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

Good afternoon, and welcome to D.M. Wenceslao's Analyst Briefing 2020. Thank you all for joining us today to discuss our financial and operating results for full year 2020. Joining us today are our CEO, Mr. Buds Wenceslao; our CFO, Atty. Herson Asiddao; and our Vice President for Corporate Planning, Mr. Julius Guevara. I would like to remind everyone that the copy of today's presentation is available under the Investor Relations section of our website at www.dmwai.com. [Operator Instructions] So to start off our discussion for today would be our points of focus. So this slide just shows the updated summary of our land holdings here in Aseana City as of 2020. So our total land holdings amount to 56.9 hectares, of which 26.9 hectares are allocated for development. So to further break this down, our completed properties comprise 3.8 hectares. Well, our leased land comprise 15.8 hectares. 5.5 hectares are land allocated for our pipeline projects and 1.8 hectares account for our roads and right of way. So that leaves us with our remaining land reserves of around 30 hectares in 2020. So out of that 30 hectares, we have 7,798 square meters of land which we have allocated for future sales. So we actually allocated 2,200 square meters of land to be sold this year. So our land allocated for future leases amount to 2 hectares, which brings us with an unallocated land amounting to around 27 hectares. So our remaining unallocated land just shows that we actually have adequate land in our land bank for our development plans in the following years. So this next slide shows us the value of our properties inside Aseana City based on the recent valuation done by Colliers International in October of 2020. So currently, our land holdings of 569,359 square meters is currently valued at PHP 203.68 billion. So out of these land holdings, our land leases actually account for 26% or PHP 53.61 billion; our completed properties amount to PHP 19.72 billion or 10%; our pipeline properties make up 12% or PHP 25.6 billion; and lastly, our remaining land reserves amount to PHP 104.75 billion or 52%. It is important to note that if we compare our current market cap of PHP 25 billion versus the appraised value of our land holdings at PHP 203.68 billion, this translates to an 87% discount in market value, which actually highlights how undervalued our stock is. So at this point, I would like to turn over the floor now to Mr. Julius Guevara, our VP for Corporate Planning, to discuss the property industry data and updates to our development pipeline.

