Balwin Properties Limited (BWN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, to a pre-recorded presentation of our results for the financial year-ended 29th February 2024. Before we kick-off, please remember to send through your questions as we progress with the presentation, as there will be a live Q&A answer session afterwards. With me is Jonathan Bigham, our CFO, who will run us through the numbers, and Raaziq Ismail, Head of Legal and Annuity, who will take us through the performance of the annuity businesses. Operational overview, at the time of our half-year presentation at the end of October last year, there was reasonable optimism in the market that interest rates would come down. Some market commentators speculated it would be as soon as March 2024, whilst the consensus was at least be June 2024, we'd see some respite. I don't have to tell you how that turned out. Before we unpack our numbers, I think it's important to give some context to our operating environment over the past 6 months. Near-term interest rate headwinds remain, further compounded by rising living costs, increases in fuel prices, higher unemployment levels, and a lackluster economy. Homebuyers' confidence also remained dampened by political uncertainty with the national election less than 2 weeks away as we speak. FNB data shows that nominal house prices grew by 0.8% over January and February 2024, compared to the same period in 2023. What this indicates is that in real terms, house prices continue to drop substantially as the average CPI rate was 5.4%. This marks the 8th consecutive year that the index has contracted in real terms. According to the latest Reuter report, both the FNB and Lightstone house price indices recorded the lowest growth rate for the past 4 years in the last quarter of 2023. This is significant as it includes the COVID lockdown periods. The first quarter of 2024 showed a reversal of the trend, however, and although one swallow doesn't make a summer, especially in election year, it appears that the sector has at last stabilized. It is in this context that we will discuss our results and importantly the way forward. The period under review shows some interesting shifts in apartment mix and the impact of semi-aggression, which I'll unpack in the next couple of slides. Our development pipeline remains significant at just over 41,500 apartments, and I'm excited to share that we inaugurated our 10th 6-Star rated lifestyle center with net 0 carbon emissions during the review period. This is a huge passion of mine, the whole greening of Balwin. I'm very proud to be a Board Member of the Green Building Council. The efficiency of a Balwin apartment is exceptional. We've been rated in the world as one of the leading property developers with regard to Green. It makes a massive, massive difference to our business and to our clients. We're starting very effectively to get our clients reduction on their interest rates, which to me is one of the best things we could have ever have done, where greening actually puts money in our client's pocket. We're one of the few developers that does this in the world, and I think it's a hell of an accolade. And thank you to all our management that have made such good, unbelievable strides in this department. Also, our debt funding makes a huge difference. We're on the verge of doing an enormous transaction, which I can't yet disclose, which will give us an extremely favorable interest rates and good terms going forward. So all this greening has made a massive difference to clients, to Balwin, and I believe we're making a difference to the world. You know, the less energy we use, the better. We have just recently been awarded our first development, which has been guaranteed free of load shedding, which is our Greenbay development. And through some exceptional innovation with the city of Cape Town, we were hoping to get all our developments on this, that they're load free. And it gives our clients a good quality of life. The quality and innovation of our lifestyle estates continues to be recognized on the world stage. To date, Balwin has received 45 international awards at the prestigious Africa and Arabia Property Awards, including 4, Best Apartment, Best Architecture, Best Leisure Development, and Best Sustainable Development. These awards are absolutely a challenge for Balwin. The category we are in is high. I personally attend the awards. It is a hell of an honor to be judged and criticized by the hundred and just over a hundred judges and 4 lords that oversee the integrity of the awards. We're very, very proud of this achievement. There's also been another absolute change in Balwin developments. Our extremely capable managing director, Rodney Gray, has come up with a concept to externalize all our lifestyle centers on our developments. We've got our first test case running at Thaba. It is working exceptionally well, which means that Balwin controls the lifestyle development. The clients are naturally members through the levy, and we also have outside involvement. It really is changing the development space for Balwin, and we will continue this. And thank you very much to Rodney for the initiative of this. Total number of apartments recognized in revenue contracted by almost 1/3, with 1,892 apartments handed over. This impacted on revenue that declined by 29% to ZAR 2.4 billion. As a management team, we responded to these challenges by implementing several key measures. Reducing the rate of construction of apartments, to match the rate of sale to preserve our cash flow. Focusing on construction cost engineering to manage construction costs prudently, without compromising on quality standards. We also continue with marketing activities and sales incentives to stimulate demand for apartments and other services offered by the group. We continue to reduce costs and lowering overheads. As mentioned earlier, semi-immigration continued to change the dynamics within our portfolio. 46% of our revenue coming from the Western Cape region, making it the best performing region for the first time in Balwin's history. A further interesting shift is in the apartment mix, with a higher demand for 1- and 2-bedroom apartments, which contributed 73% of apartments sold. 529 apartments were forward sold and haven't yet been recognized in revenue. Raaziq Ismail will unpack the performance of the annuity business later on, although I think it's prudent to highlight that its revenue increased by 70% to ZAR 132.5 million compared to ZAR 78 million in the prior financial year. During the period, we stuck to our core focus of executing on our existing pipeline of developments. As mentioned earlier, it's been an exceptionally tough time for the sector. The reduction of capacity within the industry remains a concern, especially once demand starts increasing as the cycle turns. For this reason, our approach has always been to carefully balance our rate of construction against our rate of sales. Although our construction rate has significantly slowed down, we still retain the core skills and experience required to take advantage of any up-tick in sales. The table on Slide 6 provides a breakdown of sales per region and by collection. In the Western Cape, demand for our classic collection apartments at De Aan-Zicht, Fynbos, both in Milnerton, and the Huntsman in Somerset West remained strong. This performance was well supported by ongoing pleasing sales at Greenbay in Gordon's Bay, our only Green Collection development in the Western Cape. We have also started development of Suikerbos in Milnerton. This is a natural succession project that requires no further infrastructure investment, as it was acquired fully serviced and is in close proximity to Fynbos, which sold out just after year-end. The Western Cape incidentally also has the lowest unemployment rates in the country. In KwaZulu-Natal, delays in town planning approval at the Izinga Eco Estate significantly restricted the delivery of apartments in the current year. Although KwaZulu-Natal maintained its contribution to apartments handed over at 17%, these delays impacted revenue by 30%. In Gauteng, Munyaka maintained its status as the main contributor in the region in terms of apartments handed over. Although semigration is real, we remain positive on the long term, sustained demand within Gauteng, which is expected to gradually improve as the market recovers. This then brings us to our development pipeline. Currently, we have a high concentration in Tshwane, with most opportunities represented by Mooikloof Smart City that will be developed in phases. The first 4 phases at Greenkloof at Mooikloof Smart City were handed over in November 2023. To date, we have invested around ZAR 300 million in bulkwater, road and electricity infrastructure upgrades in the node. These upgrades form part of government's infrastructure commitment for the area, as contained in the Strategic Integrative Project, gazetted from -- in 2018. In terms of the SIP, government will provide the funding for the infrastructure to the amount of ZAR 1.4 billion through certain mechanisms. We continue to engage with government on this matter. Our infrastructure investment reflects in the developments under construction line in the Statement of Financial Position. Jonathan Bigham will give more color on this. However, infrastructure investments was a major contributor to this line item, increasing by ZAR 608 million during the review period. In contrast the Western Cape currently represents our largest sales opportunity over the shortest development horizon at 5-years. Considering that it can take up to 7-years to rezone land from agricultural to residential in the Western Cape, we will strategically expand our land bank in this province. In KwaZulu-Natal, we are close to finalizing the transaction to develop Shongweni Eco-Estate in the iconic West Town development close to Hillcrest in outer West Durban. Shongweni will comprise of 1,260 apartments in 25 phases over the next 5-years. This development will form part of our classic collection and is complementary to our 2 coastal estates in Umhlanga and Ballito. In Gauteng, our focus will predominantly be on building out the current pipeline in Pretoria East. Smaller land opportunities with service and zoned land high growth nodes will be considered on a case-by-case basis. I now hand over to Jonathan Bigham to run us through the financial overview.

