Balwin Properties Limited (BWN) Earnings Call Transcript

Good morning, ladies and gentlemen. I'm Steve Brookes, the CEO of Balwin Properties. Welcome to this prerecorded presentation of results for the financial year ending 28th of February 2023. For today's presentation, I'll take you through the operational overview before handing over to Jonathan Bigham, our Chief Financial Officer, which will run through all the financial numbers, followed by Raaziq Ismail, who will unpack the very encouraging performance of the annuity income businesses. Finally, I will touch on the groundbreaking work we've been doing on sustainability as well as our plans for the immediate and medium-term future. From an operating perspective, we continue to experience strong demand for apartments during the year with 2,788 apartments sold and recognized in revenue during this period. This performance speaks to the resilience of Balwin brand and our product considering the deteriorating macroeconomic environment, we continue to negotiate. 870 apartments are presold for future years, I'll provide some more context around this number on the next slide. Revenue contribution from the Annuity business segment increased to 2.5% from 1.2% in the prior year. Even though this business's contribution is marginal in the larger scheme of things, it has fantastic scaling potential, which I'm very excited about. We have a development pipeline of 43,781 apartments across 26 developments, which will build out over the next 16 to 18 years. Most of you know, I'm very outspoken and very passionate about building green. This is no longer a nice to have but a business imperative as our customers demand it, our fund is demand it and society at large demands it. Currently, we have a record 9 Six-Star rated and Net Zero Carbon emission buildings, including our fantastic head office. I'm proud to share that our efforts to differentiate Balwin through innovation and quality continue to be recognized on an international stage. We have won more awards, and to date, we have won 38 in international awards at the Africa and Arabia Property Awards. So this next year is going to be a tough year. I came back from December holidays, immediately spoke to all our management, it is going to be a tough year. Interest rates are rising. We have tremendous problems with load shedding, various other very tricky economic and political environments in this country. So it's going to be a difficult year. Consumer mood is not fantastic, power outages, affordability. So what we have to do in these headwinds, we have to focus on quality. We have to be the best of the best out there, we have to work hard and keep our customers happy. Notwithstanding these headwinds, we reported positive movement in most of the key metrics with revenue up 6%. Demand for 1- and 2-bedroom apartments remain strong, comprising 77% of apartments handed over. Remember that we are able to rapidly change our block configuration in line with market demand to supply more 1, 2 or 3 bedroom apartments. I think it's important to address the elephant in the room, which is the lower number of forward sales at 870 apartments. This should be seen in the context of pent-up demand post COVID as well as new developments coming online in the prior financial years, especially Munyaka at Waterfall and Izinga in KZN that spiked demand. The current number of forward sales correlates with a more normalized development cycle. Semigration continues to drive demand in the coastal regions and Jonathan will unpack in more detail how the geographic contribution to revenue has changed as a result. Our annuity businesses continued to perform in line with expectations, increasing revenue by 61% and to ZAR 83.1 million. As mentioned earlier, we have an opportunity pipeline of 43,781 apartments with a development horizon of approximately between 14 and 18 years. This will significantly influence our land purchasing decisions at some regions like the Western Cape are experiencing strong demand with a limited development horizon of only 4 years currently. It should be noted that zoning and transfer of land can take several years. Hence, our continuous evaluation of our land bank against the time horizon of developments. Therefore, land purchases will remain strategic and mainly focused on the Western Cape region where smaller land opportunities with service and zone land presents itself in high-growth nodes, these will be considered on a case-by-case basis. I will now hand you over to Jonathan for the financial overview.

