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

Good afternoon, everyone, and welcome to D.M. Wenceslao's 6M 2021 Analyst Briefing. [Operator Instructions] Joining us today are Mr. Buds Wenceslao; the company's CEO; Atty. Herson Asiddao, our Chief Finance Officer; and Mr. Julius Guevara, our Vice President for Corporate Planning. Before we start, I would like to remind everyone that a copy of today's briefing presentation is already uploaded in our website, dmwai.com, under the Investor Relations section. Off to our points of focus and starting with our updated landholdings in Aseana City. As you know, we have a total of 57 hectares of land, of which 30 hectares are still reserves and 27 hectares remain unallocated. For the valuation of our properties inside Aseana City, Colliers value their assets at PHP 203.68 billion. Applying our current market capitalization of around PHP 23 billion to PHP 24 billion to Colliers' valuation, you'll arrive at a very steep discount close to 90%. By the way, Colliers did this valuation in the fourth quarter of 2020 when the pandemic was already upon us. So this PHP 203.68 billion valuation is not a pre-pandemic valuation. With that, I will now turn the floor over to Mr. Julius Guevara, who will provide an overview of the property market and discuss our upcoming developments.

Thank you for the introduction, Jeff, and good afternoon, everyone. Before anything else, I'd like to discuss some details on the property markets, particularly the office and residential sectors. So for the office market on the supply side, we're going to see an increase in supply of about 2 million, increasing the supply as at the end of 2020 from 12.3 million to about 14.3 million square meters, an increase of about 16%. So this is -- a large part of this would be in the Manila Bay Area. It's, in fact, the second fastest-growing area or CBD. The change here is going to be around 36% or an increase of about 18% out of the total new supply. And you can see the increase on a yearly basis on the upper right-hand side. As you can see, the Bay Area will be growing quite fast during 2021, and then the completions will taper off in the following years. By the end of 2023, the Manila Bay Area will comprise about 9% of the total office stock in Manila. Now as for demand, as you all know, the pandemic has really hit the office market. But we are seeing some signs of recovery. In fact, during the first half of 2021, there has been an increase in office takeup by about 10% compared to the first half of 2020 and around an increase of 43% compared to the second half of 2020. The traditional market has been driving the takeup so far. But we do see that the BPO market will recover during the second half. Now because of the new completions that will be delivered this year -- as you know, there have been several delays because of the pandemic, and we're slowly trying to catch up with the completions. And of course, because of the lackluster environment that we're having, vacancies are projected to increase in the next couple of years. So it will peak at around 17.8% by 2022 according to Colliers. So it's going to be quite challenging in the next few months, but we do hope that the increase in vaccination rates, that the office market will continue to recover. Okay. In the next slide, for the residential market. Focusing on the major central business districts in Metro Manila, there was about 133,460 units completed at the end of 2020. This is projected to increase by about 19% by the end of 2023 to about 158,460 units. The Manila Bay Area actually comprises the lion's share of these new units. It's about 60% out of the total new supply, as you can see in the upper right-hand side. Okay. And this is really because the established CBDs such as Makati, Ortigas Center and even Fort Bonifacio has a limited supply of land to be developed, whereas in the Bay Area, there's still a lot of land to develop further. By the end of 2023, the Bay Area will comprise about 24% of all of the condo stock in the major CBDs. So it has surpassed Makati as a location for condo development. As far as launches and takeup are concerned for the first half of 2021, launches fell by about 51% on a year-on-year basis. So launches were about almost 10,000 units. And takeup also fell by about 32% to around 8,500 units sold. Selling prices continued to increase despite the pandemic, but this is more of an effect of the types of projects that are now on the market and are positioned on the higher scale compared to launches on the affordable and economic side. Okay. The next section, I will discuss our company's development pipeline. We have 4 major developments in our pipeline. This is namely Aseana Plaza or formerly Aseana 5 and 6. Parqal is our mixed-use development. It's being built right in the middle of Aseana City. MidPark Towers is our second residential development or residential condo development. And 8912 Asean Ave. is our fourth office development. Now all of these projects will quadruple the size of our current building leasable area to around -- close to 400,000 square meters. Now we also have some projects outside of Aseana City, namely 58 Jupiter, our commercial building that's being built along Jupiter Street in Makati. And as you probably know, we also acquired an office building in Legaspi Village in Makati City last year. Now to give you some specifics on our pipeline projects. 8912 Asean Ave., which is our fourth office building, is about 96% completed. So just doing the finishing touches on the building. So this has around 69,000 square meters of gross leasable area. Next, we have Parqal, which is our mixed-use development. It's a series of 9 low-rise buildings to be built along the greenway of Aseana City. It is around 45% complete, and we are targeting its completion sometime in 2022. And as I mentioned, 58 Jupiter is our low-rise building project in Jupiter Street in Makati City. It's about 89% completed and is scheduled for completion sometime this year. It has a gross leasable area of around 2,300 square meters. Now for residential projects. Our first residential project, Pixel Residences, is already close to full completions, about -- full turnover, I mean. It's about 99% turned over. And again, it's just completing its final touches. Meanwhile, for our second project, MidPark Towers, it's about 16% completed as of June 2021. Now just to provide some information on the upcoming infrastructure in Aseana City. As you know, LRT-1 is being extended downwards -- or southwards towards Cavite City. And Aseana will have its own station. It really increases accessibility and connectivity of our development. So in its latest statement, LRMC is constructing the LRT-1 extension, said that the LRT-1 line is already around 60% complete. Okay. For the operating and financial highlights, I'd like to turn it over to Atty. Herson Asiddao.

