D.M. Wenceslao & Associates, Incorporated (DMW) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to our third quarter 2020 analyst briefing. My name is Reiko Yaeo, and I'm the Investor Relations Officer of D.M. Wenceslao & Associates, Incorporated. I am joined here today by our CEO, Mr. Buds Wenceslao; our CFO, Atty. Heherson Asiddao; and our VP for Corporate Planning, Mr. Julius Guevara. A copy of today's presentation is posted on our website at www.dmwai.com under the Investor Relations section. We will commence with the presentation first, and we will have our Q&A afterwards. [Operator Instructions] Our agenda for today includes our points of focus, updates on our development pipeline and our operating and financial highlights. Let me now turn the floor over to Mr. Julius Guevara to start the presentation.

Thank you very much, Reiko, for the kind introductions, and good afternoon, everyone. To begin, I'd like to go through an updated summary of our land holdings and Aseana City. So our total land holdings are around 56.9 hectares, 26.6 hectares of which are land used and allocated for development. To break this down, about 3.8 hectares are completed properties; 15.8 hectares are land leased, including 9.2 hectares leased to Ayala Land for their Ayala Malls Manila Bay; land allocated for pipeline projects account for 5.5 hectares; and about 18.3 hectares are for our roads and right of way. In terms of our remaining land reserves, about 30 hectares remain, 7,798 square meters of which are for future sales. We do plan -- or we've allocated about 2,000 square meters to be sold each year. Land allocated for future leases amount about 20,100 square meters. And then lastly, unallocated land amount to around 27.2 hectares. In the next slide, we present the value of our properties in Aseana City, which rose to around PHP 209.8 billion or up by 30% year-on-year. So our last valuation was conducted by Colliers International in October 2019. If you look at the lower left portion of the slide, we see the valuation for the owned land holdings. Land currently leased amounts about 27% of the total, about PHP 57 billion. Completed properties amount to PHP 19.2 billion or 9%. Pipeline properties is about 10%, PHP 21.7 billion. And the remaining land reserves is around PHP 112 billion or 54% out of the total. Now the value for our remaining land reserves translate to a value of about PHP 368,500 per square meter. If you compare that to our latest land sale completed in the fourth quarter of 2019, with a sale price of PHP 425,000 per square meter, the valuation translates to about a 13% discount. So in the next slide -- next couple of slides, we'll discuss some property market updates. So to start off with the office market in Metro Manila, the market, it seemed to continue to increase up to 2024. So by then, about 15,107,000 square meters of office space will be available. Now because of the pandemic, there has been some slowdowns in terms of completions. And these numbers have actually been reduced just because some developers have decided to delay some of their completions. Nevertheless, the office market will still continue to grow by about 30% from 2019 to 2024. And the Manila Bay Area remains to be one of the fastest-growing areas in terms of office space. The growth in office space here would be around 79% between 2019 to 2024. And Manila Bay will remain to be one of the most active office space development areas. And the Manila Bay area will actually account for about 9% of the total office stock in Metro Manila by 2022. Now demand still continues to be diverse. Despite all of the slowdowns due to the pandemic, demand will still be coming from the IT and BPO sectors, the POGO sectors. And we've been seeing a lot of interest and activity coming from traditional office takers. Now in terms of vacancies, we are keenly monitoring that. And initially, property consultants such as Colliers projected that vacancy rates will be increasing for the next 3 years. But based on their latest market reports, they see that 2020 will see the peak in terms of office vacancies, so it will be at around 8.3%. And it will slowly recover in 2021 and 2022. Now on the next slide, we show some market updates for the residential segment. So look, the residential condo stock will still continue to grow for the next few years, about 17% growth from 2019 to 2022. And the Manila Bay area is actually one of the growth areas, growing by about 65% from 22,000 units to around 37,000 units between 2019 to 2022. It's one of the fastest-growing areas in the Metro Manila area. And actually, the Manila Bay area is the second largest area for residential condominiums, surpassed only by the Fort Bonifacio CBD. Now take-up still remains to be strong in the Manila Bay area. So out of the actively selling projects in the Manila Bay area, about 96% of these projects have already been sold out. And we have seen prices still continuing to increase despite the effects of the pandemic. So average prices per square meter in the Bay area is around PHP 285,000 per square meter, 3% growth, roughly, compared to the prices back in 2019. So in the next section, I'll be talking about our development pipeline. Currently, we do have 4 projects that are in the works. These are Aseana Plaza; our mixed-use development, Parqal; our residential project, MidPark Towers; and 8912 Asean Ave. So our first office development is called 8912 Asean Ave. So this will be our largest to date, about 69,000 square meters of space. This will be completed by the second quarter of 2021. Construction project -- progress is about 71%. We topped off last July, and the facade along Asean Ave., Abueva and [ Aguas ] is now seeing its curtained walls being put up. Parqal is our mixed-use development, which is a series of 9 mixed-use buildings with retail at the bottom floors and office at the upper floors. Construction progress is around 26% completed. Two buildings have substantial levels of construction done on the structures already. The courtyard also is already built. The completion for this is slated on the fourth quarter of 2021. Now for Pixel Residences, which is our first foray into residential development, it's 99% completed. And turnover is at 89%, and we foresee that the turnover will be completed by the end of the year. MidPark Towers, our second residential development, the construction progress is at 11%. Now for the next section of our presentation today, I'll be handing it over to our Chief Finance Officer, Atty. Heherson Asiddao, for the operational and financial highlights.