Thank you, Steve, and good morning, everyone. It is my pleasure to take you through Balwin's results for the year ended 28th February 2023. As an overview of the financial performance, Revenue increased by 6% for the year to ZAR 3.3 billion. The gross profit margin grew to 29%, up from 27% in the prior year a very pleasing performance in the context of the rising cost base in the reporting period. Profit after tax increased by 20% to ZAR 437 million. And this culminated in a 21% growth in earnings per share and headline earnings per share, respectively, with headline earnings of ZAR 0.9149 per share recorded. On the back of this, the Board approved a final gross dividend of ZAR 0.141 per share taking the full year dividend declared to ZAR 0.24 per share, an approximate 8% dividend yield and a 15% increase from the prior year. The group generated ZAR 245 million cash from operations and closed the ZAR 607 million cash and cash equivalents, significantly in excess of the lending covenants and the treasury policy thresholds. Debt ratios remained in line with those of the prior period with a loan-to-value ratio of 40.7%. Net asset value per share increased 10% from the prior year to ZAR 8.24 per share. Focusing on the income statement of the group. As mentioned, Balwin recorded revenue of ZAR 3.3 billion being a 6% increase from the prior year. Also, as mentioned in the highlights, the gross profit margin showed pleasing growth to 29%, up from last year's 27% with the group reporting gross profit of ZAR 960 million. Other operating gains of ZAR 10 million pertained to the gains on the acquisition and the fair value gains related to the Balwin Rentals transaction and are excluded from headline earnings. Operating costs increased 30% to ZAR 393 million. The context of that growth will be discussed in the slides that follow. Net investment income improved by ZAR 2.1 million to ZAR 4.4 million. The decrease in the share of profit of associate results from the business transaction with Balwin Rentals, which resulted in the business becoming a subsidiary, and that's consolidated into the group results and no longer treaters in associates and equity accounted. The group's effective tax rate of 27.1% is materially in line with the corporate tax rate. This all resulted in the profit after tax of ZAR 437 million, a 20% increase from the prior year. The increase in profits materially flow through to the earnings per share and headline earnings per share growth of 21%, respectively. Diving a bit deeper into the income statement and starting with revenue, the growth in revenue was recorded despite a 6% reduction in the total apartments handed over for the year. The growth in revenue can be attributed to an increased contribution of signature collection apartments in the sales mix which traditionally have a higher average selling price than the other collections in the portfolio. This contribution was largely driven by success at Izinga Eco Estate in Umhlanga, KwaZulu-Natal and the initial handovers of the luxury apartments at Munyaka Lifestyle Center. We also noted a slight change of demand in the apartment configuration in the current year with a slight increased experience in the higher-priced 3-bedroom apartments, which comprise 23% of all apartments recognized in revenue, up from the 20% of the prior year. The group was able to achieve a general increase in selling prices of apartments to cover increased input construction costs and to sustain margin growth. And finally, a pleasing increase in the contribution of annuity-based business revenue, which contributed 2.5% of group revenue, a bit more than double of the prior year's contribution. Looking at the 3-year trend in revenue. The group has recorded strong revenue growth in the last 3 reporting periods, with a cumulative 23% increase in revenue achieved over this 3-year period. Revenue from the sale of apartments remains the major source of revenue. But as noted earlier, the annuity business contribution to revenue showed a pleasing increase to account for 2.5% of the group revenue. Over the page, we note the detail of the makeup of the apartments recognizing revenue and showing the contribution by brand and by region with 2,788 apartments recognizing revenue for the period, as noted earlier by Steve. Looking at the apartments recognizing revenue per region, while housing remains a major note at 48% of all revenue recorded. The theme of semigration continued in the current year, with 52% of apartments being derived from the 2 coastal nodes of the Western Cape and KwaZulu-Natal, with both of these regions showing healthy year-on-year growth. At a collection level, the classic collection continues to be the mainstay of the business and contributed 59% of apartments recognizing revenue. The Signature Collection increase its contribution to 14% mainly on the back of the strong revenue recorded at Izinga Eco Estate and the Munyaka Lifestyle Center as noted earlier. The green collections contribution showed a slight decrease to account for 27% of all apartments recognized in revenue in the year. The analysis of the average selling price of apartments is only considered meaningful. We performed by comparing each apartment type within the relevant collection. This is because average selling prices are significantly influenced by the sales mix of apartments included in the revenue, being the apartment types between the 1, 2 or 3 bedrooms or the collection between the Green Classic and Signature Collection brands. Selling prices in the Classic collection were generally stable compared to the prior comparative period, aside from the 3-bedroom apartments with prices escalated by 5%. The green collection recorded higher selling price escalations for the 2- and 3-bedroom apartments respectively, with a 12% and 15% growth recorded. Green Bay, the green collection development in the Western Cape in particular, was a strong performer in terms of sales price growth. The smaller one-bedroom apartment selling prices achieved marginal growth in the year. Owing to the differing nature of the respective developments in the Signature Collection, selling prices for this brand are reviewed at a development level. As discussed earlier, the group's gross profit margin showed further improvement in the current year, increasing to a pleasing 29%. The 2 previous reporting years recorded a 27% gross profit margin. Accordingly, over the past 3 years, gross profit has increased from ZAR 721 million to ZAR 960 million, a 33% cumulative increase. The improvement in the gross profit margin is a pleasing achievement on the back of key strategic focus of management. The continued focus on gross profit margins remains key to management as this leverages the return metrics of the business. However, owing to the prevailing macroeconomic conditions, the continued upward trend in gross profit margin is going to be a real challenge for the upcoming financial year. Short-term focus will be to try to best protect the existing margin levels, and then once the market eases to return the medium-term view to continue to grow the margin into the low 30% gross profit range. Consolidated operating expenses amounted to ZAR 392.8 million, increasing 30% from the prior year. As traditionally done, the analysis of operating cost is split between the company as well as the annuity businesses. Balwin properties the company increased operating expenses by 18% in absolute terms from the prior year. The breakdown of the costs are disclosed in the following slide and present the fixed, performance-linked and variable costs as well as depreciation and amortization charge. Variable costs increased by 26% despite a 6% increase in revenue with the increased owing to marketing costs incurred to drive sales and external