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

Good afternoon, everyone, and welcome to D.M. Wenceslao's 2022 Analyst Briefing. Joining us today are Mr. Buds Wenceslao, our company's CEO; Mr. Ben Tatunay, our Chief Finance Officer; and Mr. Julius Guevara, our Vice President for Corporate Planning. Mr. Guevara will start the briefing with an overview of the Metro Manila property market.

Thank you so much for the introduction, Jeff, and good afternoon, everyone. So I just have a couple of slides for you today in relation to the Metro Manila property market. So in spite of the continued headwinds that we're facing post-COVID, mainly from challenges presented by very high inflation rates and as a response to that, high interest rates, we are seeing an improvement in the property markets. So firstly, for the office market in Metro Manila, we ended 2022 with around 13,700,000 square meters. This was an increase of about 6% compared to the 2021 figures. And this will continue to rise. By 2025, we'll see around 15.4 million square meters of office space available in Metro Manila or a 13% increase. In particular, in the Manila Bay area, there's about 1.3 million square meters available. This will see a jump of about 184,000 square meters, an increase of about 14% and the share of about 11%. Now, in terms of take-up, we continue to see an improvement. Transactions reached about 603,000 square meters or a 43% increase compared to 2021. Traditional office locators continue to take the lion share. In 2022, they had the share of about 50%. While BPOs also continued their improvements. They have around 43% of the total transactions made in 2022. POGOs, on the other hand, they've been quiet during the pandemic era, but there was some activity and they took about 40,000 square meters. Average vacancies are also better than what was projected, ending up around 18.8% compared to around 19.5% in initial projections. However, this still seem to rise around 20.2% by 2023 due to the completion of more than 600,000 square meters by the end of the year. Now, in the Manila Bay Area, office completions are a bit muted relative to previous years and especially compared to the CBDs with only around 44,000 square meters slotted for 2023 and around 26,000 square meters in 2024. This gives some time for the available spaces in the Bay Area to be absorbed. The vacancy right now is around 39%. So the completions are a bit lower than what we saw previously, that will give time for the market to recover in the Bay Area. Having said that, the Bay Area will remain to have about 10% share of the total office market in Metro Manila. Now, moving on to the residential market. At the end of 2022, the total stock for condos in Metro Manila was at 151,170. This will increase by about 14% to 171,760 units. For the Bay Area, we will see a significant jump between 2022 to 2025. The Bay Area will actually comprise about 47% of the total new supply that will be introduced. And if you take a look at the upper right-hand side, the graph there shows how much new condo units will be introduced. By 2024, this is about 7,000 plus units will be completed in the Bay Area. And because of that, the Bay Area will eclipse Fort Bonifacio as a biggest area in the Metro Manila area in terms of condo units -- the number of condo units. Now, for the pre-selling market, some good news. Sales continue to recover in 2022. It actually ended up at around 20,000 units sold compared to only around 13,000 units in 2021. However, this is only about half of what we saw back in 2020 when there were about 38,000 units sold. Launches were also lower in 2022 compared to 2021. And that's it for my property market updates. Back to you, Jeff.

Thank you, Mr. Julius. As of December 2022, we have a total of 56 hectares land holdings in Aseana City, more than half of which are still reserves. The notable movement here is the increase in our leased-out land, 266,015 square meters, largely due to the addition of the 1.4 hectares leased by St. Luke's Medical Center, which commenced in the third quarter of 2020. In December 2022, Colliers valued D.M. Wenceslao's assets in Aseana City at PHP 227 billion, adding a net cash of PHP 2.4 billion, and the valuable assets outside of Aseana would result to a net asset value greater than PHP 230 billion. DMW currently has a market capitalization of PHP 23 billion, which means that we're trading at an over 90% discount to net asset value. The next segment of this presentation discusses our development pipeline. Our flagship project, the over 70,000 square meters Parqal is already at 89% completion as of December 2022, and is set to open this year. It is already being dubbed as the best-looking mall in the Philippines by distinguished real estate and infrastructure pundits. Parqal is a collection of 9 independent 4-storey buildings whose architectural expression has modernized approach to the Bahay-na-Bato, the Philippines vernacular architecture. The lower floors are designed to host retail and F&B shops, whereas the upper floors will be home to offices. Parqal is expected to be among the top tourist hubs in the Metro, boasting its impressive architectural design, first rate retail and commercial outlets, prominent green spaces and proximity to major public transportation terminals. The completion of Parqal this year will boost our commercial leasing space by over 70,000 square meters to a total of 232,499 square meters. This is almost thrice as much than what we had less than 3 years ago. Note that Parqal is half mall and half office, so it will increase the retail and F&B percentage to our total commercial portfolio. The construction of MidPark Towers remains in full swing. We've already topped off all towers and is at 52% completion as of December 2022. Beyond our immediate pipeline discussed in the previous slides, we have around 200,000 square meters of commercial leasing space in the medium-term pipeline as well as over 30,000 square meters of salable floor area once our third residential development is launched. I have here a short video to showcase how the rapid growth and rise of developments that I discussed earlier look like on the ground and how all these developments take part in shaping Aseana City. [Presentation]

