MB Investor Month gave us the opportunity to ask questions directly to a company’s management team, just like you’re at one of those exclusive briefings!
CLI got a huge number of great questions, and the management team decided to tackle 16 of them. That’s an Investor Month record! Check your inbox for a Grab Food Voucher if your question was one of the eight that got answered.
Thank you to CLI for being a part of the MB Investor Month event!
Note: I did not edit the questions (or answers) for spelling or brevity to preserve the tone of the exchange and uphold the spirit of candid access between corporations and retail investors.
Question (Dom): Why do you think CLI trades at a perpetual discount to its peers? What is management doing to improve this?
CLI: I believe several factors are at play here, and in the spirit of openness of this MB activity I will be candid. First, I believe that the market has not appreciated yet the scale and success we have had since most of our projects are in the VisMin area, whereas most market participants are based in Luzon. We do understand that sometimes it is easier to appreciate a business if you’re much more familiar with them and encounter them more frequently. So ironically, it is the universal banks who have people on the ground, who have a much wider network of officers and professionals who are based in VisMin, who are our biggest supporters. They give us capital via debt seeing our impact on the ground, and are confident that we can deploy capital to generate returns, at a credit risk they are comfortable with.
Second is that we have a relatively shallow stock market. Just compare our trading volume to that of our peers in Asia. I have had so many conversations with institutional investors, fund managers, analysts who have echoed the same thing. They love the business, they like the story, they find the fundamentals value compelling and they feel there is tremendous value in the stock where it is priced. But…. If only the market cap was higher, if only there was more trading volume in the stock, if only you were part of the Philippine index; then we can start a position with CLI.
We do acknowledge we need to step up and improve our IR initiatives, reach a broader audience, try to get more coverage and attention so people can be familiar with our business and can make an informed assessment of our value proposition with the benefit of familiarity.
Management will do what we’ve always done. First is to keep our priorities straight and just keep delivering and performing. The more income we generate, the more growth we deliver, the more risk-adjusted returns we can produce for our stakeholders, the more compelling our value will be. In short we’ll continue on running a good business. So eventually, the valuation from a fundamental approach will have to be reflected. If it takes paying a cash dividend rate that’s equal to our market cap, it will happen if our stock price doesn’t improve from here and we keep growing at this pace.
Second, we are already going to expand to Luzon and Metro Manila. This is because we believe there are compelling opportunities there. But another benefit is that it would bring us closer to the trading participants and increase our visibility in the capital. In 2025, we are also going to have stronger IR initiatives that aims to have a more active and engaged investing community that follows CLI.
Finally, we will continue to engage the capital markets with fundraising to fuel our continued business growth, and eventually also enter the REIT market.
Question (HydroHomie): What is it like to sell thousands of homes to new home buyers? What insights have you learned about people (the buyers, or the culture) in general from doing something at scale that regular people might only do once in their lives if they’re lucky?
CLI: It is deeply fulfilling, and imbues our whole CLI company with that sense of purpose and commitment. Owning your own home is more than just owning an asset. It is the security of knowing you will not be evicted. It is the ability to be a more involved member of the community. Owning your own place gives you a tangible and physical base and it makes for more invested citizenry. It lowers other costs and imparts a strong sense of dignity, pride and community. When the work is hard, I remind the team of this ultimate purpose and what we are doing is quintessential nation-building.
And in our culture, home ownership is truly a universal aspiration. The Philippines is known to be a consumer market and that is true in the sense it is describing purchasing habits. But what we have seen is that for people who are saving up to purchase their first home, they place this investment high up on their priorities. They will go to great lengths to purchase their home, for themselves, for their parents for their children, even if it means working in a foreign land with a foreign language and culture.
Question (@rosariomangaccat): With the steady increase in revenue and the 7% growth in Parent NIAT, how does the company plan to sustain this growth momentum while managing rising operating expenses?