commissions paid in specific and isolated scenarios in the period. Performance link costs pertain mainly to short-term incentives paid to staff and based on the preapproved company scorecard, which includes a combination of financial as well as nonfinancial measures. The increase in depreciation and amortization is largely on the back of the depreciation of the right-of-use asset, namely the Gauteng head office. The balance of fixed expenditure of the company of ZAR 161.2 million created slightly below inflationary links increase of 4.9%. The annuity businesses operating expenses increased by ZAR 39.3 million over the prior year. However, this was largely a result of many of these businesses becoming more operational during the year. It is to be noted that these businesses do not record cost of sales and all costs are disclosed as operating costs due to the administrative nature. Revenue from the annuity businesses constituted ZAR 83.1 million with an operating profit of 28% reported for the year. Raaziq will provide more color on the makeup and the performance of the Annuity Group for the year. Group profit increased by 20% to ZAR 437 million from ZAR 363 million from the prior. Earnings per share and headline earnings per share increased by 21%, respectively, to ZAR 0.9374 and ZAR 0.9149, in line with the guidance provided in the trading statement. On the back of the results, the Board has declared a final gross dividend of ZAR 0.141 per share, payable in accordance with the timetable presented on the slide. With the share trade in cum div until 20th June 2023 and the payment date being on 26th June 2023. On to the balance sheet and from an overview perspective, noncurrent assets amount to ZAR 520 million. A new addition to the noncurrent assets are the 215 apartments owned by Balwin Rentals and held by the group as investment property at a fair value of ZAR 153 million. Current assets of ZAR 6.8 billion comprised mostly the developments under construction of ZAR 5.7 billion. Cash and cash equivalents, a healthy ZAR 607 million and trade receivables, a nice reduction to ZAR 219 million. Equity reflected ZAR 3.8 billion working out to an accounting net asset value per share of ZAR 8.24, which is measured at cost. It must be noted that the accounting shares and issue differs from the total shares and issue per the JSE mostly due to the technical accounting of the BEE transaction, whereby the BEE shares are not seem to be shares and issue. When calculated based on the total shares in issue per the JSE, the net asset value per share is calculated ZAR 7.42. Total liabilities amounted to ZAR 3.5 billion, with the major contributor being the development loans and facilities, which aggregate to ZAR 2.9 billion when combining both the current and noncurrent portions. Developments under construction include the value of land, infrastructure costs, development rights as well as the development costs and increased to ZAR 5.7 billion at year-end. On a regional and brand overview, we note the majority of the balance is located in the Gauteng node at 74% and within the classic collection at 68%, with no material variance from the makeup of the balance from the previous year-end. The breakdown of the developments under construction was as follows at year-end. 41% of the balance comprises land and land contribution costs, down from 46% from the prior year. 8% of the balance reflects the development rights again, a reduction from the prior period of 11%. The balance of 51% represents construction costs, an increase from prior year's 43% contribution. As noted through this statistic, the increase in developments under construction in the year was driven predominantly through construction costs as opposed to additional investment in land, reflecting Balwin's focus on developing the existing pipeline. The major construction costs incurred were at Munyaka, Balwin's flagship development in Waterfall, where the costs included the construction of the iconic Crystal Lagoon, which was opened to the public on the 1st of March 2023, and as well as 92 luxury apartments that overlook the lagoon and had a slightly different product offering from the classic collection apartments in [indiscernible] Munyaka. The other major contributions to development under construction pertain to investment in infrastructure that is required to provide the required services to the developments in the form of external roads, sewer, electrical and water. Material infrastructure costs were included Mooikloof Smart City in Tshwane East, the Riverwalk node also in Tshwane East with The Blyde and Greencreek developments are located as well as Thaba-Eco Village in the South of Johannesburg. Very excitingly, the group opened its first lifestyle center with popular sports facilities that are external to the developments at Thaba-Eco Village and open to the public through membership. Steve will elaborate a little bit on this later. Trade receivables mostly consists of apartments handed over at year-end, but not as yet registered. Through strong focus and meticulous planning to achieve timely registrations of apartments, trade receivables reduced by ZAR 538 million, contributing significantly to the cash generated from operations. As of today, almost all of the balance of trade receivables is registered and been converted to cash for the group. As communicated earlier, cash on hand at period end closed to ZAR 607 million with a further ZAR 164 million disclosure restricted cash. Accordingly, total cash amounted to ZAR 772 million. Cash management continues to receive priority focus by the Board and the cash position recorded is a healthy one. The Treasury Committee has continued its active oversight of matters, including cash management, debt overview, forecasting and covenant compliance. The breakdown of development loans and facilities are shown on the following slide and split between the nature of the funding. We have continued the process to migrate the traditional development funding model to term-based models, and successfully converted several facilities into term-based funding models in the current year. Management constantly explores funding avenues that are cost effective to the group. The Board actively manages the debt exposure of the group against the debt covenants as well as the treasury policy. The group's debt position remained materially consistent from the prior year with a loan-to-value ratio of 40.7% compared to the prior year's 40.5%. As noted earlier, apart from the newly introduced investment property owned to the portfolio of apartments owned by Balwin rentals, the group's assets are measured at cost, and there are no other fair value adjustments included in this metric. The group reported an interest cover ratio of 3.8x, comfortably in excess of the requirement of 2x cover. Looking forward, we will continue to closely and carefully manage the relationship between the rate of construction and the rates of sales, a dynamic that is fundamental to the appropriate cash management agreement. A very pleasing performance in the period resulted from the strong cash generated from operations, totaling ZAR 559 million. Net cash from operations of ZAR 245 million was recorded after deducting the net finance cost as well as the tax payments. This is a really strong turnaround from the prior year's performance. The positive operational cash flows were achieved based on the strong profitability of the group and the discipline of a timely registration of apartments. In closing, I'd like to express a huge token of appreciation to the Board and the Board and executive team as well as to the finance department for their commitment. I'd like to now hand over to Raaziq, who will take you through the annuity businesses. Thank you very much.