Thank you, Steve, and good morning, everyone. In introduction, an overview of the financial performance and position of Balwin Properties is presented on the opening slide, and as noted by Steve earlier, present the challenging trading conditions in the residential property market over the past year. Revenue decreased by 29% to ZAR 2.4 billion on the back of 1,892 apartments being handed over. The gross profit margin of the group showed a slight reduction to 28% from 29% in the prior year, group operating costs reduced by 11% to ZAR 351 million with operating costs at a company level reducing by 22%, flowing from the above profit for the period reduced by 50% to ZAR 217 million. This culminated in earnings per share and headline earnings per share decreasing by 51% and 48% respectively, to ZAR 0.4618 and ZAR 0.4794. The Group recorded total assets of ZAR 7.6 billion, an increase of ZAR 332 million from the prior year, with context of this movement to be unpacked later in the presentation. Debt levels and bank covenants at period end were within the required thresholds, with cash on hand of ZAR 290 million and a loan-to-value ratio of 40.5%. Net asset value per share increased 4% from the prior period, with a current NAV per share at ZAR 8.58 when measured on the accounting shares in issue. Focusing on the statement of profit and loss and other comprehensive income of the group, Balwin recorded revenue of ZAR 2.4 billion, down from the ZAR 3.3 billion reported in the prior year. The gross profit margin reduced marginally to 28% from the 29% recorded in the prior year, with the Group reporting gross profit of ZAR 666 million. Operating costs decreased 11% to ZAR 351 million for the Group. Net finance costs increased to ZAR 20 million, owing mainly to the increased debt the annuity businesses. The group's effective tax rate was 29.9%, 3% above the statutory rate owing to the disallowable charges for tax purposes. This resulted in profit after tax of ZAR 217 million, a 50% decrease from the prior year. The movement in profits flowed through to the earnings per share and headline earnings per share respectively, which reduced by 51% and 48%. Revenue earned by the group was generated from the following sources. Revenue from the sale of apartments, the major contributor at ZAR 2.2 billion and revenue from the annuity businesses of ZAR 133 million. The driver of the reduction in revenue resulted from the decline in apartments handed over with 1,892 apartments being recognized in revenue, a 32% reduction from the 2,788 apartments handed over in the previous financial year. Sales price growth was materially stagnant over the financial year, with the gains realized in apartment sales in the coastal nodes offset by price reductions in Gauteng, where incentives were a strategic driver of sales volume. We note that in the interim period, revenue was recognized from the sale of the development rights for the construction of the hotel at Munyaka in Waterfall. Owing to non-performance by the buyer, the sale was cancelled by the group and not recording the results for the financial year. The popularity of the 1 and 2 bedroom apartments remained steady and comprised the bulk of apartments recognized in revenue at 73%, marginally down from the 77% recorded in the prior year. With respect to the detail of the contribution of revenue on a regional basis, we note to the continuation of the recent trend of strong sales in the Western Cape, where this region surpassed in Gauteng as the largest revenue contributor for the first time, accounting for 46% of revenue recognized. Revenue on KwaZulu-Natal was restricted owing to delays in town planning approvals at Izinga Eco Estate. The total revenue contribution, however, was maintained at 17%. The largest sales decline was experienced in Gauteng, which contributed 37% of the revenue recognized from the sale of apartments by the group, down from 48% in the prior year. With respect to the revenue contribution by collection, the Classic Collection increased this contribution to 69% and remains comfortably the biggest contributor to revenue in the Group. The Green Collection maintained its contribution at 17% of revenue and the balance of 14% of revenue recognized was derived from the Signature Collection apartments. The analysis of the average selling price of apartments is only considered meaningful if performed by comparing each apartment type within the relevant collection. The reason for this is because the average selling prices are significantly influenced by the sales mix of apartments included in revenue, being apartment types between 1, 2 or 3 bedroom apartments, or the collection between the Green, Classic and Signature Collection. The sales price performance of the Classic Collection apartments varied within the 3 nodes during the year and reflected the general muted sales demand experienced by the group. One bedroom apartments comprised 42% of all apartment sales within the Classic Collection and the strategy remains consistent for this apartment type to comprise approximately half of the block configuration. These apartments were the strongest performing apartment type owing to their relative affordability and recorded a 5% selling price growth across the portfolio. A 2% decline was experienced in selling prices across the 2 and 3 bedroom apartments. Across all apartments, a regional trend was noted whereby Western Cape recorded the strongest sales price growth while pricing in Gauteng was constrained, largely owing to the incentives offered to drive sales volume. The Green Collection apartments achieved moderate increases in selling prices over the financial year with a relatively tight sales price performance noted across all developments. Owing to the differing nature of the respective developments within the Signature Collection, selling prices for this brand are reviewed at a development level. The annuity business portfolio experienced strong growth off a low base and increases revenue to ZAR 133 million, representing 70% growth year-on-year and contributing 5.6% to the total group revenue, more than doubling its contribution from 2.3% in the previous year. The majority of the annuity revenue is derived from the Fibre and Infrastructure Services, which accounts for approximately 50% of the total annuity revenue. Other strong contributions to the revenue derived from the annuity businesses pertain to commercial and residential rental assets, lifestyle assets, mortgage bond origination and green living in the form of renewable energy. The gross profit margin of the group showed a slight reduction to 28% from 29% in the prior year. The gross profit margin from the sale of apartments experienced pressure in the current year owing to the challenging trading environment and reduced to 24%, recording ZAR 541 million in gross profit. The Gauteng region was most impacted by pricing pressures and the major contributor to the margin contraction, while the performance of the coastal nodes was largely in line with the expectations. The various sales incentives in the year were important drivers of volume, but naturally contributed to the margin dilution experienced. The immediate operational priority is to protect the group's gross profit margin in the prevailing market conditions, with the medium term objective of returning the gross margin on the sale of apartments to 30%. Increased contributions from the annuity businesses supported gross margin, owing to the different accounting methodology whereby the costs in the businesses are largely administrative in nature and accounted for as operating costs. Consolidated operating expenses amounted to ZAR 351 million, an 11% reduction from the prior year. As traditionally done, the analysis of the operating costs is best represented when split between the company and annuity businesses, with the breakdown of the costs disclosed on this slide and disaggregated between fixed, performance linked and variable costs, as well as depreciation and amortization. Balwin Properties, being the core residential development company, decreased operating expenses by 22% in response to the reduction in sales activity. Excluding the non-cash item of depreciation, the company reduces operating costs by 25% to ZAR 231 million. A significant focus was placed on cost containment as management streamlined the overage structures of the company. The operating expenditure to revenue ratio for the company was 11.3% for the year, higher than the 10% measure from prior year. As the market recovers, management