Megaworld Corporation (MEG) Earnings Call Transcript & Summary

Hello again, everyone. Good morning, and welcome to the First Quarter 2023 Results Meeting of Megaworld Corporation. Joining us for today's briefing, we have our panelists. Mr. Noli Hernandez, Senior Vice President for Sales and Marketing.

Good morning.

Mr. Roland Tiongson, First Vice President for Megaworld Premier Offices.

Good morning.

Mr. Graham Coates, First Vice President, Megaworld Lifestyle Malls.

Good morning.

Ms. Cleofe Albiso, Managing Director of Megaworld Hotels & Resorts; and Mr. Lino Victorioso, Jr., Head of Corporate Financial Services; and Ms. Caroline Kabigting, Investor Relations Officer for AGI; and Mr. Andy Dela Cruz, Investor Relations Officer for Megaworld, and will be our presenter for today's meeting.

Good morning.

[Operator Instructions] So without further ado, I will now transfer you to Sir Andy for the presentation.

Hi, everyone. Good morning. Thanks for taking the time to join our call this Friday morning. Maybe let's begin first with an overview of our financial performance. So we started the year strong as Megaworld's profit to shareholders in the first quarter of 2023 grew by 33% compared to last year as it reached PHP 4.1 billion. This resulted from the 24% growth in consolidated revenues to PHP 16.2 billion. In fact, this quarter marks the first time Megaworld has grown past pre-pandemic numbers. Consolidated revenues and net income are already 9% and 6% higher compared to the first quarter of 2019. Businesses across the board all registered stellar performances that's helped by higher completion of its real estate projects, growing office rentals, the complete removal of mall rent concessions, paired with higher tenant sales, and last but not least, the continued stellar growth of our hotel operations. Our residential gross profit margins have been stable at 49%, the same as last year. Meanwhile, as the company continued to accelerate our operations and position ourselves to capture oncoming demand across all segments, our cost and expenses have normalized and have picked up. These are largely coming from accounts such as advertising and promotions as well as commissions. Higher utilities also played a role in the increases of our costs. With this, OpEx excluding depreciation grew by 35%, bringing our EBITDA margin excluding ForEx movements to 42% in the first quarter of 2023. During the quarter, we booked some PHP 660 million in ForEx gains as a result of our dollar-denominated bonds that benefited from the weaker dollar relative to peso. Consolidated revenues in the first quarter of 2023 stood at PHP 16.2 billion, a strong 24% growth from last year. It's really fueled by the growth across all business segments. Real estate sales still account for the bulk at 58% of total revenues, followed by office rentals at 19%. Mall rentals, hotel revenues and other income account for the remainder of our revenues. Drilling down on a per segment basis, real estate sales grew by 70% to PHP 9.4 billion in the quarter due to the improvement in construction activity and higher completion rate. Office rentals are up 5% to PHP 3.1 billion. As we continue to have a high occupancy rate, we still continue to implement rent escalations and renew our expiring contracts. We also saw increasing transactions from both BPOs and traditional office segments. Mall rentals rose by 73% to PHP 1.2 billion on stable occupancy and as we removed all our rent concessions beginning in January. Our occupancy is 90%. And it's much higher than last year's first quarter of 2022. Tenant sales continued to grow and is now significantly higher compared to 2019 levels. Hotel operations, meanwhile, also saw a solid growth of 62% to PHP 813 million as domestic tourism and MICE activities continued to pick up. As a result, hotel revenues continued to grow past pre-pandemic numbers. Moving on to a snapshot of our balance sheet. We ended the period with a gross debt amounting to PHP 95.7 billion, of which 54% would be bank loans, 56% of the interest rate is fixed and 36% is U.S. dollar-denominated. Our balance sheet remains strong and our net debt to equity remaining at a very healthy 28.5%, among the lowest in the industry. Meanwhile, CapEx spend for the period amounted to PHP 12.2 billion, or around 22% of our PHP 55 billion CapEx budget for this year. This was used primarily for property development across our projects. And just to update everyone on our dollar-denominated bond that expired last month that amounted to $250 million. We paid $50 million in cash and have refinanced the remaining $200 million, all this said amount, through a U.S. dollar-denominated bank loan. This is a move in line to reduce our ForEx exposure, which all things equal, this transaction should bring our exposure down by 200 basis points to 34% of our total debt. Going forward, we have the option to prepay the $200 million bank loan. And we'll look to pay down as ForEx rate gets better in a bid to further reduce our dollar exposure. We'll now present operating updates from all our business segments, starting with the real estate segment. As discussed earlier, our real estate sales increased by a solid 17% to PHP 9.4 billion. This is already a full recovery compared to our 2019 first quarter numbers. We're thrilled to also announce that the demand we saw during the second half of last year has continued its momentum to grow and, in fact, much better -- much, much better this quarter. And reservation sales have already reached PHP 39.6 billion. And this is already accounting for 30% of our PHP 130 billion target for the year. Meanwhile, project launches for the period stood at PHP 13.9 billion. And we're on track to hit our PHP 60 billion target of project launches for the year. Next slide, please. We present to you our real estate sales breakdown. Of the PHP 9.4 billion real estate sales in the quarter, around 81% is still from our upper-middle to high-end projects, which is catered by our Megaworld and Global Estate brands. This showed a strong 20% growth from last year. We'd like to reiterate that this segment holds the lion's share of our sales, which is largely unaffected by rising interest rates