Thank you, Jonathan. The Balwin annuity group is taking shape, and we are staying focused on our vision to enhance our clients' experience and enhance shareholder value in the Balwin Group. I am pleased to announce that the Balwin Annuity Group performed well in its first year of operations, achieving an operating profit of ZAR 45.7 million and a net profit after tax of ZAR 20.6 million. The overall EBITDA margin at financial year-end is a healthy 64.2%, while the NPAT margin is 23.7%, which positively impacts the overall margin of the Balwin Group. Balwin Fiber, Balwin Mortgages, Balwin Rentals and Balwin Energy were the largest contributors to the ZAR 20 million net profit, while Balwin Lifestyle, Balwin Education, Balwin Insurance, Balwin Head Office and Balwin Technique, were responsible for the residual of the income statement. As promised at interims, we have reassessed the viability of the property management business and have decided that it would not be a viable long-term business for the group. Property management remains an add-on in the group that assist the sales department with rental incentives as well as Balwin rentals with its rental portfolio. Balwin Fiber is the exclusive supplier of fiber infrastructure to Balwin developments and has increased its homes pass from 10,261 to 11,671 with active clients increasing from 7,131 to 8,230. The average rate per unit or line rental collected from Internet service providers is ZAR 490 per apartment per month. The Fiber business achieved an operating profit of ZAR 16.1 million, up by 46% when compared with the prior financial year and a net profit of ZAR 7.9 million, up by 44% year-on-year, which indicates the growth potential of this business. We have finalized the installation of redundant fiber infrastructure cables in 16 estates, which means that our clients have no downtime when there are unforeseen outages to Internet services. Our 3-month pre-fiber campaign assisted in increasing the value proposition to our clients, and we are also investigating alternative marketing strategies to further enhance the value of our offering as well as to help increase the uptake of Balwin Fiber. We have been working on reducing backhaul and operational costs as well as focusing on the use of technology to reduce the resources required to operate efficiently. We are also currently investigating the feasibility of starting up our own Internet service provider on a closed access network, which we believe would have a positive impact on uptake across our potential client base. Balwin Mortgages has performed well with 1,648 mortgages secured between March 2022 and February 2023. The business achieved an operating profit of ZAR 7.3 million and a net profit after tax of ZAR 5.2 million in its first year of operating as a stand-alone company. The EBITDA margin for year-end is 42.8%, while the NPAT margin is 30.8%, indicating the strong profitability of this business. As a result of our green initiatives within the Balwin Group and our Edge certified apartments, the mortgage team has managed to secure our clients discounts on the individual interest rates ranging between 0.25% to 0.75%. And we are actively working with the banks to further increase the discount to 1%. In essence, this equates to a saving for our clients of approximately ZAR 98 million over a 20-year mortgage period based on the mortgages approved for the 12-month period. Our mortgage website will go live at the end of May, allowing external clients to benefit from the Balwin Mortgages offering. Our strong relationships with banks and attorneys provide a key competitive advantage as we are able to offer our clients a 50% discount on transfer and bond costs as well as interest rate concessions. Balwin Energy is focusing on providing sustainable energy and water solutions for our clients. This entity leverages off existing solar assets which Balwin install to meet [ SEI ] requirements and to provide clean, sustainable and more affordable energy to our clients. Given the current world energy crisis, solar installations are becoming increasingly popular, and Balwin has been at the forefront of ensuring green development in this respect. We provide all our clients with a 10% discount on the electricity bill, and we manage and maintain the solar PV to ensure optimal functionality. This business achieved an operating profit of ZAR 4.9 million and a net profit after tax of ZAR 3.5 million for the financial year. The EBITDA margin is 66%, while the NPAT margin is 47.5%. Balwin Energy is currently operating in 9 development sites and has reduced emissions in the Balwin Group by 1,750 tons of carbon dioxide equivalent. We are very optimistic about the prospects of the energy business and firmly believe that it has the potential to yield great returns over the next 5 years. Balwin Rentals is complementary to our development business. We currently have 215 apartments in this portfolio within the Johannesburg region, and we are looking to expand it within the next 24 months to approximately 400 apartments. Our offering ranges from affordable 1-bedroom apartments to 3-bedroom garden apartments. We have achieved an average occupancy rate of 91% throughout the year, which is a massive achievement in the current economic climate with a period low of 89% and a high of 94%. Constant increases in interest rates during the reporting period posed a challenge, but we have managed to meet our financial obligations regardless. We have also seen a capital appreciation in the portfolio to the approximate value of ZAR 13.1 million, which supported the net profit after tax of ZAR 10.8 million. With regards to the other businesses, these entities are not material contributors to the annual results. In aggregate, these businesses were loss-making to the extent of ZAR 6.8 million, mainly due to the early stage and rising interest rates. Balwin Head Office is responsible for holding the Gauteng head office and tenanting commercial space to other tenants in the Melrose area. We are happy to report the building is now fully tenanted and is proving to be financially feasible while we continue to closely manage all associated costs. As a whole, the annuity businesses are demonstrating exciting growth potential and the annuity team is dedicated to ensuring that each business makes a meaningful contribution to the Balwin Group. While we are in a tough economic environment, we remain positive and committed to the future prospects of the annuity group. I now hand you back to Steve, who will discuss the sustainability and open the floor for questions. Thank you.

