Balwin Properties Limited (BWN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for joining the webcast for Balwin's results for the year ending 28th of February 2022. My name is Steve Brookes. I'm the CEO of Balwin. And I'll be joined by Jonathan Bigham, our CFO; and Raaziq Ismail, who is Head of Legal and has a dual function of heading up our new annuity business, to unpack the results. We are extremely proud to report strong results despite a challenging operating environment, which demonstrates a continued recovery from the prior year and sustained strong customer demand for the ever-growing Balwin brand. Demand for specialty 1- and 2-bedroom apartments remained strong and approximately 80% of total apartments recognized in revenue. A total of almost 3,000 apartments, accurately 2,962 apartments, were recognized in revenue during the year under review, an increase of 416 apartments on the prior financial year. This resulted in a milestone achievement for the group of Balwin Properties breaking the ZAR 3 billion benchmark for the first time in its history. I remember starting in 1996 with a very, very humble Ivory Court of 50 apartments. And never in my wildest dreams what I've thought we could have got to ZAR 3 billion. So a tremendous achievement to all our management. Thank you very much. In addition, we experienced strong presales. We have sold 2,386 apartments that will be recognized in future revenue years, highlighting the sustained demand and strong brand of Balwin Properties. ESG compliance is increasingly playing a pivotal role in measuring corporate sustainability. And I'm very proud of our drive towards reducing energy and water consumption within our developments. I will elaborate more on this later in the presentation. Some further highlights for the year-end review include the conclusion of our BEE transaction. Through our focus on all scorecard benchmarks, we are proud to have increased our BEE rating to a Level 4 contributor status. And we will be working harder and harder at this as we are totally committed to the BEE rating. Balwin was also recognized internationally for all its efforts in bringing an exceptional lifestyle product to the market, with no less than 7 awards achieved at the Property Awards, where we competed against the best in the world. I'm always extremely humbled when I stand in front of everybody, looking at the absolute in awe of all our competitors. And we are judged by some expert judges, so this is a magnificent achievement for our small business. On to the next slide. And from an operational point of view, as mentioned earlier, the total number of apartments handed over during the year has increased by a healthy 16%. Balwin currently has a very strong pipeline of just under 52,000 apartments across 28 developments. Our core focus is to make sure we really unlock this pipeline, and we have a continued effort in this regard. Considering that zoning is our main operational area, this can take anywhere from 5 to 7 years. Strategic land acquisitions remain important. However, we will place greater emphasis on accelerating the unlocking of the existing land pipeline. We successfully handed over our first Green Collection development in the Western Cape this year at Green Bay -- in Gordon's Bay and, in line with unlocking the pipeline, increase the rollout of our Green Collection apartments. During this terrible pandemic which we are in, we expanded our online offering and subsequently migrated all our sales to only online, resulting in a far better and more efficient sales process and a lot fewer cancellations. Since the adoption of the online sales process, our cancellations have reduced to approximately 17%, and our company vision is to get them to 15%. So we're still working very hard at that. From a capital allocation point of view, considering the deep discount between the current share price and Balwin's net asset value, I'm very proud to announce that we are going to institute a share buyback program that will be highly earnings-accretive and will drive growth in headline earnings per share. To this effect, we have received Board approval to launch a share buyback program, with initial approval of ZAR 20 million. Although a very modest start, the program will be monitored and updated over time. The acquisition of our new head office building at Corlett Drive, Johannesburg made headlines not so long ago. I want to reiterate that the building is functional. It is not my ego. It is not over the top. I had a sanity check the other day and had a good walk around the building. It is honest. It is cost-effective. And I'm extremely proud of it. It also has a full 6-star green rating, reducing reliance on the grid and will yield an exceptional return of 10.3% per annum. This is complemented by an extremely exciting advertising opportunity that will unlock the location of the building. During this year, Jonathan and his team executed on a multi-funded strategy, securing ZAR 560 million of new unsecured term debt funding, which diversifies our funding in a cost-effective manner. Jonathan will elaborate more on this later. The recent flooding in KwaZulu-Natal has been devastating. We express our condolences to all the people who lost lives and to all the people of KwaZulu-Natal for the devastation on infrastructure within the region. Through the Balwin Foundation, we've supported communities that were hardest hit by this terrible tragedy. From an operational perspective, none of our developments in KwaZulu-Natal were significantly disrupted. From the devastation of KwaZulu-Natal on to something a little bit more positive, which is our sales and where the next slide demonstrates monthly sales, please note that these are gross sales and do not factor in any cancellations. As mentioned earlier, our migration to an online platform has resulted in fewer cancellations, tracking against the targeted 15% rate in all the various regions. An average of 337 apartments were sold per month over the 12-month reporting period, coming off a strong base at the beginning of the financial year. More granular information on our development pipeline is provided in Slide 7, with the bulk of the development still in our powerhouse, which is Gauteng, followed by the Western Cape and KwaZulu-Natal. Considering strong demand in the Western Cape and semigration that is happening from Gauteng and also semigration happening from KwaZulu-Natal, there's a need to identify expansion in the Western Cape. Most of our land in the Western Cape is serviced, which allows for quicker generation of returns. Ladies and gentlemen, I will now hand over to our brand spanking new, Jonathan Bigham. Jonathan Bigham has been with Balwin a long time. So he's fully aware of what's going on. He was extremely well mentored by Jonathan Weltman. And Jonathan Bigham, I'd like to hand over to you for the financial overview. Thanks. Jon?