and inflation. Our economic to mid-income category, which is catered by our Empire East, Suntrust Properties and Stateland brands, account for the remaining or 19% of real estate sales. Moving on to the middle of the chart, which shows the breakdown by location. Projects in Taguig, which accounts for 27% of our sales this time, saw a jump of 77% as we saw a ramp-up of project completion progress in the area. Bookings in Metro Manila excluding Taguig, which accounts for 37%, declined by 10%. Other Luzon areas excluding Metro Manila grew by 16%, while Visayas and Mindanao is largely flat. By classification, bookings of residential units accounted for 86% of our sales, improving by 23% year-on-year. Residential lots, which accounted for 12% of sales, grew by 8%, while commercial lots, which accounted for 2% of sales, declined by 60% but largely only a timing issue. To give a better color on our projects under construction this year, we're aiming to turn over some PHP 72.6 billion worth of projects throughout the year. These projects are all from Megaworld and Global Estate brands. 2/3 of the project value are in Metro Manila. And all of them are vertical residential units. Now moving on to our reservation sales. Reservation sales grew by 71% from year-ago levels to PHP 39.6 billion. This is also 19% higher quarter-on-quarter and already accounts for 30% of our year-end target. Demand from OFWs and international buyers account for 25% of presales figures this time around versus 20% in the fourth quarter of 2022 and below 15% in the first quarter of 2022. We saw renewed demand for our -- in Metro Manila, especially in our high-value projects in McKinley and Uptown Bonifacio. Meanwhile, our projects in provincial areas continue to remain buoyant. Most of these were the reasons we were able to grow our projects at a much faster pace. Vertical developments remain to be the larger chunk of our presales and accounts for 77% of the figure. On our launches, we launched a total of 6 projects worth PHP 13.9 billion this quarter. Of the figure, 74% are still with the upper-middle to high-end markets, still in line with the usual share of our historical launches. Megaworld has always been proud in that it has been very flexible and quick to react to the dynamics of demand. Hence, all of our launches this quarter are in provincial areas as we cater to the growing demand for tourism and leisure properties. We like to emphasize that given our expertise in the township model, we believe we have the most innovative and flexible project launches in the industry. Our land banking efforts are a testament to this. And it's not only focused in a particular segment, but we land bank in all areas that we think may become sources of growth in the future. So as we can see in our launches this quarter, among our launches is Savoy Hotel Palawan in our township in Paragua Coastown. This project is valued at PHP 4.2 billion and has a saleable area of 14,000 square meters. The project is now already 86% sold. We also launched Ocean Garden Villas Cluster C in our township in Boracay Newcoast. The project is worth PHP 849 million. And it's now 67 -- 66% sold as of March. Finally, among our launches, we also launched Positano Mactan in our township in the Mactan Newtown. The project is valued at PHP 2 billion, has a saleable area of 8,000 square meters and is 7% sold as of March. But this project was only launched in March as well. Moving on now to the performance of our office segment. Office rentals for the period grew by 5% year-on-year to PHP 3.1 billion while our GLA remains largely unchanged at 1.4 million square meters. Our occupancy rate stands at 90% as of end 2022, declining by 100 basis points from last year, first quarter of 2019 and 200 basis points from end 2022. We note that our office units saw 122,000 in transactions during the quarter and of which 84% are renewals and around 19,000 square meters are from new leases. In the quarter, Megaworld captured up to 13% of the reported new leases in the market. And our occupancy remains significantly higher than the industry at 90%, a bit lower from last year as we had some tenants who opted to downsize their operations. On our outlook and based on what we're seeing on the ground and confirmed by a report from property consultant, Colliers, BPO continues to be a strong and an important growth vector for our industry. We believe the nascent challenges faced by the overall office industry, such as the shift to a work-from-home setup and various macroeconomic headwinds, are only temporary. In fact, with increasing complexity of requirements of BPO customers, there is now more than ever an increasing need for talents in order to -- in order for the firms to remain competitive in the current industry. And upon our conversations with our tenants, more and more large BPO companies are now seeing productivity going down because of the shift to a full work-from-home setup. And aside from the IT-BPM industry that's growing, health BPOs are a growing share of total transactions in the country and now accounts for 13% of the closed transactions in the first quarter of 2023. Megaworld Premier Offices will always look to capture this opportunity and be on the forefront of the oncoming demand. Now back to our portfolio. It consists of sticky tenants with 74% of our occupied space accounted for by BPO tenants; 18% by traditional office tenants; and our share of POGO tenants is currently at 5%. Our WALE is at 3.5 years as of the end of the first quarter of 2023. And we renewed more than 90% of our expiring contracts, I think, already 91% as of today, or roughly 100,000 square meters of our expiring leases in 2023. Now for our mall segment. Mall revenues in the quarter saw a 73% increase to PHP 1.2 billion on improving spend and as we have finally removed all rent concessions beginning January of this year. Mall revenues are also 8% higher compared to the seasonally strong fourth quarter of last year. Our GLA and our occupancy remains unchanged at 484,000 square meters and at 90% occupancy rate compared to end 2022. Breaking down our strong growth in malls. This was, in part, due to the average basket size. That grew by 5% to PHP 