is confident that the operating cost structures will return to sub-10% of revenue. Fixed expenditure reduced by 2%, with inflationary increases offset by focused cost cutting where appropriate. Variable costs include sales related costs, such as sales commission and marketing costs, and decreased by 36%, exceeding the reduction in revenue. The increase in depreciation is owing to the fact that the Johannesburg Head Office registered during the course of the prior year and accordingly did not attract depreciation for the full comparative period. No allowance has been made for performance-linked expenditure in the current year, as the minimum measures contained in the group's pre-approved performance scorecard were not achieved. The annuity businesses operating costs increased by 44% from the prior year to ZAR 100.2 million, due to the increased operational activity reflected by the 70% growth in revenue. As noted in the gross margin analysis, these businesses record minimal cost of sales and the majority of the costs are disclosed as operating costs, as the expenses incurred in these businesses are considered to be administrative in nature. The annuity businesses record an operating profit of ZAR 55 million at a 41% operating profit margin. Group profit decreased by 50% to ZAR 217 million. Earnings per share and headline earnings per share decreased by 51% and 48% to ZAR 0.4618 and 0.4794 respectively. Following due consideration of the current and expected trading conditions and the prevailing market uncertainty, the Board has resolved not to declare a dividend for the 2024 financial year. This position will be reconsidered in the coming financial year. On to the statement of financial position and from an overview perspective, non-current assets increased by ZAR 125 million to ZAR 646 million, owing mostly to transactions within the Balwin Annuities Group. Current assets of ZAR 7 billion comprise mostly developments under construction of ZAR 6.3 billion, cash and cash equivalents of ZAR 290 million and trade receivables of ZAR 350 million. Equity reflected ZAR 4 billion, working out to an accounting net asset value per share of ZAR 8.58, which is measured at cost. It is noted that the accounting shares in issue differs from the total shares in issue per the JSE, mostly due to the technical accounting of the BEE transaction. When calculated based on the total shares in issue per the JSE, the net asset value per share is calculated at ZAR 7.72. Total liabilities amount to ZAR 3.6 billion, with the major contributor being the development loans and facilities, which aggregate to ZAR 3.1 billion when combining the current and non-current portions. The main drivers of costs capitalized to non-current assets pertain to the ongoing investment in the solar assets through the Green Living Subsidiary, the continued rollout of fibre infrastructure in Balwin Fibre, and the final fit-outs of the Johannesburg Head Office following the building being 100% tenanted. During the period, the group also constructed a 61-room hotel at The Blyde in Tshwane East, overlooking the Crystal Lagoon, which is measured at its fair value of ZAR 62 million. The Group holds investment property of ZAR 220 million, made up of the hotel as just mentioned and the rental portfolio of 215 apartments held in Balwin Rentals. There were no fair value adjustments processed to investment property in the current period. Developments under construction include the cost of land, infrastructure cost, development rights as well as the construction costs, and increased by ZAR 608 million to ZAR 6.3 billion at period end. On a regional level, the majority of the balance is located in the Gauteng node, at 77% of the total costs, with no material variance from the make-up of the balance from the previous year. When analyzing the make-up of developments under construction at the collection level, the majority of the balance is within the classic collection at 71%, again with no material variance from last year. The breakdown of developments under construction is as follows. 39% of the balance comprises land and land contribution costs, down slightly from 41% in the prior year. 8% reflects the development rights, in line with the prior year, with the remaining 53% representing construction costs, an increase from prior year's contribution of 51%. As noted through this statistic, the increase in developments under construction was driven predominantly through construction costs, as opposed to additional investment in land, reflecting Balwin's focus on developing the existing pipeline. The major drivers of construction costs relate to the completion of the construction of the Lifestyle Centre Apartments at Munyaka, Balwin's flagship development in Waterfall, and Thaba Eco Village in the south of Johannesburg, where the first Lifestyle Centre situated outside of the development walls and open to the general public was completed during the year. A significant component of the costs incurred in Tshwane related to investment in infrastructure. These costs were necessary to secure council approval for the registration of the initial phases of apartments at Greenkloof, the first development within the Mooikloof Smart City node in Tswane East. The first 4 phases were completed during the financial year, with 144 apartments recognized in revenue. The only land registered to the group during the current year was a parcel identified for a potential rental development in Somerset West, in the Western Cape. The land was acquired for ZAR 21.7 million, with capacity to develop an estimated 1,020 apartments. Subsequent to financial year-end, the group acquired land for the Suikerbos development located in Milnerton, Western Cape. The project is in close proximity to Fynbos, which sold out shortly after year-end, and is therefore a natural succession project. Suikerbos is expected to comprise 1,046 apartments on completion, and requires no further investment in infrastructure, as it was acquired fully serviced. Trade receivables mostly consist of apartments handed over at year-end, but not yet registered, and is materially in line with the prior period. Cash on hand at period-end closed with ZAR 219 million, exceeding the funding covenants and minimum cash thresholds set by the board. Cash management continues to receive priority focus by the board, and the cash position recorded is a healthy one. The Treasury Committee has continued its active oversight of matters, including cash management, debt overview, forecasting, and covenant compliance during the financial year. In the prior year, the group reported restricted cash, which is due to a ring-fenced debt service reserve account ceded to the unsecured debt providers. In the current year, the structure was amended and replaced with an amortized repayment profile. In total, ZAR 241 million of unsecured debt was paid in the current year. Looking forward, we will continue to closely and carefully manage the relationship between the rate of construction and the rate of sales, a dynamic that is fundamental to the appropriate cash management of Balwin Properties. Development loans and facilities were materially in line at ZAR 3.1 billion, with the loan-to-value ratio marginally reducing to 40.5%. With respect to the LTV measure, it is noted that the only asset class that is fair-valued pertains to the investment property, which constitutes 3% of the total asset base of the group. Accordingly, 97% of the group's assets, including the material developments under construction, are measured at cost with no fair-value adjustments. The breakdown of development loans and facilities is shown on the following slide and split between the nature of the funding. The Group complied with all lender covenants at financial year-end. Debt reduction is a key medium-term objective of the Board as part of its focus on appropriate cash management and capital structure optimization. The Group reported a temporary reversion in the recent trend of positive cash generation, owing mostly to the extensive investment in working capital in the period, mostly in the form of developments under construction, as discussed earlier. This led to an outflow of cash from operating activities of ZAR 308 million. In closing, I'd like to express a huge token of appreciation to the Board and the Board Executive Team, as well as to the Finance Department for their commitment to accurate and quality reporting. I'd like now to hand over to Raaziq, who will take you through the annuity business. Thank you very much.