Aside from our own developments, big infrastructure projects are also coming our way. According to DOTr, the LRT Cavite extension will start operations in 2024. Once fully operational, travel time between Baclaran and Bacoor will be cut to just around 20 minutes from over an hour currently. As you know, we are a key beneficiary of this big infra project as Aseana City will have its own LRT station. This slide visualizes exactly where the LRT Aseana Station would be. So this is in Block 1 near S&R. So just to run through the details of noteworthy the transactions closed in 2022. Early in 2022, we closed a 1,790 square meter land sale for PHP 787.6 million or PHP 440,000 per square. This PHP 440,000 per square is higher than our pre-pandemic or 2019 land sale, and this affirms the growth trajectory of asset values in Aseana City. In June 2022, we signed a Contract of Lease with a leading healthcare institution in the country, St. Luke's Medical Center, for a 13,896 square meter parcel of land in Aseana City. The lease period is 50 years and it commenced in the third quarter of 2022. Let me now turn the floor over to Mr. Ben Tatunay, our company's CFO, who will discuss our financial and operating highlights.

Thank you, Jeff. Our 2022 net income grew 3% year-on-year to PHP 2.1 billion, stripping out our CREATE-related tax gain in 2021. Core net income is 13% higher year-on-year. It is worth noting that our 2022 core net income is also 27% higher than our pre-pandemic or 2019 core net income of PHP 1.7 billion. Year-on-year, total revenues improved 22% to PHP 4.2 billion. Rental revenues increased 9% to PHP 2.2 billion on the back of fresh land lease revenues, particularly from St. Luke's 1.4 hectares, which commenced in the second half of 2022, as well as due to the surge in parking collections by much improved mobility throughout the estate. Residential revenues increased more than twofold due to the higher number of units qualified for revenue recognition and faster construction progress. Recurring income still accounted for bulk of our earnings or 52% of total revenues. Of the PHP 2.2 billion leasing revenues, PHP 1 billion, the largest share, came from land leasing, PHP 808 million from building leasing and PHP 356 million from other rental revenues. The weighted average lease expiry for commercial buildings remained high at 5.4 years. As mentioned earlier, leasing revenues accounted for more than half of the total. Looking at drivers of our leasing revenues, our total leased out land reached 166,015 square meters, boosted by the commencement of St. Luke's Medical Center's 1.4 hectares land leased in the second half of 2022. As you know, our total leasable space grew massively with the completion of 8912 Asean Avenue and 58 Jupiter in the fourth quarter of 2021. This also resulted in the decline in paid ending occupancy for the year 2021 as the operating metrics of these newly added buildings are yet to stabilize. In the third quarter of 2022, our office portfolio has been derisked from POGOs after our big POGO tenant vacated its office space. As a result, only 5% of our leasable floor area is now occupied by POGOs. Despite the pre-termination, the impact of our earnings has been negligible as it was offset by new leases in the 8912 Asean Avenue as well as by the forfeit a deposit and advances related to their pre-termination. Our occupancy rate also remained unchanged from what it was in end 2021, even with the POGO pre-termination. This was due to new space taken up in our recently completed buildings as well as due to our replacement BPO tenant, which now occupies around 15% to 20% of the POGO [Technical Difficulty]. Residential revenues continue to rise on the back of higher number of units qualified for revenue recognition and continuous construction progress. Our residential gross margin at 57% remains among the highest in the industry. Over 3/4 of the launch MidPark units were already presold with average collection of 36%. In general, our margins are among the highest in the industry: Gross profit margin at 77%, operating profit margin at 65%, EBITDA margin at 71% and net income margin at 50%. The key reasons to our industry-leading margins include: Number one, our low cost of land, which we acquired through our reclamation project. And number two, the substantial share of the higher-margin leasing business to our total earnings. We have a prudently managed balance sheet with debt-to-equity ratio of only 0.12x and a net cash position of PHP 2.4 billion. Our current ratio remains high at 1.6x and our return on equity is stable at 9%. We continue growing our dividends this year to its highest level thus far. This growth in cash dividends come simultaneously with our full-on expansion phase. This is a testament to the strength of our financial standing and it demonstrates our steadfast commitment to improving shareholder value. We have already deployed PHP 7.1 billion or 94% of the total net proceeds from the IPO to the development of pipeline projects. To summarize, for 2022, consolidated revenues amounted to PHP 4.2 billion and net income reached PHP 2.1 billion, while the core net income to the parent grew 13% year-on-year and is 27% higher than pre-pandemic levels and 2019 core net income. For the revenues from rentals, for land building and other revenues, it improved 9% to PHP 2.2 billion, amounting for 52% of the total revenues. For residential revenues, it jumped over twofold to PHP 1.3 billion on the back of a higher number of units qualified for revenue recognition and faster construction progress. We were also able to successfully deploy PHP 7.1 billion or 94% of the total net proceeds from the IPO. We continue to grow our cash dividend to its highest level yet, achieving this while simultaneously expanding rapidly. For our outlook for 2023, it looks promising as over 70,000 square meters of our Parqal, which we will be opening in 2023, will provide fresh recurring earnings contribution. As for our land lease revenues from St. Luke's Medical Center, this will already be a full year recording, which will help boost our earnings. The expected increase in the take-up of recently opened properties of 8912 Asean Avenue and 58 Jupiter will also help boost our revenues. The sustained construction progress of MidPark Towers and the continuous increase in number of units qualified for revenue recognition will also drive residential earnings growth. Let me now turn the floor back to Jeff.