548 per person in the quarter -- this quarter versus last year. This is also already 34% higher than pre-pandemic levels. Total tenant sales in the quarter improved further. And it's already 127% higher than pre-pandemic levels. Finally, with tenant sales significantly above pre-pandemic levels, we already removed all rent concessions, as discussed earlier, beginning in January. And those combined resulted in an increase of 73% for our mall revenues. Megaworld Lifestyle Malls, next slide, please. So Megaworld Lifestyle Malls continue to innovate its concept really in order to grow foot traffic and tenant sales. In this slide, we have a video of various attractions we have, whether it be a unique environment with thematic designs, vibrant landscapes, a wide array of attractions, such as amusement parks, and indoor/outdoor adventure zones. So these attractions really contribute to each visit and help elevate our malls as a destination place for our guests of all ages rather than just a place for visitors that will only go to if they want to or need to shop. Moving on with Megaworld Hotels & Resorts. Hotel revenues in the quarter grew by 62% to PHP 813 million. This was largely due to a higher occupancy of 66% and improving demand from MICE activities. We have 4,700 room keys currently. And compared to the first quarter of 2019, our hotel revenues already showed the best recovery among all our segments from the pandemic downturn and is already 42% above pre-pandemic levels. One of our best-performing hotels this quarter is Belmont Hotel Manila, largely driven by a continued brand-building and the pickup in tourist activities within the quarter. This was also helped by the busier airport foot traffic we had experienced in the first quarter as this hotel is located in our townships in Newport City, which is just across the airport. Belmont Manila's occupancy improved to 83% from 65% in 2022. As a result, RevPAR in the first quarter of 2023 jumped by 47% to PHP 2,700 from PHP 1,900 in 2022 and PHP 2,400 in 2019. It's already also higher than pre-pandemic levels. Our hotels, as similar to our malls, have also been adapting to current dynamics. We have worked with DownToEarth Philippines to create vertical food gardens, allowing our hotels really to cultivate various vegetables and spices while offering fresh harvest for our guests despite being in the city. This streamlines as well our procurement process as this eliminates our dependency on external suppliers. Overall, it should also improve profitability for F&B establishments as it cuts down on food waste, transportation costs and the lower cost -- especially lower cost of our ingredients. And finally, we'll just run through our targets for the year. Megaworld will still launch three townships this year across different areas, two in Luzon and one in Mindanao. We're also keeping our targets and expect to spend PHP 55 billion in CapEx this 2023. We're targeting 80% of our project -- of the CapEx for our project development while the remaining will be for land acquisitions. We are targeting to launch still PHP 60 billion worth of projects across 20 projects to help us reach our PHP 130 billion reservation sales target this year. And just a breakdown of our office pipeline. We expect to grow our portfolio by 209,000 square meters or by 15% until 2026. These are -- these will be in five different townships of Megaworld, namely in Upper East, Bacolod; Uptown Bonifacio; Iloilo Business Park; and Capital Town, Pampanga; and McKinley West in Taguig City. We will be -- we have a slight change here compared to the one we reported last quarter. We moved the expected opening of the International Finance Center to 2023 from 2024 previously as construction is expected to finish late this year as opposed to early next year. This building is now more than 60% pre-leased as of March from just being 50% pre-leased as of end 2022. And beyond this list, we also have more office pipeline still in the planning stage. We also like to present to you our mall pipeline. We expect to increase our mall GLA by 33% or by 159,000 square meters until 2026. The larger portion of our mall pipeline will be coming online in years 2025 to 2026, which include our malls in Boracay Newcoast; in Capital Town, Pampanga; and Highland Mall and Park in Highland City, Cainta, Rizal. Lastly, we are growing our hotel room keys by 3,159 keys, or around 67% higher in the next 5 years. And again, among our pipeline is our largest hotel with 1,530 room keys, Grand West Side Hotel in Westside City, Paranaque. That is expected to open this year in 2023. We're also looking to open Chancellor Hotel Boracay with 550 rooms in Boracay Newcoast. And finally, just to end our presentation, we'd like to end with the following key takeaways from this call. For real estate, we're seeing renewed strength for residential units in Metro Manila, especially for our higher-value projects, which, paired with our provincial strength, has helped our reservation sales grow at a much faster pace. Real estate revenues are now back to 2019 levels, too. We expect the growth to continue through the year and beyond as we complete more projects and capture more demand. For offices, our high occupancy of 90% affirms the attractiveness of our office locations, which allowed us to continue to grow our rents. We expect to continue renewing most of our expiring contracts despite the challenges in the office segment and see oncoming demand from the still-growing BPO industry. For our lifestyle malls, we saw a surge in rental income, driven largely by higher tenant sales and the complete removal of rent concessions. We expect mall revenue -- mall rents to improve sequentially as operational occupancy improves further throughout the year. For our hotels, hotel revenues continue to grow beyond pre-pandemic levels already. And as we largely see a pickup from tourists and MICE activities, we expect hotel revenues to continue its growth in step with the expected improvement in international tourist arrivals. And that wraps up our presentation for Megaworld's First Quarter 2023 Results. Thank you. And I'll now pass the floor to Jayson as we now open the floor to your questions.

