Results of Operations for the Nine Months Ended September 30, 2011

Ayala Land, Inc. (ALI or “the Company”) continued to post earnings growth and recorded a Php5.23 billion net income for the first nine months of the year, 33% higher than the Php3.94 billion recorded in the same period last year. Consolidated revenues for the period reached Php32.63 billion, 17% higher than the Php27.87 billion posted last year. Revenues from Real Estate and Hotels, which comprised bulk of consolidated revenues, increased by 18% to Php30.81 billion with growth largely driven by the strong performance of the Property Development and Commercial Leasing businesses.  

Margins of the Company’s key business lines continued to improve with strict control of project costs and direct operating expenses (discussed below in the Business Segment review). Corporate costs have also been contained, resulting to the drop in the ratio of General and Administrative Expenses (GAE) to revenues, from 8% last year to 7% in the first nine months of the year. With total revenues growing faster than total expenses, net income margin improved to 16% in the first nine months of 2011 from 14% the previous year.  

Business Segments 

The details of the individual performance of each business segment are discussed as follows: 

Property Development. Property Development, which includes the sale of residential lots and units, as well as the sale of commercial and industrial lots, posted revenues of Php18.84 billion in the first nine months of 2011, 30% higher than the Php14.50 billion reported during the same period in 2010.  

Revenues from the residential segment reached Php17.58 billion in the first nine months, 27% higher than the same period last year, driven by the higher bookings and significant progress on construction across all residential brands. Ayala Land Premier (ALP) generated Php7.33 billion in revenues or an improvement of 32% compared with the first nine months of 2010, due to the construction progress in projects such as Park Terraces in Makati City, One Serendra East and West Towers in Bonifacio Global City and Elaro in NUVALI. Alveo and the combined Avida and Amaia brands meanwhile posted year-on-year revenue growth of 18% and 41% to Php4.68 and Php4.22 billion, respectively, with higher bookings from the success of recent launches such as The Lerato Tower 2 (Makati City) and Venare (NUVALI) for Alveo,  Avida Towers Centera (Mandaluyong City), the second tower of Avida Towers Cebu, and AmaiaScapes Laguna.  

Sales take-up value for the first nine months of the year reached Php38.96 billion, equivalent to an average monthly sales take-up of Php4.33 billion. This was 57% higher than the Php2.76 billion average monthly sales take-up achieved for the whole of 2010. Residential gross profit (GP) margins of vertical projects improved to 32% from 31% with the impact of various measures designed to lower project construction costs, while GP margins of horizontal developments declined slightly to 47% from 48% due to the wider open spaces on the newest phase of Ayala Westgrove Heights and a shift in mix towards more house and lot packages. The Company’s four residential brands launched a total of 10,045 units in the first nine months of 2011, with an even greater number of units expected to be launched in the fourth quarter.  

Revenues from the sale of commercial and industrial lots reached Php1.25 billion in the first nine months, 81% higher than the same period last year, largely due to the sale of 13 commercial lots in NUVALI and 1.4 hectares of industrial lots in Laguna Technopark. GP margins likewise improved to 52% from 51% with the bookings from the higher-margin NUVALI commercial lots. 

Commercial Leasing. Commercial Leasing includes the Company’s Shopping Center and Office leasing operations. Total revenues for Commercial Leasing amounted to Php5.29 billion during the first nine months of 2011, 11% higher than the Php4.78 billion recorded in same period last year.  

Revenues from Shopping Centers rose by 6% to Php3.50 billion during the first nine months of 2011, driven by higher average occupancy and lease rates. Average occupancy rate across all malls reached 95%, compared with 93% in the first nine months of 2010. The opening of the 53,000 square meter Abreeza Mall in Davao City and 5,300 square meters in Solenad 2 in NUVALI, coupled with the continued improvements in the occupancy of Market! Market!, MarQuee Mall and TriNoma, resulted in a 7% expansion in occupied gross leasable area (GLA).  This more than offset the additional closures in Glorietta effected over the past 12 months due to the Ayala Center redevelopment. The first three quarters also saw a 6% improvement in average lease rates brought about by negotiated and programmed rental escalations. Shopping Centers EBITDA margins improved to 59% from 58% last year with the ramp up of Abreeza Mall and effective management of direct operating expenses. 

Revenues from Office leasing operations increased by 20% to Php1.79 billion for the first nine months of the year, from Php1.49 billion in the same period last year. The revenue growth was generated by the significant increase in occupied GLA for business process outsourcing (BPO) office spaces, which increased by 26% year-on-year (equivalent to 48,000 square meters). Total available BPO GLA reached 284,848 square meters as of end-September, with an average lease-out rate of 86%, compared with 83% 12 months ago.  Average BPO lease rates, however, were slightly lower (-1%) due to a change in the portfolio mix as most of the increase in occupied GLA during the period occurred in non-CBD (and therefore lower rent) locations. The significant improvement in BPO occupancy rates accounted for the two percentage-point improvement in the EBITDA margins of the total office portfolio, which reached 80% in the first three quarters of 2011. 