Okay. Thank you, Reiko, for the introduction, and good afternoon, everyone. I will begin by giving an overview of the property market, its -- the office market statistics. So the trend for 2020, as you would understand, is that the supply has really fallen compared to what was initially forecasted. So by the end of 2020, the completed office supply was 60% lower than what was initially projected. We'd only reached about 425,000 square meters compared to the 1 million square meters that was projected. Nevertheless, in the Bay Area, new office supply grew by about 22%, increasing the stock from 798,000 to 976,000. From 2020 to 2023, an additional 2.2 million square meters is anticipated or an 80% increase in the Bay Area. This seem to jump by about 37%. So we see that the Bay Area is still a dominant player in terms of office space. In terms of the percentage of total new supply, the Bay Area will have a share of about 16%. In the upper right-hand graph, you will see the trends for the various major CBDs. And there will be an uptick in terms of new supply in 2021 just because the delayed projects that were in the lead stages are already targeted to be delivered this year. And across the board, you would see that there are a lot of new completions. By the end of 2023, the Bay Area will have about 9% out of the total market share for office space. Okay. Now going into the lower portion of this slide, in the lower 2 graphs, so we can see some data from Leechiu wherein they're showing that demand really has tapered off from all sectors, the BPO, POGO and the traditional office occupiers just because of the pandemic. And in the lower right-hand side, you can see the vacancy projections, which is seen to increase from 9% to around 12% for the next 3 years because of -- not only because of a slower demand, but because of the higher deliveries in terms of new supply. So we do see that it will be a bit challenging for the short term. But nevertheless, from what we have been hearing from the various property consultants, the occupiers, particularly the BPO sector, are just waiting for a bigger rollout of vaccines so that they can start leasing up again. And also, they're just waiting for the percentage of the total office space that is permitted to be used in their offices to be increased so that they could start ramping up their employment once again. Okay. For the next slide, which is for the residential market, so it's the same trend, slower for the residential market. Although in terms of the new supply, in terms of the total stock for condominiums, this will increase by about 21% from 2020 to 2023 as the projects that have been launched in the past few years are completed. For the Bay Area, in particular, there will be a 70% -- 74% increase in total stock. The supply average to be turned over from 2021 to 2023 will be around 9,100 units on average. The Bay Area will remain to be one of the strongest areas in terms of office -- in terms of condo deliveries. And by the end of 2023, the Bay Area will comprise about 25% out of the total market for condos. In terms of takeup, the data from Colliers indicates that there was a slowdown across the board, as expected. But the Bay Area remains to be one of the strongest in terms of monthly takeup, 174 units being sold per month, stronger than all of the other major CBDs despite the effects of the pandemic. In terms of pricing, prices have stabilized. So we did not see any major corrections in terms of the asking rates for the preselling condos. Okay. So moving on, I'll discuss the development pipeline of D.M. Wenceslao. The pipeline of premier assets that are being constructed right now in Aseana City, this would include Aseana Plaza, which will be our fifth office building, so it's a 4-tower, high-grade office development; Parqal, which is a mixed-use development right in the middle of our estate; MidPark Towers is our second residential condominium project; and then 8912 Asean Ave. is our fourth office building, which will be completed this year. We do have other projects outside of Aseana City. This includes 58 Jupiter St. with a GFA of around 3,200 square meters. We also recently acquired a property in Makati CBD in Legaspi Village. It's about 770 square meters of land area, and we're now in the preliminary stages of planning it. It's most likely going to be a residential condominium development. Okay. Just to focus on our projects which we are currently developing. 8912 Asean Ave., our fourth office building, it's around 82% completed. So it's targeted to be completed within this year. We've actually closed our first transaction -- lease transaction for this, around 4,000 square meters and with a lease rate of just shy of PHP 1,000 per square meter. Okay. For our Parqal mixed-use development, which is a series of 9 low-rise buildings with 4 stories each, it's about 32% completed. This will have a total GFA of around 78,000 square meters of both retail and office. And one interesting fact about this project is that it was featured in a publication called Architecture@20. So it's an architectural yearbook that features world-class projects located in modern cities across Asia Pacific. So D.M. Wenceslao was lucky enough to be representing the Philippines. So we have 2 projects in this yearbook being featured. Okay. Now moving on to our next project, 58 Jupiter. So construction progress is about 71%. So this will also be completed sometime this year, so about 3,200 square meters of GFA. And then for Pixel, which is our first residential development, turnover is about 91%. Total collection is about 92% as of the end of 2020. As of February 2021, this reached 94%. Meanwhile, for MidPark Towers, our second development -- residential condominium development, it's about 12% completed in terms of construction. Collections is about 27% or around PHP 1.5 billion. Okay. So in the next section, I'll be handing it over to Atty. Asiddao, our CFO. Thank you.