Our business culture is a strong moral compass. 0 tolerance for defects, and we always put our clients first. We're a leader in sustainable sectional title development and green buildings with more apartments registered for the IFC Edge certification than any other property developer in the world. In fact, Balwin has developed 3.5% of all edge certified properties globally. We are also the first African company to commit to both a net zero target by 2050 and to set ourselves a carbon emission reduction target with a science-based target initiative. I believe that over time, government will introduce regulations and legislation to encourage green and sustainable building with certain municipalities already having put incentives in place to encourage green buildings. Irrespective of the legislation, we will always try to exceed requirements. Balwin was the first property development company to launch a green home loan in South Africa with all 4 of the major local commercial banks and hopefully, eventually, all the commercial banks will follow. This helps homeowners save money through reduced interest rates and lower utility costs. In the current financial year alone, 1,444 green home loans were awarded. Providing clients with savings valued at ZAR 98 million over the terms of the loans. Our ability to develop certified green buildings cost effectively means that our properties are not priced at a premium. In fact, clients can acquire them at a discount because of the reduced bond premium. As reiterated earlier, we will focus on building out the existing pipeline in Gauteng and KZN with prudent land acquisitions in the Western Cape. We expect rising interest rates and general economic pressure to temper the rate of which sales volumes have increased post COVID. Our focus on flattening the yield curve between the first and last phase of each development is gaining traction as we work towards increasing our profit margins to initially achieve 30%. Although while we recognize in the current constrained business environment, this will be a challenge. The Balwin brand continues to evolve. Our lifestyle centers are getting better and better, we're really looking at enhancing the clients' lifestyle by doing more and more for the youngsters and for the normal clients and for the aged with regard to sports, chair sets, the latest hot sport, which is obviously padel, and we have managed to launch Balwin Sport on the back of this to improve these lifestyle centers. Balwin is continually focusing on funding and cash management. We have an exceptionally strong treasury committee, and we continually strive to improve our cash management. What concerns me or keeps me awake at night over the next 6 months is obviously the political environment in this country, the load shedding. And obviously, as a result of that, the economic problems with interest rates. What excites me about the next 6 months? I'm firstly passionate about this country. I believe in South Africa, I believe in the people. I believe that load shedding will end. I'm praying that it will end because the discomfort for our clients is high. We need interest rate cycle to start changing, and then we can really, really have a fantastic country. Thank you very much. I'd like to now open the floor to any questions.

