The Edge, 20 October 2014 - Becoming a premier developer

20 October 2014

Tropicana Corp Bhd has certainly come a long way from its days as a second-tier developer. Its stronger financials and consolidated brand today have earned the developer a place in the Top l0 in The Edge Malaysia Top Property Developers Awards for the first time this year. The company, formerly known as Dijaya Corp Bhd, had embarked on an aggressive expansion from 2010, which landed it in debt amounting to almost RMI billion in 1HFY2012In the same year^ it also carried out an amalgamation exercise where it bought up all of its ma|or shareholder Tan Sri Danny Tan's assets for RM948,7 million, satisfied by 2% lO-year redeemable convertible unsecured loan stocks and RM250 million in cash.

The cash consideration was offset by a four-for-five rights issue at RM1,20 per share which Tan had subscribed, boosting his shareholding to 71.4%. Dijaya was then rebranded asTropicana, in line with its flagship development Tropicana Golf & Country Resort featuring a 27-hole championship golf course ¡ª near Kota Damansara, Selangor, and various properties bearing this brand, such as the Tropicana City integrated development in Petaling Jaya, which features serviced apartments,offices and a suburban mall. In recent times, Tropicana has stmck partnerships with other property developers, such as Hong Kong-listed Agile Property Holdings Ltd, and operators, such as education group Singapore's Lasallian Asian Partnership for Intemational Schools,to pare its borrowings and capitalise on its partners' expertise, says Tropicana group CEO Datuk Yau Kok Seng.

He sits down with The Edge to talk about Tropicana's growth in this challenging environmentlite Edge: How did Tropicana fare last year? Datuk Yau Kok Seng: The last financial year [ended Dec 31^2013] was a record for us. We achieved record sales of RM2.1 billion and record launches of RM2.4 billion, and our net profit was RM3623 million, up 119% from the previous year. More than half of our revenue came from the central region, I attribute this success to our transformation blueprint-1 joined Tropicana in January last year and the first thing my team did was to come up with the blueprint. First, we set our vision clearly to become one of the premier developers in Malaysia. With this vision, we developed our strategy, which revolves around five keypointsThe first entails unlocking value through the sale of raw land and accelerating the execution of our projects to quickly get cash flow.

We also believe that strategic partnerships are crucial because with the right partners who have good financial and are a strategic fit, they can accelerate the growth of our company. The fourth point is rebranding. We were previously known as Dijaya Corp, 'Dijaya' did not mean much to our buyers and stakeholders, so we decided to rebrand ourselves in line with our products, which does carry a premiumThe fifth point is reorganising our people. We have strengthened our management team to execute the strategies well. [Group managing director] Datuk Edmund Kong is leading our operations while Datuk Dickson Tan is the deputy group CEO.

We also brought tn talent such We have a road map where we identify our problems and find ways to tackle them through medium anc long-term strategies. After all we want to be a winner, - Yau as [group managing director] Kok Kong Chin, an ex-CIMB man to oversee the company's treasury, finances and corporate strategy. With all the talent in place, we can then grow the organisationWhat isTropicana's strategry for its medium and long-term growth? We have a road map where we identify our problems and find ways to tackle them through medium and long-term strategies.

After all, we want to be a winner What differentiates us from the rest? How can we be a game-changer? It is quite difficult to become one, but we can do things differently, and that way, we can create more value. One of our key focuses is strengthening our balance sheet-We will continue to sell raw land and non-core assets as well as accelerate our projects to unlock value to achieve the target gearing level of 0-3 times. According to our IQ numbers [endedMarch 31], our gearing was at 0-59, although it will rise to 0.7 again due to capital expenditure. But this will be temporary because we have sold land worth RM1.18 billion and the transaction An artist's impression of Tropicana Gardens Lake View will take a while to be realised* We are hoping to complete the Canal City land sale to Eco World Development Group Bhd [308-72 acres for RM470.76 million] by this year end.

There were concems about the leadership crisis in Selangor, but we have overcome them-We have received approval for the subdivision and are completing other formalitiesWe do not expect further issues with the disposalIn the medium term, once our balance sheet is strengthened, we will develop an investment portfolio of prime assets, which will include retail properties,such as the mall in Tropicana Garden in Kota Damansara, which will have a million square feet of net lettable area. This is because as a developer, in the long run, we will have the best of both worlds. Having a portfolio of property investments will give us recurring income. IGB Corp Bhd,for instance, has done very welL Eventually, our earnings profile will be 70% property development and 30% recurring income.