Thank you very much, Julius. Now for the results of the operations of the group, comparing the first 6 months of 2020 versus the first 6 months of 2021, notwithstanding the fact that our top line decreased by about 20%, our bottom line or net profit attributable to the equity holders of the parent company increased by about 18%. That's from PHP 721 million in 2020 to about PHP 853 million in 2021. Our top line decreased by about 20% due mainly to the decrease in the sale of condominium units by about 51% from PHP 546 million in 2020 to about PHP 267 million in 2021. This is due mainly to the fact that most of the turnover of the units for the Pixel Residences was done in 2020, whereas for 2021, we have recognized the remaining units, which is very few actually. As far as our rental business is concerned, we have a pretty stable recurring income. That's a minor change of about 2% only. For construction contracts, that's a decline from PHP 15.6 million in 2020 to about PHP 2.2 million in 2021 due mainly to the lesser construction activities we did in 2021. Now another significant item for our results of operations is the fact that in 2020, we have reported about PHP 254 million tax expense, which was actually a tax credit in 2021 of about PHP 16.8 million. The reversal or turnover of our tax expense is due mainly to the effect of the CREATE bill. As we all know, the President signed the CREATE bill March of this year, and the CREATE bill is supposed to be effective as of July 1, 2020. However, as recommended and based on the memorandums issued by the BIR, the effect of the changes in tax rates and, at the same time, the effect as far as for reporting purposes is being reflected in the current year or in 2021. And that's the main reason why we have a reversal from PHP 254 million tax expense in 2020 and a tax credit of about PHP 16.8 million in 2021. Okay. Moving on, focusing on our leasing business. As I've mentioned, we have a pretty stable leasing business. We have reported about PHP 974 million rental revenues for the first 6 months of this year. That comprised of PHP 493 million from land leasing. That's PHP 389 million for building leasing and about PHP 92 million for other revenues related to rental business. If you'll take note, based on the graph that we have shown for this slide, our segment gross margin is at about 72% as of the first 6 months of this year. Now for our building occupancy, there's a dip of about -- minimal dip of about 3% only from 93% in 2020 to about 90% during -- as of the end of the first 6 months of this year. Now this shows the recurring income contribution of the company from 64% in 2020, it went up to about 78% in 2021. This is due mainly to the changes in the revenue mix. As I have explained a while ago, there is a dip as far as our revenue contribution from our sale of condominium units. That's why notwithstanding the fact that the recurring business is pretty stable, in terms of contribution, we have an increase. Total leasable floor area stood at about 90,712 square meters end of 2020 and at the end of first 6 months of this year. Period ending occupancy, as I have mentioned, it went down a little bit from 93% to 90% as of the first 6 months of this year. Then land leased area from 158,000 square meters in 2020, as of the end of the first 6 months of this year, that's about 156,000 square meters. Now just to discuss the residential segment of the group. So for this year, we have reported about PHP 267 million revenues from our residential segment. This is actually a decline from the previous year, as I've discussed a while ago. That -- for Pixel Residences, we have reported about PHP 110.4 million. And for MidPark Towers, we have reported about PHP 156.3 million. In terms of residential gross margin, we have an increase from 39% in 2018, wherein most of our revenues came from our Pixel Residences. It went up about 43% in 2019. That's 45% in 2020, and that's 60% during the first half of this year. This is due mainly because of the fact that we're able to increase our selling price during the time that we are constructing and developing our projects. Now for -- in terms of revenue contribution, that's 27% in 2020, and that's 21% during the first half of this year. As we have mentioned previously, Pixel project is a slam dunk for us. That is already done, and we're now focusing our attention with respect to our next residential tower, which is MidPark Towers. This is 75% sold already with respect to the launched units. And we have collected about PHP 1.6 billion as of the end of the first half of this year. Average collection for this project is already about 28% to 30%. Now if you will take note, as we have discussed during the past analyst briefing, we are pretty confident with respect to MidPark Towers because most of our buyers have paid more than enough. And they are at the risk of losing significant amounts in case they will cancel already. Just to give you a statistics as far as our cancellation right now is concerned, our rate is at about 4% to 5%, which is relatively low compared to the other competitors in the industry. And this is mainly because of the fact that as far as our pricing or terms of payment is concerned, we have generated significant portions already of payment coming from our buyers. And that's why the probability that they will cancel their units, notwithstanding during the pandemic period, is relatively low already. Now focusing on the superior profitability score card of the group. In terms of gross profit rate, that's 76% in 2020. It went up about 80% during the first half of this year. As I have mentioned, this is due mainly to the change in sales mix. In the past, we have reported that as far as our residential projects are concerned, our GP is within 40% to 55% for our residential projects. For our leasing business, that's actually about 70% for building leasing. And for our land leasing business, that's more than 97%. In terms of operating profit, our ratio also went up from 62% to about 67%. EBITDA is also up from 68% to about 73%. Now in terms of the bottom line, our net profit attributable to the equity holders of the parent company, so it went down from 79% to 69%. This is due mainly because of the fact that in the prior year, we have recognized a onetime income of about PHP 1 billion, which was reported as part of our other income. And this doesn't have any related costs. As such, that significantly affected our net profit ratio. Now other ratios for the group. Debt-to-equity ratio stood at about 13%, up from 6% at the end of 2020. So we also borrowed certain funds during the first half of this year just to -- again, to support the projects that we have. Return on equity is at about 8%, recorded as of the end of first half of this year. That's 10% in 2020. Current ratio is pretty stable at about 1.47, 1.41. And asset to equity is about 1.5% end of 2020 and now the first 6 months of this year. Now just to give you a report on the use of the proceeds of the IPO. So we generated about PHP 7.6 billion. As of the first quarter of this year, we already spent about PHP 5.3 billion. For the quarter -- second quarter of this year, we spent about PHP 464 million. And that gives us a balance of about PHP 1.8 billion as far as the offering proceeds are concerned. So the projects which mainly benefited from the proceeds of the IPO are the following: So that's Aseana 8912. That's PHP 2.2 billion. Parqal, that's PHP 1.8 billion. And MidPark Towers, so far, we have spent about PHP 252 million proceeds for that. And Pixel Residences, that's PHP 283 million. That's all for me, then I'll turn you over now to Jeff.