Thank you, Jonathan. Apologies if I sound a bit hoarse, I'm just suffering from a bit of a cold. As Steve alluded to earlier, the global and domestic economies are currently experiencing fairly challenging conditions, which have reduced consumer spending, investment into property and the like. As a business division, we have done our best to remain resilient and adaptable to the market and consumers' needs. I will highlight a few accomplishments and challenges during the financial year for the annuity group. Despite tough economic conditions, the Balwin Annuity Group performed well, achieving an operating profit of ZAR 69.5 million and a net profit after tax of ZAR 19.8 million. Our return on capital employed in the Balwin Annuity Group is 14.5%, which indicates a strong reason to continue investment into annuity businesses. The overall EBITDA margin for financial year-end was at a healthy 49%, while the NPAT margin is 14%, which positively impacts the overall margin of the Balwin Group, as mentioned by Jonathan earlier. Balwin Fibre, Balwin Mortgages, Balwin Rentals, Balwin Head Office and Balwin Green Living were the largest contributors to the ZAR 69.5 million operating profit, while Balwin Signage and Towers, Balwin Blyde Hotel, Balwin Insurance, Balwin Technique, Balwin Maintenance and Balwin Approved were responsible for the residual of the income statement. The operating profit of ZAR 69.5 million is up by 51.8% when compared to the prior year. While our net profit after tax in the prior year may look higher than this financial year, it is due to significant non-capital investment in all businesses. For every ZAR 1 spent in operating expenses in 2024, ZAR 1.42 of revenue was generated, compared to the prior year of ZAR 1.29. It is clear that our annuity business with a 49% EBITDA margin is growing well despite the economic conditions. During the 2024 financial year, we have started 5 new businesses to support the Balwin Group in line with our vision to maximize shareholder value and provide benefits to our clients. These businesses are Balwin Connect, Balwin Approved, Balwin Maintenance, Balwin Blyde Hotel and Balwin Signage and Towers. Balwin Fibre has increased its connected homes from 11,671 to 12,926 with active clients increasing from 8,230 to 9,109. The average rate per unit or line rental collected from internet service providers decreased by 2% to ZAR 480 per apartment per month since Feb 2023. This is due to our clientele moving to cheaper packages which illustrates the tough economic climate. The fibre business achieved an operating profit of ZAR 19.3 million up by 19.4% when compared with the prior reporting period and a net profit after tax of ZAR 8.9 million up by 12.7% year-on-year which indicates the growth of this business. We have finalized the installation of redundant fibre infrastructure cables in 19 estates which means that our clients have no downtime due to breakages on our network. Our 3 month free fibre campaign continues to assist in increasing the value proposition to our clients and we are constantly investigating alternative marketing strategies to further enhance the value of our offering to help increase the uptake on Balwin Fibre. We are offering prepaid fibre in our Lifestyle Centers and apartments to clients through a system called Vulacoin. For 2023-2024 financial year, 12,016 new users have made use of this prepaid service. While the growth in Balwin Mortgages is still dependent on the rate of sale of Balwin Properties, we have taken our mortgage origination services to the market. It was launched in June 2023 and we are leveraging off our strong relationships with the banks and our conveyances. We are the only origination company to offer 50% discounts on transfer and bond costs to our clients. We registered 1,220 mortgages for the financial year at an aggregate value of ZAR 1.3 billion. Of this, 70 were external mortgages at an aggregate value of ZAR 88.7 million. Our greatest challenge hampering growth has been in educating the market on our offering as people do not yet understand that they do not need to purchase a Balwin Apartment to utilize our origination services and benefit from our offering. To mitigate this, we have marketed on social media and other mediums and will be looking into advertising campaigns in the coming year. The mortgage business achieved an operating profit of ZAR 5.8 million, a decrease of 21% from the prior year due to the general state of the property market. As mentioned by Steve earlier, because of our green initiatives within the Balwin Group and our EDGE certified apartments, the mortgage team has managed to secure our clients discounts on the individual interest rates ranging between 0.25% to 0.75%. In essence, this equates to a saving for our clients of approximately ZAR 79.2 million over a 20-year mortgage period based on the mortgages approved for the financial year. Our energy business is generating 4.1 megawatts of clean, sustainable and cheaper electricity for our clients. Balwin's De Aan-Zicht and Greenbay developments in the Western Cape were the first residential developments in South Africa to be approved for Eskom's Load Curtailment Programmes. This means that the De Aan-Zicht and Greenbay residential developments will not experience any load shedding going forward. In the global landscape, solar installations are becoming increasingly popular and Balwin has been at the forefront of ensuring green development. We are constantly looking for ways to enhance the energy business through partnerships such as Discovery Green. The arrangement with Discovery Green will allow us to purchase up to 70% of our energy