Thanks very much, Steve, and good morning, everyone. With reference to the financial overview, after the challenging trading period recently experienced, it's really pleasing to be able to present the consistent upward arrows that highlight Balwin's financial performance for the 12-month period ended 28th February 2022. Revenue grew to ZAR 3.1 billion, a milestone for the group, breaking the ZAR 3 billion revenue benchmark for the first time in its proud 26-year history. In total, 2,962 apartments were sold and recognized in revenue for the period, a 16% increase from the prior year. This financial performance translated to a profit before tax of ZAR 519 million and a profit after tax of ZAR 363 million, an 11% and 8% increase from the prior year, respectively. We're also really pleased to present a closing cash balance of ZAR 666 million, almost double the cash on hand reported from last year. A significant milestone of the group was securing 2 term loan facilities to a combined value of ZAR 560 million from Stanlib and Sanlam, respectively. This broadens the funding base of the group in a cost-effective manner. Subsequent to year-end, we've also secured an additional term loan with Ninety One. We'll give the market more information on this regarding the interim results. On the back of the financial performance noted, core headline earnings grew 16% to ZAR 0.8315 per share while the net asset value per share is calculated at ZAR 7.49. Over the page into the full income statement of the group. As noted earlier, revenue increased to ZAR 3.1 billion, underpinned by a strong increase in apartments recognized in revenue as well as the selling price increases achieved. Both elements, namely the sales quantity and the price growth, represent the continued demand for the quality, affordable apartments offered to the market. The group recorded gross profit of ZAR 833 million, representing a 27% GP margin, in line with the prior year. While somewhat disappointing in the sense that margin growth remains a key focus for management, in the context of significant construction cost increases across the sector, the stabilization of the margin is, nonetheless, a sound achievement by the business. The total profit for the year was ZAR 363 million. Note that this includes a ZAR 34 million IFRS 2 charge relating to the BEE transaction, being a once-off accounting cost. Removing this cost, the group reported a profit for the year of nearly ZAR 400 million, representing an 18% increase in group profits. This is considered an appropriate indicator of the underlying operating performance of the group for the financial year. The following slides provide further analysis of the revenue. As commented on earlier, management is really proud of the milestone of breaking the ZAR 3 billion revenue barrier. This is recorded on the back of just short of 3,000 apartments handed over, effectively translating on a pretty simplified calculation to a blended average selling price of ZAR 1 million per apartment, exactly the price point in which the business intends to operate. In accordance with the group strategy, we noted an increase in revenue contribution from the Green Collection apartments in the current year as well as a small increase in demand for the 1- and 2-bedroom apartments, which constituted 80% of the total apartments recognized in revenue compared to last year's 77%. The table provides detail of the apartments recognized in revenue per development. For the second successive year, Munyaka, our flagship development located in Waterfall, Johannesburg, returned strong sales demand. This is no doubt driven by the Crystal Lagoons and the exciting lifestyle center currently under construction for handover to the market at the back end of the upcoming financial year. It is also really pleasing to note Greenbay, the first Green Collection development introduced in the Western Cape, as the second highest contributor to apartments included in revenue. On a regional basis, Gauteng continues to account for the lion's share of apartments handed over at 60%, just over 30% coming from Western Cape and the balance relating to KwaZulu-Natal. The regional contribution is largely consistent with the prior year and is not expected to differ materially in the upcoming financial year. When analyzing the revenue contribution on a development brand level, as commented on earlier, the group saw a pleasing increase in Green Collection apartments, which grew to 31% of the total apartments handed over during the year. This is in line with the group's strategy of introducing a product with a lower price point, get built to the quality synonymous with the Balwin brand. The Classic Collection continues to record the majority of apartments handed over at 60%, albeit a reduction from the 70% contribution from the prior year. This is as a result of the growth in the Green Collection I discussed earlier. The Signature Collection contributed 9% of apartments handed over, largely the same as the prior year. Balwin has recorded pleasing increases in its sales price over the year, with a like-for-like comparative reflecting sales price growth of 5.5% for the Green Collection apartments and 7.2% for the Classic Collection. On closer analysis of the Green Collection sales price movement, we note general increases across all apartments, with a really strong growth of 9% experienced in the 3-bedroom apartments. A similar trend was noted in the Classic Collection, with the 3-bedroom apartments returning a solid 8.7% increase in selling prices, albeit with slightly stronger price increases noted in the 1- and 2-bedroom partners, too. The analysis has been performed on a like-for-like basis. Accordingly, any new developments introduced in the current year or developments completed in the prior year have been excluded from the analysis for comparability purposes. No such analysis has been performed in the Signature Collection developments as each development within this brand has its own uniqueness, which makes price comparisons on the brand inconsistent. Over the page and to close off income statement, we note the GP margin remained constant despite the cost increases experienced in the industry over the year, which we effectively managed through cost engineering, slight development modifications and concentrated cost containment. Gross profit growth remains a key focus for management, as Steve will note in his forward-looking statement later. In order to truly measure the operating cost of the group, one needs to dig a bit into the detail of the number. Although on face value, operating costs increased by 14% to ZAR 302 million. The core operating costs increased by 6%, with a meaningful component of this growth associated with consulting fees on debt advisory matters. The balance of the increase was noted in noncash items, most notably, the increase in depreciation from the right-of-use asset, sales commission and other sales-related costs