Thank you, Atty. Herson. To summarize, our consolidated revenues amounted to PHP 1.24 billion, and net income reached PHP 852.8 million in the 6M 2021. Our recurring income remains stable, accounting for 78% of our revenues, while the residential segment accounted for 21%. Cancellations remained minimal, demonstrating the quality of our buyers. And as per IPO proceeds, we have already deployed PHP 5.8 billion for the development of our projects. For the remainder of this year, we expect the completion of 8912 to boost our recurring revenues. And as for the residential segment, this will now be driven by revenue bookings from MidPark Towers. As you know, Pixel Residences is already nearing full completion and turnover with very little remaining unrecognized revenues. Lastly, throughout the COVID pandemic, we have been able to support our stakeholders, starting with our business partners. For our business partners, we provided more market-friendly terms such as no rental escalation, lower rates, and rent discounts and other concessions were granted on a case-to-case basis. Meanwhile, for employees, preventive measures were taken as early as January 2020. We have allotted PHP 100 million emergency contingency fund, introduced flexible work arrangements and continuously disinfection and sanitation of our office buildings. I'm glad to note that we have already started our company's COVID-19 vaccination program, dubbed 2 Shots Forward, supporting efforts towards recovery. For our clients, we conducted monthly virtual presentations and webinars to be able to tap them wherever they are. And lastly, for the community, we donated several sacks of rice, rapid test kits, PPEs. And we are set to donate vaccines to specific LGUs or communities within the vicinity of our projects. This now ends our presentation, and we now open the floor to questions. [Operator Instructions]