Thank you very much, Julius, for that report. Now moving on to our operating and financial highlights. The company was able to grow its top line by about 13% or that's about PHP 255 million from PHP 1.9 billion during the first 3 quarters of 2019 to about PHP 2.2 billion for the first 3 quarters of 2020. The main reason behind that increase is the 67% increase in our sale of condominium units from PHP 423 million in 2019 to about PHP 707 million in 2020 or that's an increase of about PHP 285 million. In terms of the composition of our top line, about PHP 1.5 billion came from our recurring revenue and about PHP 700 million from the sale of condominium units, and the rest is coming from our construction revenue. Moving on. For the sale of condominium units, the main reason behind the increase is because of the increase in the number of units that we have recognized for purposes of revenue. Aside from that, we have done a lot of turnovers during the past 3 quarters as far as our Pixel Residences is concerned and, at the same time, the increasing number of units and the percentage of completion of MidPark Residences. In terms of our operating expenses, we were able to have a decrease of about 19% This is due mainly to the commission that we have paid related to the settlement agreement, as we have discussed previously, related to the closure of the JV agreement with Alphaland. That's in 2019. Aside from that, we're also able to save a lot of operating expenses due to the lockdown period. Now moving on to our other income. If you will take note and as we have previously discussed, in 2019, we have recognized about PHP 850 million revenues or other income arising from the settlement agreement or the closure of the joint venture with Alphaland. Now in connection with that, in 2020, September of 2020, we recognized about PHP 1 billion other income. This is the advances that they have advanced to D.M. Wenceslao in 2010 arising from the joint venture agreement. Now the -- all of the conditions necessary for the recognition of that PHP 1 billion as other income is already present. Aside from that, as part of the settlement agreement, there's already a quitclaim for these particular advances. In such case, that was already recognized as part of our other income last September. And that's the reason why we have about PHP 1 billion other income in 2020. In effect, as far as our bottom line is concerned, we're able to grow our net profit attributable to the equity holders of the parent company by 10% from PHP 1.65 billion in 2019 to about PHP 1.826 billion during the first 3 quarters of 2020. Now focusing on our leasing segment. For the first 3 quarters of 2020, we were able to recognize about PHP 1.46 billion in revenues related to leasing. That's about 67% of our top line. About PHP 733.2 million came from our land leasing, about PHP 611 million came from building leasing, and PHP 124.1 million arising from revenues related to our leasing business. If you'll take note on the graph as presented, we have about -- segment margin of about 6 -- 76% for our leasing business. So in 2020, that's about PHP 735 million of GP coming from this segment. Now focusing on some of the main drivers for our leasing business. The Ayala Land lease for the first 3 quarters of this year comprise about 75% of our land leases. As far as building is concerned, the weighted average increased. As far as the rates are concerned, increased from about PHP 811 per square meter to about PHP 858 per square meter. And the weighted average for the lease expiry of our existing contracts for our buildings is about 5.6 years as of the end of the first 3 quarters of this year. So moving on to the key data as far as our leasing activities are concerned. Our total leasable floor area for the year ended December 31, 2019, is about 89,914 square meters. The same is still our leasable floor area as of the end of the third quarter of this year. For period occupancy, that's 98% in 2018; end of 2019, that's 98% also; and end of the first 3 quarters of this year, that's 94%. For our total land lease area, we're able to maintain our leased land area at about 158,000 square meters. Moving on to the residential segment of the company. As I have discussed a while ago, this part of our business increased significantly during this year. This is up 67% to about PHP 707.3 million for the first 3 quarters of 2020. The significant contributors are coming from Pixel Residences, that's PHP 632.1 million; and PHP 75.2 million for MidPark Towers. Now moving on and just to focus on Pixel Residences because, right now, we're about to finish the turnover of this project. So to date, we have unrecognized -- we still have unrecognized revenue of about PHP 262 million. We