at a cheaper rate from 2026. The energy business achieved an operating profit of ZAR 8.5 million up by 73.5% from the previous year and a net profit after tax of ZAR 4.3 million up by 22.1% from the previous financial year. The increase in operating profit and net profit after tax are testament to the viability of this business and it comes as no surprise that we are being approached by third parties to acquire this business, notwithstanding the fact that it is only in its second year of operation. Balwin Energy is currently operating on 11 development sites and has reduced emissions in the Balwin Group by 2,333 tonnes of carbon dioxide equivalent during the financial year while we continue to provide our clients with a 10% discount on their electricity bills. We are optimistic about the prospects of the energy business and firmly believe that it has the potential to yield excellent results in the long term. The existing Balwin Rentals portfolio consists of 215 apartments and achieved an operating profit of ZAR 10.7 million and a net loss of ZAR 1.1 million for the financial year. While the NPAT may seem to have declined between the prior year and this year, there was a fair value adjustment done in the prior financial year which increased the NPAT. The main reason for the loss this year was the consistent increases in the interest rate over the financial year given that the business is heavily geared. The focus for the financial year was to retain tenants and maximize occupancy to minimize the bleed. Our strategy going forward will be to grow this portfolio and diversify the geographic composition of our rental portfolio. The EBITDA margin for financial year was 64.9%. Despite the interest rate hikes impacting the NPAT, we have managed to meet our financial obligations and are actively engaging to negotiate lower interest rates on the funding. The rental portfolio achieved an operational yield on cost of 8.4% and an average occupancy rate of 93% throughout the period with a low of 89% and a high of 96%, which is a significant achievement in the current economic climate. The other businesses within the annuity group reported an aggregate profit of ZAR 2.9 million. As of 1, October 2023, the Balwin Head Office was fully tenanted and occupied and is proving to be financially feasible while we continue to closely manage the cost of funding and all associated operational costs. We managed to renegotiate the interest rate discount from prime minus 0.75% to prime minus 1% which has assisted with reducing our interest expense by approximately ZAR 440,000 per year. The new rate was applicable from March 2024. Balwin Connect which is our internet service provider was launched in October 2023. The purpose of this company is to support Balwin Fibre with its uptake and to provide our clients with cheaper fibre packages. All new apartments will come with a built-in router allowing our clients to immediately gain access to fibre services at the click of a button with 821 currently connected clients. We have already seen an increase in our uptake on Balwin Fibre and we are working tirelessly to grow the active client base. While the business did not generate a profit for the year, it only operated for 5 months and will reach break-even point at 1,000 connected clients which is imminent. We opened our first 61-room hotel at the Blyde Estate managed by MINT Hotels during October 2023. The hotel generated an operating profit of ZAR 1.1 million for the 5 months to year-end. The hotel has been well received with occupancy rates improving month-on-month. Conferencing and event bookings are also picking up as the hotel becomes more well known in the area. We launched Balwin Maintenance during the financial year with the sole purpose of protecting our brand and reputation while also protecting our clients' investment in the long term. We offer full turnkey management of the 10-year maintenance plan. Each body corporate is responsible to have a maintenance reserve fund from which all maintenance items are paid for. Balwin Maintenance will assist the body corporate to manage the reserve fund to get the cheapest rates for maintenance work leveraging off its extensive database of contractors and it will ensure that all maintenance work is carried out to the correct standard and that adequate guarantees or warranties are provided to the body corporate. We have presented the concept to 17 Balwin Estates and it was well received with all estates committing to sign up for the service. We generated a small profit of 71,000 for the 5 months in operation. This business will not provide services to third-party estates at this stage as the main purpose is to service our Balwin Estates in the long term. Balwin Approved was launched during December 2023 offering our clients the ability to trade in their current Balwin apartment for a new Balwin apartment in the same or a different development. The purpose was to generate new sales and assist clients to dispose of their existing apartments by certifying these as Balwin Approved. An apartment will only be certified as Balwin Approved once it has been inspected by our maintenance team and repaired to the requisite standard. We are excited about the prospects of Balwin Approved and we are constantly investigating ways in which we can bolster this business by improving the offering. Overall, the team remains positive and committed to the growth of their annuity businesses, and are excited for what the future holds given the dynamic and agile nature of our business. I now hand you back to Steve, who will discuss Balwin sustainability initiatives and open the floor for questions. Thank you.