Our first question comes from the line of Carl Sy.

Let me just check if you can hear me.

Yes, Carl. I can hear you well.

Great. So I'll ask about your office segment first. It's still 90% occupied, same as first quarter. I wanted to check with you guys if you -- for the second quarter specifically, did you either sign new tenants possibly for 8912 or renew existing tenants? And if the rental reversions were positive or negative.

So for -- this is Buds. So for new tenants, we were able to sign 2 major locators for 8912, but it just missed the cutoff in terms of the handover. That's why we didn't recognize it for the second half of 2020. In terms of reversion, so obviously, right now, because of the situation, we've had a couple of tenants who've stayed with us since the start, especially tenants in Aseana One, that we were able to give minimal increases, 5%. For those that are currently a bit higher -- currently at PHP 800 to PHP 900 per square meter, we gave a couple of them no escalation for the first year, with escalations ramping up in the second and third year. We've also had a couple of smaller leases, but again, it's immaterial to our financials.

Okay. So to clarify, you have had contracts at PHP 800 to PHP 900. Because I think in Julius' slides earlier, from Colliers, the rental rates in Manila Bay Area are PHP 700 to PHP 800. In your case, you were saying you were able to sign up tenants at PHP 800 to PHP 900, but you granted like a waiver of rental escalation for a year. Is that fair? Do I understand correctly?

Yes. Even the new leases right now are closing somewhere between PHP 800 to PHP 900, the ones in 8912.

Okay. So you're actually doing PHP 800 to PHP 900. And yes, I guess the only other question for me would be if there's any indication on land prices in the general vicinity of, well, Aseana.

I think, right now, as you know, most of the major buyers of our properties, most of them are companies whose major businesses not in real estate. So far, we have not offered anything lower than the price we've closed in 2019, which is at PHP 25,000 per square meter, yes. That being said, I think there are some that are offering right now their properties at around the low 400s or maybe even at PHP 400, but we have not heard of any close transactions within the vicinity.

Thanks, Carl. Our second question comes from the line of [ Fio ].

Am I audible?

Yes. I can hear you, man.

Okay. I just have 2 questions. For one, for the new asset launching in the third quarter this year, can you probably disclose like a ballpark number what percent is pre-leased from this asset? And secondly, is there any pressure on the gross margin side for residential given rising commodity prices and things like steel bars and the like? So does this affect the residential segment? That's all from me.

So for 8912 Aseana, we're currently hovering at about -- around 10% to 15%. So in terms of pre-leasing, there's another 27,000 square meters currently under negotiation. For the residential, you have to understand that most of these -- most of our major gen con contracts were awarded in 2019. So we were able to secure the steel, glass and cement prices pre-pandemic, so we weren't hit by the sudden increase in the steel rebars that we're seeing right now in early 2021.

Yes. Just to add, [ Fio ], if you've seen the residential gross margin slide presented by Atty. Herson, our residential gross margin is actually increasing, and it's particularly driven by the very high increase in the average price per square meter of MidPark compared to Pixel Residences. So if anything, it's actually going up. [Operator Instructions] We have a question from [ Jason Escartin ]. Just wanted to follow up on steel costs. When do you expect input costs to rise after having secured prices this year? Do you have anything on that, Buds?

Sorry. Can you repeat that, Jeff?

