Kepwealth Property Q2 profit plummet 95%

Kepwealth Property [KPPI 4.78 10.32%] recorded a Q2/21 profit of P0.3 billion, down 95% from Q2/20 profit of P6.2 billion, and down 74% from Q1/21 profit of P1.2 billion. KPPI operates both as a landlord for its own corporate office space, and also as a property manager under contract to lease out corporate office space on behalf of other owners (which it calls the “asset management” segment), but neither of these segments performed well during the period.

In the first half of 2021, KPPI’s leasing revenue was down 25% to P28.9m, and its asset management revenue was down 100% from over P11m in 1H/20 to just P8,581 in 1H/21. Overall, KPPI’s 1H net income was down 91% y/y, which KPPI attributes to the termination of the asset management segment in January of this year.

At the time the decision was made to cut the asset management segment, KPPI’s clients were pre-terminating agreements with KPPI due to the pandemic. KPPI told shareholders that terminating the segment “is expected to result in a decrease of the projected revenue of [KPPI] by twelve (12%) percent for the year 2021”.

MB BOTTOM-LINE

That line sure aged like milk. KPPI’s asset management segment was never the primary driver of the company’s earnings, but it did offer a potential route for growing KPPI’s bottom-line in a very asset-light way by using KPPI’s existing assets (leasing operation) to provide property management services to developers that don’t happen to already belong to a vast, vertically-integrated conglomerate. Unfortunately for KPPI, that plan pretty much died when COVID struck and threw the commercial leasing business into chaos. It might not be the best way to make money (especially during a pandemic), but it was at least a new approach that had a lot of potential.

Now that KPPI has turned its back on that business plan, it’s hard to get a feel for where it’s headed. The company has never done a great job of communicating with the market since its IPO in 2019, but I find the one paragraph on the death of the asset management segment in December 2020 to be unsatisfying and verging on evasive. All the company said was that its clients were terminating the agreements and that this would cause a 12% drop in projected revenues. No other context was provided. KPPI’s 2020 revenues were P81m, so a 12% drop would put its projected revenues at around P72m for the full year in 2021. Halfway through, they’ve only managed to get P29m, that’s a P58m pace (28% drop), and yet the company is silent on why the drop in projected revenues is almost triple what was anticipated when the decision was made.

Did the management group fail to consider the impact of a 2nd COVID wave, or overestimate the demand for commercial leasing space? Or, is this all just so many farts in the wind while we wait for the rumored Hotel SOGO backdoor play to mature? That was the rumor that turbo-charged KPPI’s post-IPO performance a couple of years ago. If that’s not happening, where’s KPPI going? Sure the commercial leasing landscape has shifted dramatically since its IPO, but that’s also true for every one of KPPI’s peers.

KPPI is small, and it should be agile. If I were a KPPI shareholder, I’d be wondering how KPPI plans to use that to its advantage as COVID continues to ripple back and forth through the economy. So far? Crickets. 

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