that increased in line with a 16% growth in revenue, as discussed earlier. We also noted an increase in the operating cost of the fiber business on the back of a 45% increase in homes connected in that growing business during the year. As noted earlier, a further addition to the income statement was the once-off IFRS 2 charge of ZAR 34 million pertaining to the BEE transaction. All of this translated to an 8% increase in earnings per share to ZAR 0.7724, a 6% increase in headline earnings per share to ZAR 0.7588 and, after removing the impacts of that once-off BEE charge, a 16% increase in core headline earnings per share to ZAR 0.8315. Over to the balance sheet, where management is pleased with the strengthened financial position reported. Property, plants and equipment increased due to the recognition of the right-of-use asset for the Gauteng head office, which was subsequently acquired post year-end, as discussed earlier by Steve. Developments under construction represent the heart of Balwin's asset base, contributing ZAR 4.8 billion to the total assets of ZAR 6.6 billion. Stakeholders are reminded that the developments under construction are accounted on a historic cost basis and not on a fair value model. The increase in the balance from the prior year amounts to approximately ZAR 700 million. This was largely on the back of the registrations of land parcels at Izinga Eco Estate in Umhlanga, KwaZulu-Natal; Thaba-Eco Village in the south of Johannesburg; Mooikloof Mega City in Tshwane East; Greenbay in Gordon's Bay, Western Cape; and an extension due to the popular demand of the existing development at The Huntsman also located in the Western Cape. What is pleasing is that of these 5 developments were land registered, 4 of them contributed to the financial results in the current year. Mooikloof Mega City is expected to begin generating shareholder returns in the near future. The group has invested in this pipeline over the course of the past few years, growing the pipeline from 30,000 opportunities in the 2020 year to the 52,000 opportunity pipeline at period-end. As communicated by Steve, the short- to medium-term focus of management is the execution of the existing strong development pipeline and generation of shareholder return. Cash and cash equivalents almost doubled from the prior year, with ZAR 666 million cash recorded at period end, a pleasing result for the group. Total equity at year-end amounted to ZAR 3.5 billion, translating to a net asset value of ZAR 7.49 per share. As noted, this is measured on a historic cost model and free from any upward valuation of any of our land or developments under construction. Total development loans and facilities of ZAR 2.5 billion were on book at year-end, ZAR 1.8 billion being classified as current and the balance of approximately ZAR 700 million as noncurrent. On review of the developments under construction, the majority of the balance is located in the Gauteng node at 70%, with the remaining 30% evenly spread between the 2 coastal regions. This is in accordance with the regional revenue contributions. The analysis performed at a development brand level also reflects consistency between the balance sheet and the contribution of revenue across the brands. Land and infrastructure account for 46% of the total developments under construction. As a reminder, the development rights pertain to the 3 projects at Waterfall, Gauteng, which are held on a leasehold basis. Trade receivables mostly consist of apartments handed over at year-end but not yet registered. Of the year-end balance of approximately ZAR 700 million of debtors, as of today, only ZAR 50 million is not as yet either lodged or been registered and converted into cash for the group. As communicated, cash on hand at period-end closed at ZAR 666 million. Cash management continues to receive priority focus by the Board, and the cash position recorded is certainly a pleasing one. Balwin has recently formed the Treasury Committee to further strengthen Board oversight of the treasury matters, including cash, debt overview, debt management, forecasting and covenant compliance. The committee includes certain nonexecutive directors and members of management and is chaired by the Chairman of the Board. This is another progressive step in the continued maturation of cash management of Balwin Properties. On review of the group debt, total liabilities amounted to ZAR 3.1 billion, with the biggest contribution coming from the development loans and facilities of ZAR 2.5 billion. The balance of liabilities was made up of the deferred tax liability, right-of-use liabilities and trade and other payables. The breakdown of development loans are shown on the following slide and split between land facilities of approximately ZAR 850 million, infrastructure loans of ZAR 190 million and top-structured loans of ZAR 526 million. In addition, due to the success of the Waterfall developments, the group has reduced its debt obligation down to only ZAR 15 million outstanding, relating to the development rights at Waterfall, Gauteng. General banking facilities and investment loans of ZAR 392 million (sic) [ ZAR 952 million ] were on hand at year-end, representing short-term loans secured by unregistered apartments as at 28th Feb 2022. A new component to the funding profile of the group in the current year is the addition of 2 unsecured funding facility from Stanlib Asset Management and Sanlam Investment Management, to a combined value of ZAR 560 million. Management plans to change its existing funding structures over time towards term-based funding rather than the existing phase-by-phase funding model in order to reduce the associated cost of funding while retaining the existing security offered to the funding institutions. Debt advisory specialists have been engaged by management to assist the group in this regard. The group's long-term debt-to-equity ratio at the end of the reporting period was 30% compared to 29% reported in the prior year. Long-term debt includes all land and infrastructure debt, but the Board believes it is an appropriate metric as development finance is specific to a development, short term in nature and secured by existing presales. On review of the cash flow performance of the group. A total of ZAR 10 million was used in operations for the year. Essentially, the cash profits earned largely reinvested in the development pipeline during the period, as discussed earlier. There was also a net ZAR 60 million cash lockup in debtors' movement during the year. A further ZAR 130 million was used in operating activities on tax payments and net finance costs, which includes the interest paid that is capitalized to developments under construction. Cash generated from financing activities amounts to ZAR 545 million, assisted by the new unsecured term facilities I've discussed earlier. I would like to hand back to Steve now who will take you through our sustainability initiatives.