Yes. [ Jason ] is asking if -- when we expect to input -- for the input costs to rise after having secured the prices this year. So until when are the current prices -- will the current prices be stable with their contracts?

So right now, actually, we're already seeing steel prices start to go down a little bit from their highs in March. So at least for us, for our 2 major development pipelines, which is Parqal and MidPark, the total steel requirements for those projects have already been secured as early as third quarter 2019. Our next big project is Aseana Plaza. But for all these reasons, we're still doing most of the substructure rigs, which is, again, being done by our construction company. So usually, what happens, as you know, is that most of the construction activities, which are main competencies of the companies being usually undertaken by the company, so everything from the ground down. So right now, we just recently finished the pile driving of Aseana Plaza. And we're just only starting to do the substructure rig. So we'll let you -- we'll probably get to awarding those contracts once -- maybe by first quarter or second quarter next year, yes. But Aseana Plaza, that's a 1.5-hectare site. The basement of that is just -- it's going to take 1 year by itself just to excavate and construct. So there's no pressure right now on us for -- to award steel contracts.

All right. Another question from [ Ms. Grace ]. What is the Wenceslao estimated NAV per share? Let me take that. Well, if you look at the Colliers valuation, it's at PHP 203.68 billion for our assets in Aseana. If you translate that to price per share, that would be somewhere around PHP 55 to PHP 60 per share. So as you can see, there's a very steep discount of close to 90% when you talk about NAV per share. I think there's a follow-up again for [ Ms. Grace ] on the plans to tap into other upcoming reclamation areas in key provincial cities, if any. Probably, Buds?

Sorry. Our only existing reclamation contract right now is the one in Cebu. But again, obviously, it's already election season. At the same time, because of the pandemic, it's something that we're not rushing. These projects take a long gestation period, and I think we're going to wait until the next administration to see how the project proceeds.

All right. Another question from [ Mr. Ryan Dexter ]. Are there any plans for REITs? What's your projected land value appreciation in Aseana once the subway is completed? And is there any plan to increase land bank in this area? I think first, on the REIT. Is there any plan to have a REIT?

So as you know, right now, we still have a substantial portion of our IPO funds left. We're a highly -- our business has a lot of high recurring income business because of the office buildings and the land leases. And we are obviously looking into that. But right now, maybe we're going to wait until most of the development pipeline -- as you know, 75% of our development pipeline is in recurring income, mainly office and retail. So we're going to wait for those projects to be finished and to be leased out and to be operational before we even explore that. We would -- if we do go into -- or explore going to REIT, obviously, we would want to be a sizable issue. And right now, we just see that given our current operating assets, we feel that we have more development pipeline to put into a potential REIT structure.

So yes. I think, [ Ryan ], to add to Buds' statement, there's also the 3-year maturity requirement of the assets before it can be added into the REIT. So it has to take time and it should be matched with our capital raising requirements, which is not immediate. On to [ Ryan's ] second question, are we projecting land value appreciation in Aseana once the subway is completed? Probably if -- do we have a hard number in this?

Julius, do you want to take that?

Yes. So definitely, there will be an effect on land values increasing once these connections are completed. However, we don't have a hard number to pin on it. But of course, there will be a positive effect. That will definitely increase connectivity and accessibility to Aseana City.

Okay. And for [ Ryan's ] last question, is there any plan to increase on land banking activities probably in the area or outside of Aseana?

I think similar with our purchase last year in the Makati CBD, we're always looking for opportunistic -- opportunities outside of Aseana. Obviously, we'd want to make sure that the properties we're investing in will add value or will further increase the quality of our land bank. So we have big projects like the one in Cebu, that's still ongoing. But right now, there's a lot of opportunities that's being presented to us and other set of businesses. So those are the ones that we are carefully taking a look at.

Yes. So I think that's one of the benefits of having really a conservatively managed balance sheet. Despite this pandemic, there are opportunities that actually just present themselves. And companies like us with a comfortable balance sheet can actually grasp on them. So yes, [ Ryan ], I hope that answered your questions. And if there are any questions, we'd be happy to answer them. Probably I'll give it a few seconds, but if there are none -- okay, if there are none, well, thank you very much for attending our briefing. And the copy of this presentation is already on our website. So stay safe, everyone. Thank you.

Thanks, everyone.