Thank you, Sir Andy, for the presentation. So at this juncture, we will now open the floor for questions. We'll first start with the questions that we received via e-mail. So we have a number of questions here from the different segments. So I'll first start with questions raised regarding the real estate segment. So a question here reads, which locations or townships has Megaworld seen a significant increase in demand for sales? Maybe Sir Noli, you can give us an answer?

Yes, I will say it's the same. McKinley West continues to exceed our expectations. And also, Uptown Arts -- Uptown Bonifacio has been very consistent for the past many years, even during the pandemic. I would say that we have even -- we're not just on a par with 2019 sales, we actually exceeded those levels. And our hope is that we will see the same trend moving forward.

Thank you, Sir Noli. So another question here, just asking on whether we're seeing any cost pressure from construction materials. And how do you protect your development margins as a result of these cost pressures?

Who's going to -- because from our segment, the residential sector, we don't -- of course, the pricing is something that is done in concert with the head office. We know that our price points have increased quite substantially. But the way that we're able to cope with this is we spread the cost pressures to our buyers, obviously. The other approach is to be a lot more efficient in our operations and thereby reducing our costs even further. So in other words, I think we're -- compared to all the years prior to the pandemic, we have been doing a lot more for a lot less. And that's overall a good thing.

Thank you, Sir Noli. So we'll move now to the questions regarding the offices segment. So we have a couple of questions here. I'll first read this question being raised. So given that Megaworld's office occupancy is still relatively higher than the industry average, what key factors are you attributing this to? And is it sustainable? Maybe Sir Roland?

Thank you for the question. Well, the first is we have a diversified portfolio. And it's helping us sustain our occupancy. When I say diversified, it's in terms of clients, we have many different clients in our portfolio and, of course, our locations. The number of locations that we have is allowing us to make up for any deficits in some locations. So examples of locations where we are enjoying a very high occupancy compared to the market -- to the local markets there are Southwoods in Laguna, Davao and Iloilo. So those are really very -- townships that are experiencing a very high occupancy. Even if in their localities, there are problems, especially in Southwoods, which is very near Alabang. Yesterday, I saw a report from ANC that Alabang is experiencing a 36% vacancy rate. The second factor, I think, is the increase in the number of new leases. We have tripled our number of new leases as compared to pre pandemic. And that helped us cope with the size -- the smaller size of the transactions that we are experiencing. And thirdly, client retention. As Andy mentioned earlier, 84% of our transactions this year is in renewals. And we are really making a big push in terms of retention. We have started doing that way back in 2019, and it's bearing fruit today. We have upgraded our buildings in order to help us with client retention and, of course, improve our relationship with our tenants.