have percentage of completion of 92%. But this -- we already collected about PHP 1.3 billion for this particular project as well. Now in terms of our revenue contribution, our total residential portfolio contributed about 32% of our top line for this year. Now we're very glad that we have no cancellation for Pixel Residences to date. For MidPark Towers, notwithstanding the recent lockdown and the significant effect of COVID as far as our buyers are concerned, we only have 2 cancellations to date. And right now, the average -- weighted average collection from our buyers is about 25% for MidPark Towers. In terms of our key performance indicators. Our gross profit margin decreased from about 80% to 72%. The main difference is basically because of the change in our revenue mix. In 2019, that includes land sale already. In 2020, there's no land sale for the first 3 quarters of this year. Operating profit, we have the same story, from 65% operating profit margin to about 59%. So it's basically, again, due to the change in sales mix. Same is the story for EBITDA, from 69% slightly declined to about 65% due mainly to the sales mix. Now as I've discussed a while ago, in 2020, we recognized other income of about PHP 1 billion, and that's part of the below-the-line items, as a result of which, our net profit attributable to equity holders of the parent company, the ratio increased from about 68% net profit margin to about 83% net profit margin. In terms of the other data related to our performance, so debt-to-equity ratio, notwithstanding that we have a very low debt-to-equity ratio in 2019, that again decreased to -- from 3% to 2% as of the end of the first 3 quarters of this year. Return on equity, it's relatively the same. That's about 12% end of 2019 and the first 3 quarters of this year. Current ratio is -- was maintained at about 1.6x. Asset-to-equity ratio, it's almost the same at about 1.56, 1.5x end of the first 3 quarters of this year. Now just to give you an update about the use of the proceeds of the IPO. So we have generated about PHP 7.6 billion from the IPO. As of the second quarter of this year, we have spent about PHP 3 billion of that proceeds. For the third quarter, we have spent about PHP 565 million. That gives us remaining amount of PHP 4 billion balance from the offering proceeds. So just to summarize the financial highlights for the first 3 quarters of this year and the outlook for the rest of the year. If you will take note, we have sustained top line growth of about 13% to PHP 2.2 billion from PHP 1.9 billion year-on-year. And if you will take note also, notwithstanding the COVID situation, our top line as far as our recurring business is concerned has not declined. This is due mainly because of the fact that we were able to recognize our top line for our leasing on a straight-line basis. So we have given some deferments as far as our rental tenants are concerned, but this doesn't have any effect as far as revenue recognition is concerned. Aside from that, there is a 67% increase in residential sales, up to about PHP 707 million, or that is about 32% of our total top line. Pixel Residences, we have turned over about 72 units. That's up 500 from the last quarter and the highest since the start of the project. What's more important is that we were able to grow our net income to about 11% or PHP 1.85 billion. And the net income attributable to the equity holders of the parent company increased as well about 10%, that's PHP 1.826 billion. And as I've mentioned a while ago, we were able to close or cancel only 2 units during the year for our buyers, for our residential buyers. And that shows the quality of the buyers of our residential projects. Moving on for the outlook for the rest of the year. We have continued surge -- upsurge in our revenue led by the residential segment, particularly Pixel Residences. And we plan and target to turn over all of the remaining units for the rest of the year. MidPark Towers, we have engaged our sales agents, and at the same time, we have tapped the digital platform as far as marketing activity is concerned. We have diversified also in other prime areas in -- as far as our being a developer is concerned. So we bought Erlag Building in Legazpi Village. I believe most of you know this already if you have read the news. And we have steady progress as far as construction activities of our pipeline projects are concerned. Now just to give you a picture of the property that we have recently purchased in Makati. This is the property along Esteban Street, and this is within Legazpi Village, and it's very Dela Rosa Street as well. This is about 770 square meters of lot. So that ends my presentation. Now it's the time for our Q&A if you have any questions.