Thank you, Mr. Ben. Moving on to sustainability. These are our 5 pillars of sustainability: Quality of life, environmental stewardship, good governance and ethical business practices, people-centric labor practices, and economic development. These pillars group are material sustainability topics. Our sustainability efforts are discussed in greater detail in our sustainability report. These sustainability efforts did not go unnoticed as D.M. Wenceslao ranked in the 88th percentile of the S&P Global Corporate Sustainability Assessment, real estate industry, as of February 2023. This puts D.M. Wenceslao's sustainability performance at the top 12% of S&P assessed real estate companies globally. If you are keen on comparing our sustainability rating with our peers in the PSE, you can use the ESG RV or ESG relative valuation in your Bloomberg Terminal. Although I understand it takes a month or so before the 2023 updated scores gets reflected on Bloomberg. We will continue to participate in sustainability assessments with the aim of improving our score year-over-year and with a medium-term goal of being included in sustainability indices. The D.M. Wenceslao group of companies continues to make strides in the real estate industry as it celebrated big wins in the 10th Philippine Property Awards by PropertyGuru. Our subsidiaries, Aseana Residential Holdings and Aseana Holdings, Inc. have bagged the Best Completed Condo Development for Pixel Residences and the highly commended award for 8912 Asean Ave. in the Best Office Architectural Design. With that, we now open the floor to questions. Please use the raise hand function and please wait to be acknowledged. Thank you. All right. Happy to take questions.

[ Jason ], you can unmute yourself. I think you're mute. There you go.

I just wanted to get a sense of your interest rate outlook and how you expect to navigate a rising rate environment, please. That's all for me.