Thank you Raaziq. As I mentioned earlier, our continued commitment to reducing our environmental impact is not only the responsible thing to do, but it is a financial imperative. We are the first South African company to have both a science-based target and a net 0 commitment approved by the International Science-Based Target Initiative. These initiatives alongside our consistent quality and innovation will continue to differentiate us from the competition in a very tough market and should support our negotiations for more favorable funding. We were the first developer in the country to leverage our ability to build more sustainability with our green bonds. This qualifies homeowners for an average 0.25 to 0.75 reduction over and above their normal bond rate because of the sustainability of our developments. My vision is to get all the financial institutions to grant 1% less than the client's favorable rate. During the year, we registered 1,220 Green mortgages for clients, providing savings of almost ZAR 80 million over a 20-year term. During the year under review, we launched our 10th 6-Star Green rated Lifestyle Center. The net 0 carbon footprint of these centers, as well as our Corporate Head Office, not only significantly saves on utility costs but serves as an important educational tool for homeowners, staff and tenants on the transition to a greener future. It is also worth noting that to-date we have certified just over 23,000 apartments as EDGE compliant. The Excellence in Design for Greater Efficiency initiative by the International Finance Corporation requires a 20% saving in water and embodied energy during the construction phase compared to conventional building methods. So far, we have certified almost 16,000 apartments as EDGE Advanced with a 40% in embodied energy and a 20% saving in water usage. All apartments currently under construction are built according to EDGE Advanced standards. Post the reporting period, 2 of our developments in the Western Cape, DeAan-Zicht in Richwood and Greenbay in Gordon's Bay, joined the City of Cape Town and Eskom's Load Curtailment Programmes. This is a first for sectional title real estate in the country as load curtailment is an alternative to load shedding, putting the power in residents' hands so to speak. It avoids load shedding, if residents reduce their consumption by a certain percentage during various phases of load shedding. Before I conclude, I want to reflect on the past 28 years as a company. We will soon be starting our 100th development since our humble beginnings in the South of Johannesburg 28 years ago. Our ethos has always been to put our clients first with family-orientated lifestyle developments and we'll continue to make it easier for homeowners to own a board apartment, especially in these tough economic times. Let's not candy coat the current tough trading environment, but at the same time, let's not just discount our resilience, experience and innovation. The research I quoted at the start of this presentation showed that apartment sales will return to normalized levels over the median term. However, the window for this is mainly dependent on factors outside of our control, such as a stable political environment, higher economic growth and a lower interest rate environment. Our focus therefore remains on those factors that we can manage, such as focusing on our core operations by leveraging the existing land bank and pipeline development opportunities. Where there are opportunities for growth in strategic areas, such as the Western Cape, we will be cautious to not impact liquidity and add debt pressure to the balance sheet. Although margin pressure is expected to continue in the current financial year, we will continue to manage costs prudently by leveraging our brand, especially through Balwin Sport and our environmentally responsible developments. The Balwin Foundation, of which I chair, is an incredible foundation. We have done an enormous amount of good to an enormous amount of charities in South Africa. Our foundation will continue with all our charities and the good that we're doing. However, we are refocusing. We are almost splitting our foundation to 2 cores, which is training and sport. The training, to me, is an absolute necessity in this country, and we're going to be opening 4 training centers, one in Gauteng, one in Tswane, one in the Western Cape and one in KwaZulu-Natal, in order to train the local community into trades and guarantee them employment thereafter. That is the ethos of our training, and also to retrain a lot of our current existing staff to sharpen up their skills in the various trades and therefore improve Balwin's ongoing quality control. Sport is a fantastic level playing field. You know, sport, when you're on the field, it doesn't matter who you are, what you've come from, what you've done. You've got one goal, to either win, bash the ball in the back of the net, or knock the ball over a net and paddle, et cetera, et cetera. We are putting the sport firmly in our foundation so we can have full control of it, and we are going to be focusing on 4 core sports. We've already done phenomenally well in our first year. We have the only Marathon Series in South Africa, where we have 4 marathons we partake in, which all qualify you for the Comrades Marathon. We have a phenomenal, phenomenal team in Sebastian Brokmann in our Padel, which is the fastest growing sport in the world. And we managed to have 1 year of having Willy Lahoz, the ex-world 2x world champion in our stable, to uplift the country's Padle. And he is a fantastic gentleman, selflessly trying very hard to improve all the coaching and all the Balwin ambassadors. Then we have our football, which as you know, in this country, everybody is football crazy. So it's mainly in the Fibre side arena, and we are doing a lot of good work with the local communities with football. We also do mountain biking linked to trail running and trail walking. And we predominantly are focusing on Thaba, because we have the National Championships there for mountain biking, and we have a large piece of land that has been used for this. So sport and training is a big focus of the future of our foundation. Sport is a fantastic connection. Sport connects people. I think our late president, Mr. Mandela, was a very keen sportsman. I think he was a very keen boxer. So we have a very strong heritage of sport in this country. It also gives a fantastic brand opportunity for Balwin to grow our brand through sport. And hopefully, at the end of the day, to remember, we are here to sell apartments. In conclusion, ladies and gentlemen, although our business has been tempered by the current interest rate cycle, we have done a lot of work to right-size the group and make it more efficient. This positions us well to capitalize on future opportunities as the macro environment improves. This then brings our presentation to conclusion. Thank you for dialing in. I will now open the floor for questions.

