannot house the very poor people. We just can't get down to that level, but we can house the lower middle class. In other words, all the teachers, the plumbers, the electricians, et cetera, et cetera. So that will make a big difference. And we're doing a lot of work involved with government in that brand. Continuous emphasis on responsible environmental management, very, very important. South Africa environmentally is a very, very important leader in the world. Strong brand equity as demonstrated by our fantastic demand and online sales. The online platform will be developed more and more as we get going. A big driver for mine this year is our annuity business. We have 1 strong annuity business in our brand, which is our Balwin Fibre, which is really growing up it's starting to contribute to the bottom line and really making a difference. We want to make a huge announcement in the future that this annuity business is a big driver of mine, and we'd like to see some huge big growth in Balwin through our annuity businesses, and we will keep everybody informed as we unveil this fantastic opportunity. Ongoing COVID. As we know, this pandemic has not left us yet, and we're monitoring it and keeping strict protocols. IT information, technology and automation. We're driving that extremely hard. We want to be at the cutting edge and be as paperless as possible and make the experience for our clients as pleasant as possible. We have tremendous optimism in this country. South Africa is a fantastic country. I am proudly South African, and we believe in the government's ability to do infrastructure in the future. We're involved in their strategic integrated projects. We have 2 that are live at the moment. And we have numerous other ones that have already been approved, and we've been asked to accelerate the approvals of any future projects, and they really are coming to fruition. And despite heavy criticism, our government is trying extremely hard to engage with private enterprise people like ourselves to get the infrastructure done competently, properly and to a reasonable budget. I think that's about all from me. I'd like to open the floor up to any questions to myself or Jonathan. Thank you.

[Operator Instructions] Steve. We've got a couple of questions. Ladies and gentlemen, we do have a bit of a lag on the platform, if you wouldn't mind sending through your questions as soon as possible to make sure we cover everything. The first question -- actually, 2 questions from Londiwe Buthelezi from Fin24. The first question is Balwin has secured development -- a development pipeline of 56,313 apartments, which will be built over a 15- to 20-year development horizon. Where will most of these be in terms of the collection segments or the brands and the regions?

Thank you. Our pipeline has spread into our 4 geographic areas. So we've got a pretty good spread, and we watch that quite carefully, so we don't have a massive concentration risk. But the biggest growth by far is in our Green brand. So to summarize, it's spread all over our 4 areas and the biggest growths in our brand are Green brand.

Yes. Just to add on to that. In our long-form announcement, you can turn to the development pipeline, and it's got our entire pipeline broken down for each of the 56,000 apartments into different regions and different collections as well. So you can see the makeup of the exact ones there.

She's also asking the Signature Collection dragged down the average price of sold apartments below inflation for the group. Do you foresee prices starting to lift anytime soon? And if not, how will this affect Balwin's plans given that the Classic Collection contributes 65% of the group's revenue?

Yes. The Signature Collection is always a difficult collection. It's a lot of the collection in our Signature brand is because of the land holdings we've got. So we don't easily intentionally go out and buy land for our Signature Collection. We've got 1 incredibly strategic 1 in Izinga, which is in Umhlanga, which we did purchase for Signature. But the others, we're getting through them, and we're already seeing, particularly at Polofields some good growth going forward because we've just revitalized our lifestyle center at Polofields, and we are confident about some good growth there.

And Londiwe also is asking what is the occupancy rate for the Signature Collection with finished developments versus the number of sold units and apartments on average?

Yes. Look, we still have a fantastic record of occupying completed built apartments. At the moment, there's a slight lag at Polofields, but it's so insignificant. I don't think it's more than 20, 30 apartments and a slight lag at Paardevlei. But when I say a lag, they haven't completed the apartments yet. So we actually haven't got there yet.

Mark Narramore from Excelsia Capital is asking if you can provide more color on trading in September and October?

