Rental Yields — Rising Rate Environment — Office Spaces , Commercial Spaces — Everyone Loves Recurring Businesses—
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I read a recent headline stating an analyst report about the Philippines running out of office spaces. Does this mean good office spaces will have surging prices due to higher demand? Highlighted below are things I’ve felt important being discussed.
CCLB — Clark, Cavite, Laguna and Batangas.
According to a study by Leechiu Property and Consultants,
“THE Philippine business process outsourcing (BPO) industry is headed toward a resurgence in 2019, as the rise in wages in the United States coupled by the weaker peso are encouraging multinational firms to move back to the country.”
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You won’t be able to discuss office demand in the Philippines without naming the two most prominent property developers taking significant rental revenues from such trends. Let’s discuss both of them.
It is unfair to say that SM Prime Holdings holds any significant market share in office spaces as 88% of its rental revenues come from malls but this has been growing significantly over the years. In its most recent filing, SM Prime has achieved approximately 75 Bil peso revenues in the last nine months of 2018 or an average monthly collection of 8.3 Bil peso or 277 Mil peso daily rental revenues. This represented a 15% growth year on year due to new malls opened in the last 3 years. 15 New malls with an additional 870,000 square meters. Same store rental growth sales is 8%. What a great business, they always seem to beat inflation rates no matter how crazy Philippines is. You’ll also notice a hefty 47% EBIT Margin and a 31% fat profit net margin. Essentially, rental business is a high margin business.
Selling food and snacks accounted for a P4B sales. Not bad given these are mostly popcorn and drinks. It’s almost equivalent to the same P3.92B from cinema and ticket sales. It’s a 1:1 Sales Ratio then between movies and rides+bowling+ice skating+snacks.
So where are the Office Spaces?
In terms of SMPH recent filings, we note that they’ve added 114,000 and 190,000 GFA with the opening of ThreeE-Com and FourE-Com in MOA. Year to date, SMPH has 10 office buildings with a total GFA of 595,000 sqm.
Locations of SM’s 10 Office Buildings are Makati, Pasay, Quezon, Taguig, Clark in Pampanga, Taytay in Rizal and Sta Rosa in Laguna
SMPH Further Spends P120B to Expand Until 2020
Other Worthy Mentions are SMPH On Track Mall Expansions.
Roadmap Towards Over 10M Gross Floor Area
Notable Things:
- SMPH Strategies Bearing Fruit. All New Malls in the Provinces Added net income. SMPH Earned EBIT Margin of 55%. Mall Operating Income at P24B in the last 9 months or 2.67B income every month.
- The Epitome of a True Cash Cow is the Declaration of Cash Dividends. 2018 Cash Dividend was 35 cents paid equivalent to a 39% payout or 10Bil net income.
Note that the Philippines’ Index Top 2 Weights are SM Investments and SM Prime Holdings Effectively being 25% weighting of the entire market. It just goes to show that PSEI Most Effective Stable Paying Cash Cows are Henry Sy’s companies, specifically his mall operations.
A strong recommendation is to read through the investor presentations in the SMPH website.
Recent Filing: https://smprime.com/sites/default/files/reports/SM%20Prime%209M2017%20Results%20%28As%20of%20January%202018%29_0.pdf
Underlying fundamentals for SMPH is so strong that any corrections in the past have only been limited to a 20% peak to trough correction with a resumption of the uptrend. Should SMPH continually stay within a range, any dips reaching 31.55/30/28/24 are treated as bonanza opportunities to invest in a leading integrated real estate developer the Philippines can be proud to call its own for the next five years.
***All pictures come from Megaworld itself: https://www.megaworldcorp.com/investors/sites/investors/files/2018-11/MEG%209M2018%20IR%20Kit%20%E2%80%94%20UBS%20Global%20Real%20Estate%20Conference.pdf
Megaworld has a total of 4,689 hectares largely in Luzon with 73% ownership. Its prized jewel is Fort Bonifacio owning 105 hectares with a total of 7 townships in Metro Manila covering 160 hectares. These are Forbes Town Center, McKinley West, McKinley Hill, Uptown Bonifacio, Arcovia City, Newport City and Eastwood City.
Megaworld boasts of 4004 hectares across its portfolio with 23 townships across the Philippines. It employs a tried and tested model for its residential business in a self-funding scheme where buyers pay the entire construction costs. See the slide below. In the last 9 months of the year, they’ve sold 78.4B worth of residential sales. More importantly, the company has already gotten P105Bil reservation sales in the last nine months of the year. They’ve managed to book a stable gross profit margin on all their residential sales of 11.5% (15% improvement from last year’s 10%) due to additional bookings of lot sales. Megaworld’s highest realestate sales come primarily from Taguig, Makati, Pasay, Paranaque ,Quezon City and Manila. Notable to see that Taguig itself now has 5.8B worth of sales compared to 4.4B last year or 25% of the sales mix. 10% is from Makati showing business is really booming still within the most expensive commercial districts in Manila.
Megaworld teaches us what a strong property developer’s business model is. They acquire land for P1K/sqm given they usually build 10 storeys high so the cost of P10K/sqm gets divided by 10. If you see a typical building such as in Eastwood, the mathematical payback period is 4–5 years when they lease their units out recovering their entire construction cost of Php 610M. Replicate this business elsewhere and do the same math. In this next slide, for McKinley Hill, total land and construction cost is P30K/sqm for One World Square with a land cost of 83M and a Construction cost of 905M. Within 5 years, they get their money back. That’s the Megaworld business model. Driven by office and commercial space leasing, Megaworld grew its portfolio earning P10B for the last 9 months which is very stable no matter what happens outside the global economy. With high quality tenants in their portfolio, you be the judge seeing the slides I show below. They have a 77% EBIT margin. Which business can you find that commands this?
Megaworld’s rental income is significant. Looking at their revenues for 9M18 shows brisk residential sales, high rental income which total 41.8B in 9 months, net income equivalent to owners of Megaworld is 11.8B with a 38% EBIT margin and a 28% Net income margin.
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With these tenets, its not hard to imagine why Megaworld is a strong property investment. Commercial pipeline growing for 2018–2019 to support their 2020 goal of a 20B net income.
Recent disclosures show MEG is also a top condominium developer in Makati launching 28 residential towers, selling 6,500 units. The newest tower is Vion Tower which is to become Edsa-Makati’s Tallest residential tower (57 storey) along Edsa corner Roces avenue.
Megaworld has been volatile over the last 5 years going from 2.97–5.95. Currently marketcap at 4.8 is P150B; Nevertheless what’s very clear is the amount of rental and residential sales the company has effectively completed suggesting that the underlying trend for Meg will be upward in the very end.