Thank you very much. Ladies and gentlemen, welcome to the live Q&A of the Balwin results presentation. Please remember to send through your questions by clicking on the tab underneath the logo on the top left-hand side of your screen. The first question we have this morning is from [ Loki Voeges ], private investor. Raaziq, I think this one is addressed to you. Can we get some more information on how the annuity business operates? Fibre, what are the cost structures? What is once-off versus recurring costs? What is the composition of the recurring costs, maintenance, service providers, et cetera? And let's say long-term, there are about 30,000 fibre clients already installed. Where do you see the profits margins going? On Balwin Rentals, how are the costs of providing these shown in the financial accounts? And also, what is the net rental yield with provision of cost of capital? What are the occupancy rates and the plans to increase the number of units rented out? Will you do this at more estates?

Thank you, [Morne ]. The ethos within the Balwin annuity group is quite simple. It's first and foremost to benefit our clients and then to add commerciality into everything we do. We have quite a few business subsidiaries within the Balwin Annuity Group, which I've touched on towards the end of the presentation. Given that this question was posed at the beginning of the presentation, I assume it's before Mr. Loki had the opportunity to hear my portion of the presentation. So I'll touch on some of the aspects. And if there's anything that I've missed or that you would like more detail on, I'm happy to answer that one-on-one. So you're welcome to reach out to me or to reach out to Morne. But the cost structure within fibre, the fixed costs are more than 50%. So that goes to your next question on if we're 30,000 fibre clients, what would our profit margins be? It would be in the region of 56% to 60%. On the rental portfolio, while the cost of providing the rental units are shown as expenses in the financials, we have an operating yield on cost of 8.4%. Our occupancy rates were on average at 93% with a low of 89% and a high of 96% during the year. We work in various marketing strategies to try and push rentals. That's constantly, it's very dynamic, ever-changing, to try and adapt to the rental market. We are looking into more estates. We do want to look at expanding our rental portfolio, definitely, especially by developing smaller land parcels within Balwin that are not really suitable for the build-to-sell model. So yes, I hope that answers the question, Morne.