Thank you very much, Jonathan. Very well done. Greening and sustainable business practice are not only business imperatives at Balwin but is a legacy that I'm very, very passionate about. I'm a member of the Green Building Council and will continue my legacy in this business. To date, a total of 37,769 apartments across 19 developments have been registered as EDGE-compliant. That is a magnificent achievement and, I think, if I'm correct, one of the highest in the world. Just to remind everybody, EDGE Advanced certification requires 40% or more on-site energy saving and 20% water saving compared to conventional buildings. That is a magnificent achievement, and we will continue doing it. Balwin Properties lifestyle centers, it is a vision of mine to make them all 6-star green-rated. So far, we've done the first 6, and we will continue with that vision. It's a strong vision and needs total commitment, and I want them all to be net-zero-carbon-rated. Balwin Properties continually puts our clients first. We have managed very successfully to leverage off advancements and building green. Our retail banks have really come to the party. We've got better rates for all our clients, and that makes a huge improvement when you sign for a 20-year mortgage. To date, a unbelievable total of 4,367 green bonds have been secured for clients. I cannot tell you how proud I am of this. Our mortgage department with the retail banks have done an exceptional job. And the estimated total saving for our clients is ZAR 325 million over the term of the mortgage. That is an unbelievable achievement of which I'm very proud of. Looking forward, we will continue to prioritize our existing land bank while carefully matching the rate of construction to the rate of sale. I'm extremely excited about our share buyback program. Thank you very much to our Board for allowing us to do this, and I think it will add extremely good value to our shareholders. From an operational point of view, Balwin remains well positioned despite increasing headwinds and an increasing interest rate cycle. We have 2,386 apartments presold or forward sold and continued strong demand for our brand, supported by online sales and a management team that is extremely committed and hardworking. Finally, our annuity business by only being this infancy, but it has great potential to complement Balwin's existing business, with minimal capital outlay and a great leveraging of Balwin brand. And I'm also very proud to make sure that our clients will benefit from all these annuity programs. I'll now hand you over to an extremely capable young man, Raaziq Ismail, to provide you with a bit more color on Balwin annuities. Thank you very much.