Hotels and Resorts. Revenues of the Company’s Hotels and Resorts business improved by 31% to Php1.62 billion in the first nine months of 2011. This was largely due to the impact of the consolidation of the El Nido Resorts operations in Palawan, through the acquisition of a 60% stake in the Ten Knots Group last April 2010. A total of 150 island resort rooms in Lagen, Miniloc and Apulit Island (formerly Club Noah) were added to the Hotels and Resorts portfolio that also currently operates 634 branded hotel rooms between Hotel InterContinental Manila and Cebu City Marriott. EBITDA margins for Hotels and Resorts, slightly declined to 28% from 30% with the start-up costs for the opening of Apulit Island resort. The Company is currently constructing its first three owner-operated businessman’s hotels under its own brand Kukun in Bonifacio Global City, Davao and Cagayan de Oro. These three hotels are targeted to begin operations by next year. 

Services.  Services, comprised of the Company’s wholly-owned Construction and Property Management businesses, generated combined revenues (net of inter-company eliminations) of Php5.06 billion during the first nine months of the year.  This was 14% lower than the Php5.70 billion posted in the same period last year following the Company’s deliberate move to focus on internal projects in its construction operations (only revenues from third-party contracts, or the revenue share of third-party minority interests in internal projects are reflected as construction revenues in consolidated Company accounts).  The decline in Construction revenues more than offset the 7% growth in Property Management revenues, which reached Php851 million in the first nine months of 2011 from additional carpark management contracts, compared with Php793 million in the same period last year. The blended EBITDA margin for Services was at 6%.    

Equity in Net Earnings of Investees, Interest, Fees, Investment and Other Income 

Equity in Net Earnings from Investees was stable at Php686 million for the first nine months of 2011, from Php683 million in the same period last year. The stronger performance of shopping center joint ventures accounted for under the equity method, particularly TriNoma and Alabang Town Center, and the mark-to-market gains on the investment holdings of First Longfield Investments Ltd. (investment vehicle for ARCH Capital Partners L.P.), were offset by tempered lot sales in Bonifacio Global City.   Interest, Investment and Other Income meanwhile also increased by 16% to Php1.13 billion for the first nine months this year, compared with the Php972 million in the same period last year. The increase in other income was accounted for mostly by the higher interest income earned from higher average cash balances for the period and gains from the Company’s divestment of its ownership stake in ARCH Capital Management Co., Ltd. in March 2011.  

Expenses 

Total expenses for the first nine months of 2011 amounted to Php24.81 billion, 13% more than the Php21.87 billion incurred in the first nine months of 2010.  Cost of Sales from Real Estate and Hotels, which accounted for the bulk of expenses, rose 14% year-on-year amounting to Php20.73 billion. General and administrative expenses (GAE) meanwhile grew by 13% to Php2.43 billion due to payroll-related expenses but was still slower than overall revenue growth, allowing the GAE-to-revenue ratio to decline to 7%. Interest Expense, Financing and Other Charges increased by 14% year-on year to Php1.66 billion, mostly due to higher interest charges with the additional Php10.0 billion in fixed-rate corporate notes issued by the Company in January 2011. While total financing charges increased, the average cost of the Company’s consolidated debt decreased to 6.52%, from 7.57% in the same period last year.   

Project and Capital Expenditure 

The Company spent a total of Php19.83 billion for project and capital expenditures in the first nine months of 2011, 42% more than the Php13.97 billion spent during the same period in 2010 and almost at par with last year’s total spending. The bulk of capital expenditure in the first nine months were attributable to residential development (58% of total), landbank acquisition (14%), shopping centers (12%), and hotels and resorts (8%), with the balance spent on BPO offices, commercial and industrial lot development, and other land development activities in the Company’s strategic landbank areas. The Php19.83 billion spent in the first nine months represents 61% of the full year 2011 capital expenditure program of Php32.6 billion. The Company expects to disburse the balance of its planned annual capital expenditure in the fourth quarter of 2011.    

Financial Condition 

The Company’s balance sheet remained strong with sufficient capacity to support its aggressive growth plans in the next few years. Strong cash inflows from the successful pre-sales of various residential launches as well as proceeds from the Php10.0 billion notes issue at the start of the year brought Cash and Cash Equivalents to Php24.5 billion, with a corresponding Current Ratio of 1.88: 1. Total Borrowings stood at Php29.9billion from Php21.0 billion as of December 2010, translating to a Debt-to-Equity Ratio of 0.50: 1 and a Net Debt-to-Equity Ratio of 0.09: 1.