Yes. Very difficult to comment forward-looking. I mean, these are our historic results to 31st of August. So without putting any forward-looking statements, there hasn't been a significant change in the way the operations, how the demand has still been strong for what we're seeing out there. And it's really been a continuation of what we've seen over these first 6 months of the year. So still strong demand for our product, which we're exceptionally happy with.

Mark is also asking if you're expecting higher gross margins in the second half of the year?

There will be a slight uptick in the second half of the year as these projects do mature. We are expecting a slight uptick in the second half of the year. Yes, absolutely.

Rediff, Van Niekerk is asking, first of all, congratulations on the results. In the previous reporting period, you used to disclose Balwin's long-term debt-to-equity ratio, which was 29% at February 2021. What is it currently?

That is still maintained the same. It's still sitting at just short of 29% as well.

And your second question is you mentioned that the sales commission and operating expenses is not fixed and related to the number of apartments sold. Is it not more appropriate to include sales commission and cost of goods sold, meaning above the gross profit line?

Unfortunately, we can't, from an IFRS point of view that needs to be disclosed as part of operating expenses and not part of the sales cost also attributable to that increase in operating costs relating to the ZAR 500 million that we successfully raised and which will be a consulting fee, which we did, which will bring long-term benefits to all shareholders because that money is raised over term. We hit the expense right now for the 6-month period, but that benefit of that money will be termed, which will be 3 years.

Then a couple of questions from Talya Ginsberg from Umthombo Wealth. She says, Balwin is not a REIT, and therefore, does not have the obligations to pay dividends the same as a REIT structure would. Why did Balwin pay dividends worth 65% of net income, when it was 4x greater than the cash generated from operating activities?

No. That metric is not correct. So we pay 30% of our profit after tax. So the dividend here was ZAR 0.74, which is 30% of profit after tax not 65%. The 65% is perhaps there's some miscalculation that you would have looked at there. But there's also -- when you look at the comparative prior year period was a cumulative catch-up of the period where it was withheld from COVID. So perhaps not looking at the direct comparison.

And then the second question from Talya is could you elaborate on the cash conversion cycle of Balwin, given the long development times, I assume it is slow.

Yes, quite correct. It is a lot slower to turn over the cash, and that's just the nature of the industry and the business. So it takes a while to build an apartment. And obviously, that converts into cash at the end of the cycle. We traditionally hand over phases every quarter. So every 3 months, we hand over a section, but that's related to a number of aspects related to risk to pricing, to construction, to building, to presell. So there's a number of elements, but absolutely, it does take a longer cycle to obviously convert that back into cash.

And then a couple of questions from Izak van Niekerk from Mergence Investment Managers. He is asking what is the longer-term target for gross profit margins and outlook for when you expect to get there as gross profit margins have continued to come down and remains well below previous long-term guidance of 35%?

Yes. Thanks, Izak. The longer-term target is from the low to mid-30s is the longer-term target. We should be able to achieve up to 35% quite correctly, as you mentioned. And that's over a period of time. There has been a big focus on the business in the early phases of our construction now to not drop below because our prices the way it's done is our prices can in the early phases, bring traditionally lower margins. And then right at the end of the project, bring unusually higher margins into the 40s, and we're trying to narrow that gap to bring the graph down where we start at 30% flat and then slowly grow that. But it's a difficult equation to get right. Firstly, there's a market out there, and also getting off to the huge number of presales. So we have had slightly lower margins, but the number of presales that, that's been able to generate and secure for the business has been substantial. We've got 2,800 apartments plus in our presales and that came at a slightly lower margin, but those are going to uptick and we are expecting an uptick and you'll see that in our final results towards the end of this year that you'll see are higher.

And then the last question from Izak, please can you provide a number for the one-off costs incurred for funding?

That was around between ZAR 10 million and ZAR 13 million, ZAR 10 million was fixed, and then there's another portion which took it to a cumulative total of ZAR 13 million.

Thank you very much. There are no further questions from the platform.

Thank you very much, ladies and gentlemen. I think we'll end with that.

Thank you.