Thank you for the introduction, Steve. And I must say the annuity team and I are very excited and enthusiastic about this business. Getting straight into it. The vision for Balwin annuities is to enhance our client experience and, at the same time, enhance shareholder value by identifying alternative income streams, thereby creating diversified growth for Balwin in the long term. The aim is to leverage off Balwin's extensive client database and strong brand in order to provide value-added products and services to our existing clients, utilizing existing resources. Balwin has, to date, sold approximately 62,000 apartments and have a database of approximately 100,000 clients. The attractive nature of Balwin annuities is that it is capital-light. The identified businesses have low start-up costs but exciting long-term return prospects. In most cases, we are leveraging off assets that we acquire in our core business and structuring innovative ways in which a new revenue stream can be created. The yield curves for these businesses over the medium to long-term are very attractive, with no significant cash investments required during the start-up phase. The long-term objective is to create businesses with annuity revenue streams independent of Balwin Properties' rate of construction. Several of the companies that make up Balwin annuities are in a start-up phase. However, I would like to demonstrate the potential of the business at the hand of Balwin Fibre and Balwin mortgages, 2 existing annuity businesses with historical performance indicators. Balwin Fibre commenced in 2017 to provide our clients with quality fiber connectivity at affordable rates. Balwin Fibre is the exclusive supplier of fiber infrastructure in most of Balwin's developments. The company has capitalized on technology to ensure it can expand on its asset base with minimal resources. Currently, there are only 3 employees in this company who manage approximately 9,200 connected homes across 16 developments and around 7,000 active clients. As can be seen on the screen, Balwin Fibre reported losses in 2018, 2019 and 2020, mainly as a result of the upfront costs associated with the installation of fiber infrastructure and time required to gain economies of scale. Balwin annuities anticipate applying the same methodology of relatively small amounts of capital investments required to scale a particular business, with expectations of generating profits in approximately the third year. Following which, economies of scale will add significant uplift to the yield. This is illustrated in the case of Balwin Fibre, which reported a profit of ZAR 214,000 in 2021 and a net profit of ZAR 5.4 million in the last financial year, underscoring the exponential yield growth as the business gains economies of scale. Balwin Fibre's current organic growth rate is 11.47%, making the fiber business sustainable, even without relying on Balwin Properties' rate of construction and apartment handovers. The second case study is in Balwin Mortgages. Balwin Mortgages has, to date, been a department within Balwin, which has now been separated into its own business unit, operating as a stand-alone entity. The vision for Balwin Mortgages is to expand its business operations utilizing the existing mortgage origination team to become one of the leading mortgage originators in South Africa. To achieve this, Balwin Mortgages will leverage off its strong business relationships with retail debt providers and other stakeholders to offer the market meaningful savings on their property acquisition journey. Further initiatives under consideration are opportunities that exist in switch bonds as well as introducing the Balwin-approved apartment concept to our clients. As can be seen on the screen, Balwin Mortgages reported consistent revenue and profit growth for the past 5 years, except for a slight drop in net profit in 2022 due to the expansion of the team. Balwin Properties is a leader in residential online sales, with all sales performed online. Balwin Mortgages will further augment this user experience through technology to ensure a quick and effective bond origination. The next slide provides some color on the annuity businesses other than Fibre and Mortgages that are currently under consideration or in the early stages of development. Balwin Commercial is essentially a property management entity that will manage properties at an attractive yield. Balwin Properties is currently reviewing its interest in Balwin Rentals, with a view of expanding its rental business. The rental portfolio is currently achieving an attractive 9.77% net yield, which the business will aim to improve on. Balwin ICT is investigating the feasibility of cell towers and digital advertising boards at select developments and will engage strategic partners on the rollout, subject to investment thresholds being met. Balwin Financial Services has partnered with Telesure Investment Holdings to provide affordable insurance and offer specific incentives to our clients on which we will earn recurring income. Balwin Education aims to capitalize on its existing school sites located within its developments and will partner with experienced operators to provide quality and affordable education to its residents. Balwin Energy is, among other things, a solar management entity, focusing on researching sustainable energy solutions for our developments. This entity will leverage off existing solar assets, which Balwin installed to meet [ SEI's ] requirements to provide clean and sustainable energy to our residents. This entity will effectively provide our clients with cheaper and cleaner energy. These entities are at various stages of development, and more granular information will be provided as the businesses mature. We are very excited about these prospects and look forward to their growth. I'll now hand you back to Steve, who will open the floor for questions. Thank you.