Thank you so much, Sir Roland. So at this juncture, I'll move to the participants who have raised their hand for questions. So I see Mr. German de la Paz raising his hand. So go ahead, German.

Can you hear me?

Yes, we can.

Thank you for the presentation, and congrats on the results. I have three questions. First, on other income, it seems it went up by PHP 760 million year-on-year. Just want to ask for more color on that. Second, about the tenant that downsized for Q1, may I ask the profile of that tenant and also the reason for the decision to downsize? And then third, for residential, may I ask for what you were seeing in terms of cancellations and whether any revenue reversals incurred in Q1? That's all.

Thank you, German. I'll direct those questions to Mr. Lino Victorioso.

So I'll answer the first question on the other income. So what you will see there actually is largely coming from the ForEx loss that was mentioned earlier by Andy. So there's about PHP 600 million of that. And then about PHP 500 million of that comes from our income from short-term investments. And the rest are other incomes from property management and all other smaller income. So that actually makes up for the other income that we have.

Lino, yes, I'll just to add to that, it's ForEx gain, not ForEx loss.

I'm sorry, ForEx gain, my bad.

On the second question, on the tenants that downsized and the reason, maybe Roland, can you give us color on that? You're on mute, Roland.

Thank you, Andy. For most of the tenants, German, for most of the tenants that are downsizing, they are mostly because they are shifting some of their businesses into work from home. And that's really the most common reason for downsizings, and sometimes cancellations even. But usually, we just experience downsizing. And we try to compensate for that by leasing some more. That's why we tripled our number of transactions to address that.

Yes. Okay, for our segment, happily, we are seeing a lot of stability in terms of our closed sales. We haven't seen any backouts so far. Our sales seem a lot more solid. And I think, if I may, this is mostly due to the fact that our sales are coming from actual buyers. And we don't see a lot of speculative activities in the market. So that's something we hope to continue seeing for the rest of the year.

Just to add that, just to add a number on our cancellation rates. Last year, we were experiencing cancellation rates of between 3% to 5%. But this quarter, it's much, much lower. And we're happy to note, it's now less than 3%.

Thank you, German. So I see Carl is raising his hand. Go ahead, Carl.

Let me just check you can hear me as well.

Yes, we can.

Great. So I have a number of questions. I'll start off with the office segment. So it was mentioned anyway that some BPO tenants downsized because of work from home. I'd like to just check if they pre-terminated or if they had a lease that really expired and they chose not to renew it.

Carl, for this year, what we experienced is an early notice of nonrenewal in the future for a portion of their office space.

Okay. And I'll ask this time for, let's say, the reduction in occupancy, could you tell us like the location where -- which townships they vacated?

We had one in Quezon City and I think another one in McKinley.

Sorry, what was the second one?

McKinley.

McKinley. And regarding the IFC, which you are actually completing earlier than previously planned, so you added 10 percentage points to the pre-leasing rate. Could you tell us this time what type of tenant signed up there?

We're actually -- for the one who recently signed up, they are actually on customer experience, so they're a BPO.

Got it. Okay, I'll ask about the residential business this time. And it looks like the proportion of sales coming from international buyers is increasing. So I'd like to ask about, first, is this -- if you could break down a rough number on how much is OFW versus actual foreign passport holder? And what -- why do you think there's such a big increase coming from -- is it your own efforts or there's really just so much more money abroad that's looking to come into the Philippines or something?

I think it's a combination of all of the above. We know that there's a lot of money floating around. That's one. And on top of that, we have also intensified all our marketing efforts, both internationally and locally. And mostly, I think it's a function of the overall optimism that is so prevalent right now despite all the ongoing usual crisis in the international scene. But I would say it's attributable mostly to our efforts.

And I'll ask about those efforts. Do you mean you're doing more road shows abroad? Do you have like sales networks abroad permanently, you have sales offices? Can you describe what you're...

Yes, all of those that you mentioned are something that we have always been doing. But we have to also point out the massive improvement in terms of communicating with clients wherever we find them. So that's something that we have to really highlight. It's phenomenal how we can, just given the technology, we can make presentations wherever we are and wherever our clients happen to be.