Is there anything wrong with DD putting its REIT proceeds into CentralHub projects?
Thank you for this question, Ken! The short answer to this is “no”, but the longer answer depends on your definition of the word “wrong”.
When DoubleDragon [DD 7.08 0.3%] listed DDMP [DDMPR 1.30 3.2%] back in 2021, the REIT Law required DD to use the proceeds from that sale on anything related to domestic real estate development.
The REIT Law is incredibly permissive about what the sponsor/parent company can spend that money on.
There is no requirement (at all) for a sponsor to spend the proceeds of a REIT sale on developing properties for that REIT.
So, legally, it’s not “wrong” for DD to have pushed money into CentralHub developments that are not a part of DDMPR’s portfolio.
In fact, we can check the reinvestment reports that DD other sponsors have submitted to see this playing out across the other REITs in the sector; sponsors push money into projects that are often clearly outside of the portfolio scope of their REIT subsidiaries, and even if the projects are the type that could eventually form part of a REIT’s portfolio, the sponsor doesn’t usually openly identify those projects as anything more than a “potential pipeline” for later injections to the REIT.
One notable exception is Citicore Renewable Energy Corporation, the sponsor/parent of Citicore Energy REIT [CREIT 2.12 1.0%]; it put money into a variety of projects and expressly identified a few that would be near-term injections into CREIT.
So, in terms of common practice, there doesn’t seem to be much wrong with DD’s actions. But now is where it gets tricky.
Many investors considered those CentralHub logistics projects to be part of the pipeline for injection from DD into DDMPR, but then DD and Jollibee [JFC 238.40 2.3%] started talking about starting an entirely new REIT, the country’s first industrial REIT, focused on specifically those CentralHub projects that people had thought were going to DDMPR.
DD had been open from the beginning that the proceeds would go to CentralHub, but the expectation that many had built in the absence of any information about the DD/JFC plan for a potential additional REIT, was that those assets would be pushed down into DDMPR.
Only from that perspective, for the people who developed that expectation, are these actions perhaps “wrong” in relation to that expectation.
MB BOTTOM-LINE
My initial excitement for DDMPR came from the implication that DD was using the DDMPR IPO as a means of turbo-charging development of CentralHub for later injection back into DDMPR.
The sooner a project is built, the better, since REITs can only “take” mature projects that have been operating for at least three years, so I thought that this was a pretty interesting approach: use the IPO to raise a bunch of money, and use that money to speed development and reduce lag from construction to injection. Compared to what we’d seen from Ayala Land [ALI 26.90 2.9%] and AREIT [AREIT 31.90 0.3%], this plan by DD seemed to be more focused and more aggressive.
Sure, AREIT had plans for an immediate post-IPO injection, but DDMPR looked like it was sprinting down a very clear development path.
My interest wasn’t in DDMPR’s commercial leasing, it was in my belief of its eventual future as the home of CentralHub and associated logistics properties.
So, for me, what DD and DDMPR have done since with respect to CentralHub is not wrong in a legal or common practice sense, but it is “wrong” in relation to what it seemed to me like DD and DDMPR would be doing.
But here’s the important part: the conduct of the companies is what actually matters.
My belief that it would happen doesn’t matter at all.
Once the conduct of DD and DDMPR suggested that CentralHub was not a part of DDMPR’s future, or that CentralHub’s role in DDMPR’s future might be drastically reduced, I re-evaluated my thesis for my initial investment, and using that data, made the changes that were necessary.
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Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.
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