So for outlook, we just take you with what most of the economists are looking at. I think the consensus right now is at 6.5% to 6.75% by the end of the year. As to how we're navigating it, I'd like to highlight that from a financial perspective, actually, our balance sheet is one of the best positioned balance sheets to not only thrive -- not only survive, but actually benefit from a high interest rate environment. If you look at our cash position of PHP 5.6 billion, that comprises 14% of our total assets and that's easily the highest in the industry. So we have the highest cash in the industry as a percentage of total assets and we have the lowest debt in the industry. So in a sense, our interest income would be much better off with higher interest rates and then our -- the impact on our interest cost would be manageable given our very low debt. On the operational side, I think the impact has always been on the residential segment. But I'd always like to highlight that despite 10-year treasury right now, I think, is at 6.3%, 6.4%. Despite that, already matching our rental yield here in Aseana City, the main driver of rental -- of residential investors, rather, is still the return, the price appreciation on their condominium units. Since 2016, the CAGR and the price per square meter of our condo units here in Aseana was rising at 18% annually or CAGR. So if you add that with a rental yield, that's still over 20%. And I'd also like to highlight that this residential investor segment or the bulk buyers is something that we're actually very optimistic at this 2023 where we've seen a pickup in demand from this segment. So, yes. Carl Sy, I saw the chat. So let me read it out for the rest of the audience. A number of BPO firms transferred their registration to BOI. Have you received much more BPO inquiries in 1Q '23 than 4Q 2022? Probably, Buds, if you'd like to take a stab on the question.

Yes, sure. So this for us, Carl, 2022 was our strongest leasing year ever. I think it surpassed even our 2015 record. Last year, we had signed [ OS ] and contracts close to about 30,000 square meters which basically doubled the size of Aseana One. In terms of the inquiries, majority are still from the traditional tenants. I would say 90% of our closed leases are with traditional companies, majority from the logistics and shipping companies.

Thank you, Buds. Carl, let me know if you have a follow-up question on that. Anyone else who has questions, please feel free to use the raise hand function and we'll call you up. I'll give it a minute or so for you to think of potential questions. But of course, if you don't want to ask it here -- sorry, okay. Here you go. Another question from Carl Sy. So you mentioned that Parqal is comprised of -- it's actually 9 4-storey buildings. Will all of these be opened at the same time or in phases? Probably Buds again.

So right now, there's about 30 lessees that are in various stages of [indiscernible]. The major anchor tenants here are basically [indiscernible] marketplace and we'll [indiscernible]. So those are the 2 opposite tenants. So in all likelihood, we will likely open is -- we will do a soft opening of the various -- there's 3 major blocks of this. But we will do a major grand opening sometime in maybe July, August when we're sure that the bigger space [indiscernible] have already opened. Then you have questions -- sorry, go ahead. Go ahead, Jeff.

So it's -- just to read it for everyone, what is the percentage of construction completion of MidPark? As of December 2022, it was at 52%. Okay. Feel free, Carl, to chat if you have other questions, no. For the rest of attendees, you can also use the chat function if you like that better. But you can also use the raise hand function. Otherwise you can also Viber me or email me your questions. By the way, after this, I'll send the survey. I just wanted to check again with you if you still prefer the virtual setup or if you want to transition already to the face-to-face briefing. So please answer that. I'll send it after this briefing. But yes, I think if there are no more questions, thank you very much for your time. And -- sorry, there's one bubble. Okay. It's from [ Rafi Mendoza ]. What are ways for the company to increase liquidity in the stock, although dividends per share increased by 23%? The dividend yield is still marginal, no. So increasing the liquidity of the stock, well, this is part of what we're doing. We're going to do -- we always do these analyst briefings and we join corporate base for those who are inviting us to sort of get the story out there. But another thing that we're doing right now is aiming to be included in ESG funds or sustainability funds as well as sustainability indices. So very recently, we've been included in a local ESG fund. So that will help boost liquidity. And in the medium term, we're targeting to be included in bigger sustainability indices like the Dow Jones Sustainability Index to help with passive flows as well. In terms of the dividends, it's rising. Take note that we IPO-ed in 2018 and every year since, no, so 5 years since we've been distributing dividends per share, rising dividends per share for that. And that's in line with our hyper-growth phase because we're giving these dividends out, but at the same time we're also expanding. As you've seen, our commercial leasing area has almost tripled from where it was when we IPO-ed. So these dividend yields would continue to rise -- this dividends per share would continue to rise as our earnings rise along with us reaping the benefits of these expansions. So this year, Parqal will come online. We're expecting the normalization of -- where we're expecting further pickup in the occupancy of 8912 and 58 Jupiter. So these increases in earnings would also help us increase dividends moving forward. So yes, thank you. If there are no more questions, again, I'll be sending out another survey on the mode of our analyst briefing. Please do answer that. And thank you very much, everyone. Please keep safe always. Thank you.