Thank you very much, Julius, for that. Now we go to our operating and financial highlights. So despite the pandemic in 2020, the group registered a net income of about PHP 2.13 billion, although that is 10% lower than in 2019. The main reason behind the decrease is mainly due to the fact that in 2019, we have a land sales, whereas in 2020, we did not do any land sales. If you will take note as far as our recurring income is concerned, we were able to have a very stable revenue for our land rentals, building rentals and other related revenues. That's about PHP 1.96 billion in 2019 and 2020. Whereas as far as our residential business is concerned, sale of condominium units increased significantly by about 37% from PHP 547.6 million to about PHP 749.3 million in 2020. Our operating expenses decreased by about 36% from PHP 548.2 million to about PHP 351 million. The main reason behind this is because of the commissions that we have recognized and paid in 2019. In 2020, that also includes the effect of the pandemic, and that's why there's a decrease in our operating expenses. So overall, our net profit attributable to the equity holders of the parent company decreased from PHP 2.37 billion to about PHP 2.1 billion in 2020. Focusing on our leasing business, in 2020, we registered about PHP 1.960 billion of revenue, and that's about PHP 1.958 billion in 2019. It's almost the same. Moving on to the details, that's about PHP 978.5 million for land leasing; building leasing is about PHP 809.1 million; and other revenues, that's PHP 172.7 million. If you'll take note on the graph presented, our recurring income segment margin is about 72%, 73%. So it's almost the same for 2019 and 2020. Now I'd just like to take note that for our building occupancy rate as of the end of 2020, we have about 93%. And as far as the weighted average lease expiry for existing buildings, that's about 5.8 years as of December 2020. To give you more detailed analysis of our recurring or income business or leasing, so total recurring contribution for 2018, that's about 88%, 56% for 2019 and 72% for 2020. The main reason for the jump from 2019 to 2020 is because of the fact that we don't have any land sale in 2020, as I have discussed a while ago. Now in terms of our total leasable floor area, that's 89,914 square meters in 2019 to about 90,712 square meters in 2020. As we have discussed during our third quarter briefing, we have acquired a building in Makati, and that is the reason for the increase in our total leasable floor area. For our period ending occupancy, that's from 98% to 93%. So we have one tenant which pre-terminated their lease, and that's the main reason for the decrease in our period ending occupancy rate from 98% to about 93%. Total land leased area is still the same at about 158,000 square meters. Moving on to our residential segment. So in 2020, this segment contributed about PHP 749.3 million in our top line. That's up 37% from PHP 548 million in 2019. This amount mainly pertains to Pixel Residences, around PHP 629.2 million; the rest of PHP 120 million pertains to MidPark Towers. Now we have started the turnover of Pixel Residences late 2019. As you can see in the graph, at the end of 2020, we only have about PHP 265 million unrecognized revenues for this project. And this project is about 92%. To date, we're close to collecting and recognizing the entire amount for this particular project. Also, in terms of revenue contribution, this segment contributed about 16% of our top line in 2019 and 27% in 2020. Now I would like to take note that for our MidPark Towers, we have collected about 26%, and that's the average collection for all of our buyers. This means that our buyers paid already a significant amount of their total price, in which case, the possibility or probability for them not to pay out or to terminate or to -- not to continue with their purchase is relatively low already. Moving on to our next page. In terms of our profitability scorecard, if you'll take note, this is almost the same year-on-year. Gross profit margin decreased by about 4% only from 80% to 76%. That, notwithstanding risks, we're still reporting very high margins across all business levels. Now the main reason for the slight decrease is mainly due to the fact that we don't have any land sales in 2020. As we have previously discussed in past briefings, the GP margin for land sales as of the -- based on the last land sale that we did is about 93%. Operating profit decreased by about 2%, from 65% to 63%, due to the reason, as I have discussed, we don't have any land sale in 2020. EBITDA, on the other hand, is pretty stable at 69%. Now if you will take note, during the third quarter, we discussed to you that we have recognized other income of about PHP 1 billion. That is the main reason why our EBITDA is pretty stable at 69% in 2019 and 2020. In terms of net profit attributable to the equity holders of the parent company, this increased significantly from 68% to 79%. This is mainly due to the other income that we have recognized without any cost. So it's actually -- it was actually recognized in the third quarter, and this is -- this pertains to a PHP 1 billion advances made by a co-joint venturer, which is already right for the recognition of -- as other income. In terms of the other ratios of the group, so debt to equity is still very low at about 6%. Third quarter of 2019, we borrowed additional PHP 1 billion, particularly to finance the operations and construction of MidPark Residences. Return on equity, on the other hand, decreased slightly from 12% to 10%. Current ratio, still stable at 1.6x in 2019 to about 1.42x in 2020. Asset to equity ratio is also stable at 1.5x in 2019 and 2020. Now just to give you an update on the use of proceeds of the IPO. So we did the IPO in 2018. We were able to generate about PHP 7.6 billion from the IPO. To date, we have consumed or used up about PHP 5 billion of that proceeds. That gives us a balance of about PHP 2.563 billion as of the end of 2020. The profits were mainly used for the Pixel Residences, that's about PHP 310 million; Asean 8912, that's about PHP 2 billion, Parqal, that's about PHP 1.5 billion; MidPark Towers, that's about PHP 380 million; and right now, Aseana Plaza, that's about PHP 327 million. So just to summarize the highlights for 2020 and, at the same time, the outlook for 2021. As I have mentioned, our consolidated revenue is about PHP 2.7 billion. Notwithstanding the pandemic, the group reported a net income of about PHP 2.1 billion in 2020. We have a pretty stable recurring income, and the contribution is about 72% for the year 2020, and that's close to PHP 2 billion already in the year 2020. Residential segment, on the other hand, this is a growing business for us. We generated an increase of about 37% from PHP 547 million in 2019 to about PHP 749.3 million revenue in 2020. So as I have discussed during the third quarter of this year during the briefing, we have minimal cancellations as far as our projects are concerned. So we have successfully deployed about PHP 5 billion of our IPO proceeds or that's about 66% of the total net proceeds that we have generated during the IPO. Aside from that, just this month, the Board of Directors of the group declared cash dividends of about PHP 160 million. This is the same amount as the dividends that we have declared and paid in 2019. For this year, we're looking forward for the completion of Asean 8912 and Parqal during the second and the last quarter, and that will add about 140,000 square meters to our gross leasable area. This will significantly boost our company's recurring income streams. For our residential segment, again, we are expecting to generate or recognize already the unrecognized revenue of Pixel Residences of about PHP 265 million in the first and second quarter of this year. Now for MidPark Towers, we're still ongoing preselling for this year. And we're pretty confident that the average payout or collection that we have of about 26% will be more than enough reason for our buyers to continue with their purchase. So that's all for this year. We'll now turn over you to our Investor Relations Officer, Ms. Reiko Yaeo, for our COVID-19 response discussions.

