Why the Manic Bids on Property Firms as the BSP Pushes for Lower Rates: 1Q 2019 Performance of Ayala Land and SM Prime

Why the Manic Bids on Property Firms as the BSP Pushes for Lower Rates: 1Q 2019 Performance of Ayala Land and SM Prime

Ayala Land share prices soared to a record last week based on the prospects of MORE easing by the BSP.

From Ayala Land’s May 7th Press Release: “Ayala Land Inc. (ALI) saw a solid start to the year as it increased its net income to P7.3 billion in the first quarter of 2019, a 12% growth from the same period in 2018. Total revenues were also up by 7% to P39.7 billion as a result of the sustained performance of its property development business as well as a surge in commercial leasing revenues.”

The 12% net income growth of Php 7.3 billion cited by the firm represented net income attributable to equity holders. Including non-controlling interest, net income for 1Q was Php 8.297 billion higher by only 9.44% from 2018’s Php 7.581 billion.

Figure 1

The decline in net income growth emanated mainly from the considerable drop in Property Development revenues growth (6.66%), the most since at least 2013.

The fall in the segment's revenue growth has been attributed mainly to lower project completion for Ayala Land Premier, Lower bookings for Alveo and full sellout of MCT Bhd projects in Cybersouth.

Shopping mall revenues were slightly off 2018 levels.

With gross leasing area (GLA) expanding by 6.11% to 1.91 million sqm from 1.80 million sqm last year, mall revenues, which accounted for 13.61% share of the top line, expanded by 13.67%.

From 2019 17Q: “The average occupancy rate for all malls is 89% while the occupancy rate of stable malls is 95%.”

From 2018 17Q: “The average occupancy rate of all malls is 89% while the occupancy rate of stable malls is 97%.”

The average lease rates rose 3.8% from Php 1,059 to Php 1,063 per sqm. Despite the drop in occupancy rate of core ‘stable’ malls, new malls plus rent inflation contributed most to ALI’s mall revenues.

Seen from a longer perspective, ALI’s top line revenue growth, which constitutes property development and shopping malls, has been on a downtrend since 2013.

But ALI has a trend that keeps going higher.

Figure 2

The answer: financing cost. Interest expenses continue to surge. Growth in interest expenses was up 16.14% in 1Q 2019 but down from 19.18% over the same period a year ago.

The reason for such explosive growth in interest expense has been due to surging debts. ALI’s total debt grew by 5.18% in 1Q19 to Php 189.97 billion from Php 180.6 billion a year ago.

Figure 3

The difference of Php 9.36 billion in 1Q debt growth has vastly overshadowed the Php 716 million of marginal net income growth. Or, ALI acquired Php 13.07 of credit for every peso of net income it earned!

Ayala Land, a favorite developer of mine, in short, has been borrowing far more than the net income it generates since 2013!

Of course, debt growing faster than net income signifies a business model shared by most of the industry, including the bigger competitor, SM Prime.

SM Prime posted a net income of Php 8.995 billion in 1Q19 higher by 16.11% or by Php 1.248 billion from Php 7.747 billion a year ago.

In the meantime, SM’s total debt expanded 10.02% or by Php 20.239 billion to Php 222.23 billion from Php 201.992 billion last year.  

So SM Prime’s debt grew by Php 20.239 billion vis-à-vis Php 1.248 billion in net income growth. Or, SM Prime borrowed Php 16.22 for every peso of net income it generated!

Like ALI, SM Prime’s debt growth far exceeds its income growth since at least 2013!

Oh by the way, SM Prime’s share prices hit a record last May.

Figure 4

Because of the rapid debt expansion, SMPH’s interest expenses expanded by 23.34% outgrowing both total revenue (+13.63%) and net income (+16.11%) in 1Q 2019.

Interest expenses have been outpacing topline growth and net income growth since 2017.

Figure 5

Oh yes, SM Prime’s 1Q topline grew 13.63%, but the 23.2% jump in real estate revenue growth masked the 9.51% growth in mall revenues, the lowest since at least 2014.

Also, since 2016, SMPH’s 1Q rental revenue growth has been trending lower. SM Prime’s gross leasing area expanded 3.8% to8.3 million square meters in 1Q19 from 8.0 million square meters a year ago. Mall revenues accounted for 55.7% share, while property sales comprised 34.3% of the company’s total 1Q19 revenues.

What happens to the industry if the current diminishing pace of topline dynamics persists amidst sustained debt growth?

How sustainable can this be?

So yes, the market salivates over the BSP Governor Diokno’s push for lower rates because it might delay the untoward ramifications of the mounting financial statement imbalances of the biggest property companies in the country.

Can such sugar rush bidding of shares property firms last too? Given the incredible structural deformation of the PSE’s pricing system, anything is possible over the interim.

But in doing so, such would be like chasing fool’s gold.

Of course, one can play momentum and hope that the fear of missing out (FOMO) may drive greater fools to bid prices to the sky. But a buy and hold should be a dangerous proposition.

Jollibee’s transformation, as I previously noted, has been benign compared these.

[See Jollibee’s Fantastic Paradigm Shift: From Consumer Value to Aggressive Debt-Financed Pacman Strategy March 3, 2019]

And another thing. Despite an increase of 4.46% in customer’s base, Meralco’s electricity sales (in GWH) in the 1Q grew by 2.33% only, the least in four years.

If Meralco’s actual output reflects on the state of NCR’s GDP, which constitutes 37.5% of the national headline GDP, how realistic has the 1Q’s 5.6% national GDP been?