CLI: We feel single-digit growth, even from the base where we’ve grown so much, is sustainable because we have only just begun to scratch the surface of the affordable housing market. According to government statistics, there is a backlog of over 6.6 million houses today. So factor in the continuing growth in housing demand and then compare it to what CLI has done. We built and delivered about 2,000 housing units all over VisMin last year. We’re but a drop in the vast housing opportunity that has yet to be addressed. We could have 100 CLIs and we would still be in a deficit in terms of the Philippines housing needs. Here is some research data [view slide]. Opex is simply a direct factor of the size of our operations. The biggest factor is construction completion as the earlier we finish projects, the less opex we have to spend.
Question (Daniel): What are the greatest risks to CLI’s receivables? If CLI is asking investors to consider its receivables, what trends could impair the value of the receivables to investors?
CLI: I would say it is the banking industry’s health and willingness to give home loans to the home buyers. This would include Pag-ibig. Since we do not offer in-house financing, the great majority of our contracts are paid in bulk via our buyers getting a mortgage with the banks and Pag-ibig who lend to our end-buyers. Given our industry-best delinquency rate of less than 2.5% and net cancellation rate of less than 1%, we have a very high confidence in the quality of our receivables portfolio. Not only are these rates better than most banks NPL ratio, consider the fact that the inventory is still with us and you can see how little downside risk there is in this area.
Question (@vincegurredo): With the improved debt-to-equity ratio and substantial outstanding receivables, how is the company balancing its debt maturity profile with future capital expenditure plans?
CLI: First is we want to maintain our leverage ratios. So we have a very clear and organized way of mapping and scheduling our principal maturities. What we strive to do is to forecast internally generated cash, then strategize Capex for ongoing projects and expansion. Then we look at Opex and principal payments. From there, we strategize our fundraising, keeping in mind our target leverage levels and making a strategic call on interest rates based on advise from our bankers and economists.
Here’s a chart that really underscores this [view chart] – you can see that we align our debt maturity towers with the projected aging of our receivables. This reduces refinancing risk and always puts us in a strong position to raise funds at terms we want to accept.
Question (@graciamacala): The report highlights growth in hotel and leasing revenues. What strategies are in place to further diversify the portfolio and ensure the resilience of recurring income streams?
CLI: For now, we are laser-focused on the hotel and leasing business since they are at their infancy stage. We have 4 hospitality assets operating, 3 of which are less than a year old and are still on their way to being fully finished. We still have 6 more hospitality assets to open in the next 5 years and we are building up to 100,000 sqm GLA so we will focus on opening and executing on those first.
Question (Melchor): Sell out too quickly and the price was too low. Sell out too slowly and the price was too high. What’s the optimal sell-out rate for new units, and what tools does CLI have to boost margins when the rate is too high or to boost the rate when the rate is too low?
CLI: We aim to sell out 90% of our projects within a year.
We never sweat selling “too quickly” for a few reasons. First is that we already always sell with staggered price increases. So say the first price increase triggers when we sell say the first 50% of a project. Second is that the prices we have set are part of our financial model that yields us a strong return on capital. It also just allows us to have more confidence in building or launching expansion phases to the project. Third is that we don’t mind leaving something on the table for our buyers in terms of price appreciation. We believe that the products we are bringing to market should also be a viable, long-term investment for our buyers that can appreciate in value. Finally, having a project sold out also gives our investors, including the banks, that much more confidence that despite the relative leverage, we are able to put that capital to work and the sales book will essentially guarantee that our loans are going to be paid.
The rarer situation is when we have unsold inventory. We have several strategies in our toolbelt that we can use from Ready-For-Occupancy (RFO) buying schemes with cash discounts, sales promotions, open houses, and special events.
But in aggregate, what we launch, we mostly sell out. This is the strongest and clearest manifestation of our business model and value creation. If we sell out too fast, not to humble-brag but we can just launch more projects in that market replicating the model [view slide].
Question (CLI Investor): Can elaborate on how the new PFRS standards significantly changed the financial statements of CLI?