Thank you, Atty. Herson, for the discussion on our financial highlights for 2020. So this next slide now shows the actions that we have implemented in response to the evolving and challenging environment brought upon by the COVID-19 pandemic. So in terms of our leasing business, we have actually responded to calls of support from our tenants, and we have provided more market-friendly terms such as no escalation and lower rates, especially for our smaller tenants. Aside from that, we have also provided rent discounts and other concessions, such as rent deferment and waiving of penalties for our retail tenants. Please do take note that all of these concessions are actually done in a case-to-case basis. Aside from that, in terms of our marketing activities, in the early stages of the pandemic, we have also adopted a more digital approach to reaching our clients. We have started hosting monthly virtual presentations and seminars instead of open houses and our usual marketing events. For our residential projects, we conducted virtual hosted tours to showcase our residential projects in Aseana City in social media platforms. In the latter part of 2020, we have also started reintroducing physical presence in our marketing activity. So this is done through private events and activations in high-traffic areas while still observing strict health protocols. So we also places the health and safety of our employees and other stakeholders as our paramount concern. So actually, as early as January, we have taken preventive measures when the news of COVID first broke out. In April of 2020, we have announced a PHP 100 million emergency contingency fund for our employees and tenants in response to this COVID pandemic. So this is allotted to ensure continuance of wages, leave conversions and other means of support and assistance. So we have also disbursed the salaries of our employees for 2 consecutive periods in advance to help them prepare for the enhanced community quarantine. Aside from that, we have also introduced flexible working arrangements to our employees. And we have also readied our office buildings and premises for the new normal through disinfection and sanitation of our office buildings. We have also enforced physical distancing in our common areas, rapid testing for our employees. We have also placed foot baths and temperature checks at entry points. Presently, we have employed an in-house sanitation team who regularly conducts deep cleaning and fogging of our properties. So at the same time, we have also extended aid to the community that we operate in. In 2020, we made donations to the city of Paranaque, giving boxes of food, masks and rapid test kits. So that actually concludes our presentations, and we will now proceed to our Q&A session.

[Operator Instructions] Okay. So yes, Carl Sy.

Yes, I actually have a number of questions. I'll ask -- I'll begin with the office segment. Do I understand correctly your -- as of third quarter, the occupancy of the office buildings was 98% and it became 93% in the fourth quarter? Or was that earlier in the year it became 93%?

Carl, I think that's earlier in the year. It was earlier in the year. I think it was second quarter when it became 93%.

Understand. And...

94% or 93%, yes.

And just checking as well, am I correct that there was just one tenant that pre-terminated, but it happened to be a very large tenant? Is that the case?

Yes, it was one floor.

One floor, okay, got it. And for the tenants -- I mean some of your tenants might have been up for renewal last year. I want to ask, so in 8912 Asean Ave., you mentioned that your lease rate there was about PHP 1,000 per square meter per month. I was wondering if I could...

[ Thereabout ].

Yes. So I was wondering if I could get the figure for the renewals of any tenants in the first 3 buildings, as an average, of course.

