February 12, 2014

RLC’s weak office and hotel growth, one-offs weigh on 1QFY14 earnings

RLC yesterday announced 1QFY14 earnings of P1.03b, down 13.4% on weak performances of its hotel and office business segments as well as the P316m in one-time write-offs related to damages from the supertyphoon in central Philippines (worth P297m) and a fire that hit its flagship mall (P19m). Otherwise, recurring earnings would have risen 10.9% YoY. Revenues grew 17% YoY to P4.4b. Some salient points from the results are:

Office revenues grew by just 1% in the absence of additional leasing space (occupancy rate is now at 99.4%) or rent escalation. The two new office buildings are up for turnover next month but only 25% of the first tower is pre-leased

Generally lower hotel occupancy rates offset any benefit from room count expansion, thus keeping hotel revenues flat for the year. Mall revenues grew by a respectable 10% YoY driven by some GLA expansion and the sustained strong growth in same-mall-sales (+8% YoY ) despite the depressed consumer spending in areas affected by the typhoon and the normally peak season associated with holiday spending. If not for the typhoon and the fire that hit a segment of the Robinsons Galleria mall, the company believes same-mall sales growth would have been at a double-digit level.

Residential revenues grew 38% YoY to P1.67b and accounted for 32% of total revenues on progress completion and previously strong presales. Residential presales was flat in the absence of any major project launches. Residential EBITDA margins however rose by about 420bps on greater contribution from high-margin products.

Our Take: The 1QFY14 reported earnings accounted for just 18% of the consensus full-year earnings forecast. Even taking out the impact of the one-off items, recurring earnings would have represented just 23.5% of the full-year forecast vs about 27% normal contributions in the previous years.

While there is room for mall and residential revenues to catch up given the contributions from the 7 new malls to be completed this year and further progress completion on previously presold residential projects, we believe that RLC will have to accelerate office pre-leasing and mall expansion as well as residential project completion to meet market forecasts. We note that most analysts already took into account the revenues to be contributed by the two new BPO office buildings which will expand total office GLA by 60% this year.

However, with low pre-leasing rate and the building turnover set for March this year yet, we reckon that RLC can only start booking revenues from the new buildings by June or equivalent to just three-months’ worth of revenues into this fiscal year (ending September). Just the same, we believe that FY15 will be a strong growth year for RLC as it will reap the benefits from the expansion programs across business segments. – WealthSec