Good morning, ladies and gentlemen. Thank you very much, Steve. [Operator Instructions] Steve, the first question we have this morning is from Tyler Ginsberg from [ Tomb ] Wealth. Just asking if you think about the macroeconomic environment in a country like, let's say, America, in the past 15 years, they saw a trend of very low and decreasing interest rates with rising property values and demand. While in South Africa experienced the opposite. We do not say that this macroeconomic reality had the property development business model very difficult in terms of generating cash and being profitable.

Good morning, everybody. Look, it's a very difficult comparison to compare an ultra first world country to South Africa. South Africa is a new democracy. Thanks, Kevin, for that. And I believe it's a totally different environment. It's very difficult to draw comparisons. The South African market, there's a lot of people that are aspiring to buy property, so I think there's going to be -- despite high interest rates, there's still going to be people that look for good quality property. It is going to be more difficult. I really believe that interest rates are going to peak and then they'll drop and will be in a more stable environment.

Thank you, Steve. Then Peter Lord from Topfloor asking, has Reggie Kukama paid all the money outstanding for your share purchase. If not, what arrangements are being made for the recovery of the money and why is he still a director if that money hasn't been paid yet?

First of all, in South Africa, we have to be cognizant of the past. We have to be. Reggie Kukama was a very good person to employ as our empowerment partner. He really is, he's actually moved into an office in our offices now to try and help us more and more. And I think going forward, he will be a tremendous asset. I'm very proud of the fact that he volunteered to join in our offices and actually come and spend as much time as possible for us. So hopefully, we can leverage some of his support and his professionalism out there. He is behind on his payments. We do sweep the full dividend against his debt. So that is happening. He will stay a director. We will make arrangements for the balance to be paid. And sorry, what was the third question, Mona?

That was the arrangements being made for the recovery of the money? And why -- if not, why is he still a director?

Okay. I think I've answer that. Thank you.

Then the second part to Peter's question is, why is Ulrich paid 4x for the director of a similar-sized company is paid. There are no forward sales in the bridged results.