CLI: First, it requires us to disaggregate the implied interest rate component of our sales as a separate line item. While I personally don’t agree with this approach, and would like to argue otherwise, I understand the accounting principles behind it and what it aims to do.
So the impact is that the implied interest rate component on BOTH our revenues and cost of sales will now move down to financing component. This means for this matter, it will improve our gross profit margins but as you go down the line of our income statement, it will not affect our net income. The financing component was simply transferred from the top line to the financing line.
The second impact is on inventory. Following the same principle, we can not capitalize interest on inventory already but instead must recognize interest that we are incurring for the Capex deployed for inventory as an expense. What this means is that we will carry inventory at a lower cost on our books, we will recognize interest as an expense and will lower our income, but when we eventually sell that inventory our margins will be higher because the cost of that sale will be lower.
TLDR: Accounting conventions require us to move around interest components and recognize it earlier. No effect on our business operations, it doesn’t change anything in terms of how we manage our business, but it does affect the timing of when we recognize interest.
Question (CLI Investor): When do you expect hotel segment to be EBIDTA positive and net income positive?
CLI: I expect each hospitality project to be EBITDA positive within a year of operations. Net income positive may take longer since we’re taking depreciation into account. I expect it to be net income positive within 2-3 years time from the time it opens.
Question (CLI Investor): What is CLI’s VisMin market share by sales value instead of number of units?
CLI: 29.22% share of the net take up value in this region. This is based on an independent market study by Colliers. Data includes Palawan, and is for trailing 12 months up to June 2024.
Question (@choochoopain): What is one aspect of CLI’s management culture that would surprise investors?
CLI: That we really do care about our homeowners and we strive to earn that trust for the long-term. That our management are still part of ALL of the independent condominium corporations and homeowners associations for every project we have built. We’re in the minority, naturally, since the buyers are now in charge but we still choose to be involved to help maintain and manage the developments.
Our fully owned subsidiary, CLI Property Management, is still the proper manager of choice for ALL our finished projects, thus far. This is true even for those projects of ours that we have turned over for over a decade. We remain invested in the well-being of those communities we helped build, we continue to earn the fees as property managers and our contracts are renewed by the independent HOAs and Condo Corps.
Another, we are already a certified Great Place to Work with a higher rating than many bigger and older companies in the Philippines. We strive to create a very positive work atmosphere where people are valued, given career opportunities and growth, and can have an active and balanced work-life.
Question (CLI Investor): What are CLI’s goals in the next five years? What are it’s projections for reservation sales and net income to parent growth?
CLI: We want to maintain a sustainable growth rate, on our sales, and net income. This necessitates a balancing act between expanding further, and keeping our leverage ratios where it is now. This means that while we are focused on growth, we are equally focused on delivery and collecting the sales we closed years ago.
Another big goal is to launch our own REIT. This is about 4 years down the line so the first order of business is to finish the recurring income projects in our pipeline on time and on budget, operate them with excellence, establish a history of operating cash flows, and then work on a REIT and maximize the valuation we can get to return capital for those investments.
Question (CLI Investor): What are the demographics of buyers (Ex. foreign vs local, OFW/office worker/self-employed) for this year and how has it changed due to rise in interest rates?
CLI: 97% local buyers. 70% are locally employed or have their own business, while 30% are OFW or OFW-driven.
The rise in interest rates has not really affected our sales. As you can probably glean, most of our sales are to what we call the primary market. They’re people who want to take delivery of their homes, for themselves, or their own family. They are not flippers or speculators. So while the rise in rates have made mortgages more expensive, we continually work with the banks and Pag-ibig to find ways to keep their monthly amortizations more affordable. From grace periods, to longer tenors, to discounts on fees, we collaborate closely with our banking partners so we can achieve our mutual business goals.