Thank you, Attorney. So now we are now ready to take your questions. [Operator Instructions] Thank you. Okay. So I have a question here from Romel Libo-On.

Just going back to the Erlag Building acquisition, can you provide more color on the rationale for the land acquisition especially since I think -- I mean you've had projects outside Aseana, but this is a land acquisition as well? And can you also clarify, you're acquiring land with the building in there. Are -- is this going to be redeveloped eventually? And is it going to be residential or commercial?

Romel, this is Buds. So as you know, we're -- we want to diversify in terms of the portfolio of land bank that we have available. So right now, as you know, 90% of our land bank is inside the Bay area. What we're seeing is that properties which were previously -- had low supply in terms of their availability in the markets, some of them are coming online right now. We're actually looking at a couple of them. But this was the first one wherein we were able to find a good value in terms of location and price per square meter. So in Legazpi Village, the FAR for residential is 16, I believe. Right now, there's a 5-story building there. Obviously, it's not maximizing its floor area ratio. Based on the underwriting we did in terms of the financial model for a proposed resi project that we're planning, we saw that the margins were similar if not slightly higher than the resi projects we were -- that we're currently executing in Aseana. So that's why our Board gave us a green light to pull the trigger and acquire this property.

Okay. So we have here [ Carl Sy ].

Can you hear me?

Yes.

Yes, we can hear you.

Great. Yes. I'd like to ask -- well, first, I'll ask about your financials. Excuse me if I didn't completely understand the other income, the gain from your former partnership. But I'll just ask for me, is this some -- is there more -- are there more gains yet to be booked or is that it? Are we done?

Okay. I'll take that, [ Carl ]. Anyway, the PHP 1 billion other income that we have recognized as of -- during the period September of this year pertains to the previous advances made by the co-joint venturer to our supposed joint venture. Based on the settlement agreement that we have signed, there was a quitclaim. At the same time, some of the other conditions related to that -- for the recognition of that as other income is already present. And that's the reason why we have recognized that as revenue already. So basically, we are not liable to return that money anymore to the co-joint venturer.

Perhaps the other question for me would be along the lines of is your co-joint venturer still liable to give you anything. Or that's it?

Nothing. None. No more. That's it.

So there should be -- I mean the game should be over. Is that right?

Yes, yes, yes.

Okay. Okay. My next question actually refers to the office division. So recently -- well, first, I'll ask if in the third quarter you had any closures of office tenants particularly for POGOs. And related to that, since the third quarter, so actually, it was late October, there were changes to tax regulations on POGOs. I'd just like to ask if you have spoken to your POGO tenants if they said anything that, "Oh, this is a very big deal, and we're considering closing," or anything of the sort, yes.

Yes. [ Carl ], I'll take that. So as of the third quarter, we have not had any closures or indications of closures among our POGO tenants. We -- you and I have had some private discussions about this in terms of the effect. Definitely, there's a substantial effect for them. But in terms of the -- at least for us, there's a tenant -- POGO tenant portfolio in profile. What we have leasing from us is one of the bigger players, so we're pretty confident in their ability to at least finish their lease. They signed with us in 2017. They're on the third year of lease. And based on my discussions with the owners, they have no -- there's no indication from them that they will -- that there's any hesitation in terms of continuing the lease.

Okay. And have there been -- so I guess for both -- for -- I mean whether on residential price or land price or office rents in the Aseana area and the -- simply just outside, have there been any indications of changes or particularly reductions in whether office rents or residential price or land price? So as an example, you -- as you mentioned, your last land transaction was PHP 425,000 per square meter. Has anyone made any transaction recently?

Not that we've heard of. But right now, we're actually in discussions with several prospective buyers. In terms of the time line on when those will close, it's still up in the air. But at least for us, once we sell at a certain price, we don't go beyond -- we don't go lower than that. So the ones I'm hearing outside of Aseana is still ranging from PHP 500,000 to PHP 550,000 per square.

Okay. And to clarify, when were those transactions, the PHP 500,000 to PHP 550,000?

So I mean those are asking prices.

Asking prices. Understand. And so you also mentioned that you do not want to lower prices. I presume that also refers to your residential selling price like MidPark. So could you just remind me what was your -- or what's the selling price now for MidPark?

So I think we were doing at around PHP 270,000 to PHP 280,000 per square. Obviously, I'm sure you've talked to all who've done that. So there are more -- there's more flexibility in terms of discounts and upfront payments that developers are offering. And we're seeing that also from our own prospective buyers. So given that we're in this current state right now, we are being -- we are offering more flexible terms.

Thank you. Let's see. Any other questions, guys? Okay. If not, thank you. That concludes our briefing. Thank you so much for joining us today. If you have any further questions or clarifications, please feel free to send us an e-mail to [email protected]. So thank you, and stay safe.

Thanks, guys.

Thank you.

Thank you.