Thanks. Thank you very much, Raaziq. Sticking to rentals, Charles Boles from Titanium Capital asked, apart from the head office, what other end stock does Balwin have? What is the number of residential units, and does Balwin have a policy on putting development stock into the rental pool? In other words, are sales slow, are more units being put into the rental pool?

So currently, we've got 250 rental apartments. That's at Green Park. As I just said, we are looking into new rental developments. We are not looking at converting rental stock within our current build-to-sell model. We want to do full rental developments, where we fully control the development. We think this is ideal, long-term. So yes, currently, we only have 215 rental apartments, with a view to expand that portfolio by developing specific rental developments.

Then Charles had a follow-up question, saying, did I understand correctly that yield on cost of rental units is 8.4%? Does it make sense to commit to these, given the funding costs?

That's a good question. We are heavily geared within the rental portfolio. We do acknowledge that. And we are investigating ways in which we can reduce that gearing, especially within the Green Park portfolio. And we are also investigating the feasibility of our next rental development before we commit to it, because we are alive to the fact that we are heavily geared, and that it is impacting the yield.

Thanks. Thank you very much. The next question is from Boitumelo Selowa, from the National Housing Finance Corporation. It's 2 questions. The first one is, is there an opportunity for another Green development in the Western Cape? And construction cost engineering is quite critical for the development's return on investment. If you were to advise emerging developers, what are the key factors to focus on for an effective cost engineering?

I'll answer that. Okay. Thank you. Very good questions. Yes, we already have another project in the Western Cape. We've called it Green Sprite. It's another, just over 1,000 apartments of the Green brand. And we are looking at another Green brand development in the Paardevlei Precinct, and another one in the future in the Milnerton area. So we've recognized that the majority of our sales are coming from our Green brand, and we are very, very keen to expand in the Western Cape. To give some color, one of our biggest discussions in Balwin is cost engineering. We have some extremely robust meetings. We have an exceptional team of quantity surveyors and suppliers. It's a big network. Cost engineering in any development company is absolutely fundamental. So to give advice to any young entrepreneur that's going to become a developer, you really need to get your cost engineering right. Because in this business, if you don't get that right, the development cost can run away with you. And unfortunately, at the end of the project, you end up with making 0 profit. So we are very, very alive on our ability and the importance of cost engineering.

Thank you, Steve. And then a follow-up question from Boitumelo is, current interest rates are affecting end-user affordability, directly affecting most financial ratios. How does Balwin plan to overcome this challenging period?

So I hope it doesn't stay as challenging as it is. We are holding on and holding our breath for the first interest rate cuts, which I was quite optimistic about March. Now it's looking like June. I hope in June we'll see some cuts. We saw this coming about 18 months ago, and we worked frantically with the IFC in Washington to find a mechanism to make all our greening worth something to our clients. We are pushing the financial institutions hard. My aim and my vision is to have a 1% reduction in the best rate a client can get because of our greening. So for example, if a client can get one below prime, that means you'll get 2 below prime because of our greening. At the moment, we're on a spread of between 0.25% and to a maximum of 0.75%, but we are engaged with all institutions to try and get it to a standard 1% for Balwin clients, and that makes a massive difference to our clients out there.

Thank you very much, Steve. Charles Boles, Titanium Capital, and Talya Ginsberg from Umthombo Wealth asked, could you please provide additional insight into why the hotel development didn't proceed? And then Talya is asking, is the hotel or hospitality industry an avenue Balwin will be exploring?

The hotel, it's not a case of not proceeding. We have a client that has bought the development rights from us and obviously to construct the hotel. His finances have been delayed, so we're hanging in there with a client. We know him extremely well, and we're hoping that he is still going to commit. We have designed a phenomenal Radisson RED Hotel. It's fully designed, the STP is approved, building plans will be approved shortly. We're ready to go. My vision for Munyaka and the Mears, the landowners of Waterfall, are clear. It'll be the first international branded hotel into Waterfall, and we are adamant that we want a Radisson RED Hotel. So we're hanging in there with this client that has bought the rights, well, signed for the rights, and we are giving him the chance to get his affairs in order, and then we will be proceeding.

Thank you, Steve. A follow-up from Talya Ginsberg is, what impacted on cash flow from operations? And other than suspending the dividend, what other measures are you putting in place to improve cash flows?

Thanks, Talya. I'll grab it. Thanks for the question. I think in terms of the impact on the cash flows for this year, I think if you look through the cash flow statement, you'll see there was quite a big working capital lockup over the 12 months. Two big drivers of that, one was the continued investments in the developments on the construction. We gave quite a bit of context to that in the results announcements, but really 3 big factors there. One was the completion of the building of the iconic Lifestyle Centre at Munyaka, as well as the completion of Thaba Eco Village in the south of Johannesburg, and then secondly was the continued investments in Tswane. So we needed to put in the services at Tswane, which I think the market is quite familiar with in terms of the Gazette and the strategic integrated projects. We made the decision to start putting in those services to get the homeowners in the homes, and there were 144 apartments handed over in the current financial year. Those apartments also put strain from a receivables perspective, because while the apartments were handed over, they weren't registered in time for financial year-end. So those 144 apartments were the big parts of the cash lockup from a receivables perspective. In terms of the improvements going forward from the cash flow side of things, I think operationally we need to get the business back to handing over and registering 3,000 apartments a year. That's certainly the minimum target that we set ourselves as a management group, all things being equal from a macroeconomic perspective. Then it's really unlocking the income statement and the profit margin. So we have a target from a bottom line and net profit perspective to return the business back to close to 20% net profit after tax margin, obviously starting on the volume of the apartments and the gross profit they're in, and continue work on reducing the operating cost to revenue margin. And then from a capital structure perspective, I think going forward a big focus, as we said in the results, is improving the capital structure of the business, reducing the debt. And what that will do is alleviate some of the cash flow pressures from the debt repayments going forward.

Thank you, Jonathan. On the back of you said that 3,000, you need to get back to the 3,000 apartments per year. John Aaron from SBG Securities is asking, he's saying, I understand that the environment is tough at present. Assuming that we start to see rate cuts by the year-end, or by the end of the year, how long do you think it will take for consumer sentiment to improve?