Yes. Sure. So obviously, these tenants have different lease rates depending on when they close their office spaces, no? So for Aseana One, we were at an average of about PHP 500 to PHP 600 per square meter when we closed this early 2010. So those tenants are still paying roughly about only around PHP 700 to PHP 800 per square meter right now. So the ones that are new there, they're mostly -- the concessions that we're giving them is either, one, we gave them no escalation for when [ bidding ]; for the second is we renewed it at a slightly higher level, around 5%.

Got it. So -- okay. So anyway, from what you're saying, the tenants that you have that renewed are still paying higher rent than what they signed for before? Is that fair?

Yes. It's also -- you have to think about quality decreases. Right now, people don't want to -- regardless of whether they say that they're looking at other buildings, people don't want to go to a fit-out exercise right now in the middle of all of this, especially invest in new CapEx for fit-out for new premises, unless the lease rate is substantially lower that would justify that move.

Okay. Yes, that's fair. And may I ask now what's, if you have it, the rough breakdown of your office tenants between POGO, traditional and BPO?

It's still -- traditional still occupies majority, especially it will probably go up right now because of most of the tenants that were there applying for us are mostly traditional tenants. It should be under 30% our POGO exposure. Majority, about 60% is still traditional.

Got it. And then on the residential side this time, it was mentioned that, I think, for the -- in preselling, there's really not a whole lot of discounts granted. And also, for MidPark, you did say that, let's say, 26% has already been collected. But out of the PHP 6.2 billion in presales, could you remind me -- so that's what you presold. But what's the total amount that can be sold? Yes.

Yes. Herson, do you have that figure?

That's more than PHP 9 billion.

So let me clarify. So out of 4 build -- 4 towers have been launched, right? So 4 towers, PHP 9 billion. So you've presold 2/3 of the 4 towers on an average. Is that fair? Is that about right?

Yes, that's correct.

Okay. And when would the first towers be completed?

Sometime around 2023.

2023, got it. And -- yes?

Early 2023.

And from, let's say, the PHP 6.2 billion in presales, what would this number have been in 2019? So basically, I want to get a feel of how much were you able to sell during the pandemic, right? Is the demand still strong?

In 2020, admittedly, obviously, because of ECQ and considering that the price per square meter of our condo business are in the premium side or the luxury side, sales have been -- presales have slowed down definitely. That being said, in terms of our defaults, it's been also been very minimal single digits, maybe less than 5%, I think. So in terms of -- just to qualify it, what we're seeing from our buyers in our market is obviously it slowed down because of the CS price. But in terms of defaulting on their payments and considering the fact that we've collected, on an average, roughly 26% of what the total contract price is, is that it's been resilient in terms of it being -- it holding consistently to our collection projections.

Okay. And could you give a rough idea of -- so you are saying your products are relatively premium. Could you give an idea of the price per square meter now?

Right now, it's about PHP 275,000 per square.

PHP 275,000, okay. Yes. And some other questions. First on, let's say, the other income. So from 2018, you had some other income, about PHP 100 million a month. Last year, it was from the advance from a co-joint venturer. I was wondering if we should still expect more of -- is there something left or that's pretty much it?

That's pretty much it, yes.

Okay. Yes. And then on land sales as well. So of course, you didn't sell any plots last year. I was just wondering if -- I think your last sale was in 2019 at PHP 425,000 per square meter. Do you believe that the prices now would have fallen from that period?

So far from the listings that we're seeing in the market, not -- within the Manila Bay Area, MOA side, including ours, it's still at -- askings are still around PHP 500,000. We don't -- we have no visibility yet on what the actual deals closed are. But that's the asking that we're seeing, PHP 500,000 to PHP 550,000.

Thank you, Carl. So we have one question here from [ Paul Michael ]. So how much is the percentage of the total tenants that are POGO-related? I think that was already answered by Sir Buds earlier. So our total exposure to POGO is around 30%. So traditional offices mainly comprise -- or a majority of it comprise our portfolios there. [Operator Instructions] If you don't have any questions, I think that would be all for our question-and-answer portion today. Thank you so much for joining our briefing today. Should you have any further questions, please do not hesitate to reach out to us via [email protected]. Again, thank you, and please stay safe. Thank you.

All right. Thanks, guys.

Thank you. Good afternoon.

Thank you.