Once we have completed the transformation strategy, we will consider injecting our assets into a real estate investment tmst (REIT). Look at Sunway Bhd ?,when they listed the REIT, the 'son' was bigger than the 'father' due to its market capitalisation! REITs also command a yield of over 6%, which is very good return. What kind of assets will Tropicana invest in, and why? What kind of yield are you expecting? It is a bit premature to give a breakdown of the REIT now, but it will comprise properties, such as maUs,offices and hotels, coming up in Penang, the Klang Valley and Iskandar Malaysia, It will also include holding assets of our education division* We regard ourselves as a developer of integrated components.

Now, we want to introduce education as a component.We are currently building St Joseph's Institution Intemational (Malaysia) in the heart of Tropicana Gardens in Kota Damansara, In St Joseph's case,there are two holding companies ¡ª one holding the assets and the other operating the schooLThe one holding the assets is us. We are targeting 1,700 to 1,750 students and a propertyyield of 8,5% to 9,5% in the medium to long term. We are also talking to a big education provider for Tropicana Metropark in Subang,They will provide us a basic yield of over 5% and a share of the revenue. It's like a mall where you charge baseline rent and get a share of the revenue. Once the mall is filled to capacity, the revenue share will be higher than the base rent, and that is where you get the money. There is a tremendous upside in education because parents are concerned about their children's future, thus the very strong demand. Education for us is not merely a yield play ¡ª and I would really like to stress this ¡ª but a catalyst for our township. For instance, just by having an international school in Tropicana Gardens, we sold almost 90% of two apartment blocks [launched recently]. On paper, your minority stake in some of joint ventures does not look favourable to shareholders. On what basis do you take up a minority stake? You must first understand why we entered into a strategic partnership with Agile.

Firstly, it was to raise cashSo,ifwe took a majority stake it would not help us to achieve this objectiveObviously, we did not sell the land cheap either. We sold it to Agile at RM3,280 psf, which was close to the market benchmark of RM3,299 psf. Don't you think that was a good price? We believe in selling at a reasonable price, without much compromise. Of course, selling raw land is less profitable than developing it, but how much less profitable exactly? That is why we must sell at a fair market price. Even with Eco World, we sold them the Canal City land at a fair price, if it was expensive, jEco World non-executive director] Tan Sri Liew Kee Sin will jump at me! (laughs) You must also ask, why did we keep a minority stake instead of selling outright? We have other goals to achieve in this partnership, Agile is among the top 10 developers in China, I have seen some of their projects in Sanya and Guangzhou and they are world-class. Their job-sites are well managed and their entrance statements and landscaping are outstanding. We can actually leam much from them-Their style is also in line with our DNA, which is what differentiates us from other developers. It's very important to have a differentiation for your brand to command a premium. They also have a strong marketing network in China and Hong Kong, so it helps with the sale of properties. Then, why did they pick us? It's because they are new in Malaysia and this is their first major project here,So, in a way, they have endorsed us as a good developer that they can leverage, perhaps through our network here, be it our customers or the local authorities- So, we both benefit. what are some of your upcoming launches and why do you think they will do wcU? We have Tropicana Aman in Kota Kemuning, Tropicana Metropark and Tropicana Gardens, Tropicana Aman is an 863-acre development that was part of the former Canal City, We are hoping to launch landed homes in 4Q2014-2015Over at Tropicana Gardens in Kota Damansara,we have plans to build.

We are also launching another block in Tropicana Macalister in Penang, For 2H2014, we have tentative plans to launch over RM2.6 billion worth of properties with 83% of them in the central region. More than half of them will be landed properties, RM2,6 billion will be a challenging target to meet, but it was planned this way because the approvals for our projects are coming in around 4Q. We believe that they will do well because of their locations and concepts, and they are preferred by owner-occupiersThe industry largely believes the dampened sentiment ivill persist unless the voo' :¡ö¡ö . ¡ö vised orliftt' In IQ, we achieved almost RMI billion sales compared with RMl.l billion a year ago- We had launched only RM590 million [worth of properties] then, so most of the sales were from previous launches-We had embarked on a sales campaign, which garnered almost RM935 million in sales. So, under the current market environment, we think we have performed pretty well. Our sales target was RM2 billion and it was an uphill stmggle because of strict financing mles.

There were quite a number of cancellations, but it was below the market average of over 40%To date, we have achieved RM2.2 billion to RM2,3 billion in sales, and now we are embarking on another programme, called Redefining the Art of Living, in conjunction with the opening of our flagship gallery at Tropicana City Mall. So, we are offering attractive packages with discounts and freebiesBut during a downcycle, this is where our differentiation comes in. Our projects are near public transport like the mass rapid transit or are in areas where there are hardly any big new launches like in Subang Jaya- Or they offer generous open space. There are genuine buyers out there. But with banks getting stricter and the developer interest bearing scheme banned, the number of speculators and investors has gone down, That's why we're aiming for owner-occupiers and upgraders-As their income grows,they will want to move to somewhere nicer where their children wiU enjoy growing upWe also have the product range to address the downturn. If you look at our launches from 2013, almost all of them are over 60% sold. We carmot just look at Malaysians buyers,That is why we have our sales gallery in Singapore, We also have buyers from Hong Kong, China and Taiwan.Thus, it is important to look at regional markets.