Question (Mark): 1. Does CLI intend to continue its consistent dividends of around 15-20% of previous year EPS? 2. Why does CLI have a generous dividend policy when it raises capital in both debt & equity markets, why not reinvest all earnings? 3. How do you foresee to fund CLI’s future cashflow requirements, I am concerned about the rising debt level.
CLI: 1) Yes.
2) Because our shareholders have said that it is important for them to receive some sort of cash return on their investment even as the stock price has not moved up. We COULD reinvest everything, but it further shrinks the pool of investors who may not share the same investment horizon. And actually it is because we have this access to liquidity that we can make strategic, balanced decisions on how much cash to give back to shareholders but still have enough funding to pursue our expansion strategies and CAPEX.
3) I understand where the worry may come from but first let me offer some context. CLI has been on an incredible growth streak since the IPO. We’ve become #1 in the markets we compete in, we’ve increased our business almost 5x, expanded into new markets, and also generated over 20% CAGR on revenue and net income in that time. And yes, we did use debt to fuel that growth. That is because debt was at its cheapest levels in many decades that it was the form of capital that would maximize shareholder returns.
Now, we also understand that this strategy has a limit and we have our internal metrics, as well as the traditional banking covenants to keep this in check. So our current strategy is to just taper off the growth of our debt levels, focus on monetizing the over P85bn of receivables from contracts, operate our recurring income assets, reduce the leverage ratios and then put ourselves in a position where we can re-leverage.
This requires careful assessment of the opportunities that arise and make sure that are taking on those that maximizes our investments and commitments, while balancing organizational and financial capabilities. Finally, a REIT play for the medium turn will serve to return so much capital back to CLI and this will be a one-time event that will drastically reduce debt.
Question (@ampapricot): CLI has won awards for sustainability and corporate social responsibility. What specific ESG initiatives or innovative solutions are being prioritized to enhance shareholder value and community impact?
CLI: There are many initiatives that CLI undertakes that would fall under the ESG umbrella. I could never do justice to all the wonderful things that our people do in this short space. What we do is document this thoroughly in our annual reports with a very comprehensive section on our ESG initiatives. From our environmental activities, to our contributions to the local economies, to our labor diversity, it’s laid in great and colorful detail there.
I invite you to our website to peruse it at your own time. Here’s the link for a quick download.
Question (Joe): Is it true that CLI pays its contractors a very long time?
CLI: This is a loaded question so I will handle this with care and context. When a company grows as much as CLI has, its processes and governance also has to grow and evolve. At a much smaller scale, the owners/managers can be the project manager, the purchaser, oversee bookkeeping, verify construction progress, manage cashflow, raise capital, cut the checks, ensure payroll, pay the taxes, etc.
But as the company grows, we have to put in place governance and processes to be able to efficiently manage dozens of projects across the country. How can we confirm a billing is due? If it matches the progress done on site? If the materials delivered were of the right specs and quantity? We have to check the billing against the contract signed, apply the proper withholding tax rates, ensure proper documentation and compliance (insurance for example).
What I always say to our contractors and supplier is to work with us. There’s a need to understand and appreciate why we put these measures in place and then realize this is to ensure correctness and propriety when we make payments. We are simply protecting our stakeholders investments. We are partners who have entered a business contract and we want our ecosystem to be profitable and worthwhile for everyone. Which means we are also protecting the contractors by making sure they are accountable and deliver what was contracted.
So here’s the answer to the above question of CLI paying its contractors a very long time. No. It is the exception rather than the rule. And the exception comes into play when there is a problem with the billing or a dispute with what is being billed. We’re no longer a small company where all processes and decisions are centralized with a few individuals. I have had numerous conversations and meetings with contractors myself so I can orient them on our process and the rationale of each step. For the most part we do a lot of repeat business with them. We believe in win-win business deals and that dealings need not be zero-sum.
Merkado Barkada is a free daily newsletter on the PSE, investing and business in the Philippines. You can subscribe to the newsletter or follow on Twitter to receive the full daily updates.
Be the first to comment