Good morning, ladies and gentlemen. Thank -- good morning, ladies and gentlemen. This is a live broadcast, a question-and-answer session. With me is Jonathan Bigham and Raaziq Ismail. And I am, obviously, Steve Brookes, the CEO of Balwin. We're here to answer your questions as best we can. Thank you very much, ladies and gentlemen.

Thank you very much, Steve. Ladies and gentlemen, we do have a lag. [Operator Instructions] The first question is from [ Azik Fanika ] from [ Vergence ]. He is asking, can we expect improvement in the cash from operating activities? This has been negative for the last 2 years due to the high level of investment in developments under construction.

Thanks, [ Morne ]. I'll take that question. Yes, it is a focus point of management. We are looking at improving cash from operations. As people who've followed the group will note, in the last 2 years, there's been quite an aggressive but important and strategic rollouts of our development pipeline. But as Steve mentioned quite a bit in the presentation, it is a strategic focus now to execute on that pipeline.

Thanks. Thank you very much. We're waiting for further questions to come through. There aren't any additional questions that has gone through yet, Steve. Would you like to give it another minute or 2?

Yes. Obviously, we'll hang around for a little bit longer to answer any questions, ladies and gentlemen.

Just a question from [ Peter Lord ]. He's saying that there's no dividend notification. I think that was part of the results announcement that went out just after 7:00 this morning.

Just after 7. It's part of the results announcement.

Thanks. Thank you, Jonathan.

Yes. And to answer your question, [ Peter ], it's in the announcement. We are busy checking in case there's an error. But we want to keep consistency with our dividend policy.

Thank you very much. Steve, there are no further questions.

Okay. Thank you very much, ladies and gentlemen. We will now close. Thank you.