Likewise, for our W Hotel and The Residences in KLCC,with its location and the upcoming high-speed rail, it will appreciate- But today,we cannot Tropicana Corp Bhd FINANCIAL YEAR-END DEC 31 (RM MIL) 2013 2012 2011 2D10 2009 Revenue 1.475.5 6304 375,2 292.3 311.S Pre-tax profit 503,5 224.9 99,2 53.4 72,1 Paid-up capital 1,107,3 793.1 458,1 455,0 454.3 Shareholders' funds 2.570.3 2.098.6 1038.8 975,0 839,8 Profit attributable to shareho ders 3623 1711 77.0 43.3 50.5 Dividend payout ratio Or) 10% 15% 14% 24% 8% COMPLETED PROJECTS PRQJECT/LOCAnON TYPE NO OF UNITS GDVff^M) LAUNCH DATE TAKE-UP (%) Tropicana Go f & Country Resort-Style 2,553 More thai 2,2 bil Since 100 for completed Resort (TGCR) tow/nship 1992 developments Tropicana Indah Resort Resort-sty e 2,026 Almost 2 bi! Some are stil Homes (TIRH) township ongoing Tropicana City Mixed-use Mai Approx 550mil. Since 2004 100 integrated deve opment Serviced suites: 601 Office tower Grande Vilas 2- and 3-storGy 12 units 635 mil 2009 More than 92 (located at TIRH) bungalows Pool Vil as 3-storey 54 units 232.4 mil 2010 More than 96 (located at TIRH) semidees Tropicana Grande Condominium 328 units.

IN THE PIPELINE PROJECT/LOCATION TYPE NO OF UNITS GOV EXPECTED LAUNCH Tropicana Aman Tropicana Danga Cove (phase 2) Integrated development Integrated development RM13 billion RM12,1 billion 2015 ONGOING PROJECTS PROiECT/LOCATlON opicana Metropark TYPE Integrated development Tropicana Gardens Integrate: development Tropicana Heights Township Tropicana Danga Bay Integrated development Penang WorldCity Integrated development NO OF UNITS Phase 1-Pandora: 627 Phase 2 - Paloma; 571 Courtyard villas: 16 Phase 1 - Arnica residences: 336 Phase2-Bayberry: 413 Phase 1 - Fairfield Residences; 289 Phase 1 -Tropez Residences: 1,149 Phase 2 - Bora Residences; Tower A; 396 Phase 1:906 Phase 2:167 GDV (RM BID LAUNCH PERIOD TAKE-UP (%) 7,1 June 2013 Pandora-98 2.6 Oct 2012 17 8,3 Feb 2014 Dec 2011 10 Sept 2013 Paloma - 65 100 Over 90 Over 90 Over 90 Over 60 Over 90 Over 63 design large units^ so we are looking at 800 to 900 sq ft. It is a high-end project that will be priced at over RM2,000 psf, although we haven't finahsed the actual price yet. So, the profile of buyers is different and will include foreign investors. In Iskandar Malaysia, we must be very careful. You must understand that we do not launch when we are not prepared. So, we launch only when we have the right strategy to achieve a good take-up. You mention that a lot of your plans were revised to allow more landed properties to be launched next year. How will it impact your bottom line? Early on, our team told the whole world that we have a gross development value (GDV) of RM70 billion.

Now, we have changed it to RM50 billion. But that is just a number. What matters is the margin. What is the point of having a GDV of RM70 billion if you cannot sell your inventory? Take, for example, Iskandar Malaysia where we have a joint venture with Tan Sri Lim Kang Hoo to develop Danga Cove,a 200-acre project in Danga Bay. It was initially planned as fuUy high-rise to maximise plot ratioHowever, let's not run away from today's reality, that the Chinese developers have come in and Iskandar Malaysia is now far too crowded, creating a temporary oversupplyBut why is it temporary? Because we have confidence in Iskandar Malaysia's long-term prospects ¡ª it is so near Singapore, and Khazanah is trying to create something great there. Our short-term strategy to deal with this temporary glut is changing oxn: plans-We are delaying our launch and switching our plan to 70% landed and 30% high-rise because there is still a strong demand for landed properties in good areas if you price them right. Like Walker Group's Senibong Cove, UEM Sunrise's East Ledang and Leisure Farm, their properties have appreciated much and are highly sought afterSo, earlier, we said Danga Cove had a GDV of RM13 billion to RM14 billion, but now, it has only RMS billion. It is okay because we still can make over 20% or 30% in gross profit margin. At the end of the day, we aim to optimise our revenue rather than maximise plot ratios.