Have you heard anything about the SMREIT?

I got this question yesterday from echAir, and while I don’t have any special or inside information, I think that we can connect some dots from the public news that we have access to. We first heard about a potential REIT coming out of SM Prime Holdings [SMPH 26.90, up 0.8%; 63% avgVol] back in April 2023, and at the time, SMPH was planning to list SMREIT in the “second half of 2023” with a massive $1 billion IPO. Then things got quiet until we heard in August that SMPH would delay any SMREIT IPO until 2024 due to market conditions (interest rates, inflation, etc). In early January, an SMPH director said that the company’s cash flow was “quite strong” and that he saw “no purpose” to “going immediately” to an SM REIT IPO to raise funds. By April of this year, SMPH officially called off plans for a 2024 SM REIT IPO citing market conditions and a sufficient amount of cash to finance existing projects. The last we heard about it was a little bit later in April when SMPH said that it was “not the right time” and the company officially delayed a potential IPO to 2025.

> Why do an IPO in the first place?  It’s important to remember why a sponsor would sell an interest in its REIT subsidiary, and that is to raise money. There’s no inherent benefit to SMPH giving up an ownership interest in a batch of its cash-generating assets. The reason it would do that is to raise money, and it would only do that if it needed money. The main thing that has always been mentioned with a potential REIT listing is SMPH’s need to finance its massive reclamation project in Manila Bay which is projected to cost ?100 billion. 

> OK, but what changed?  The first change was the inflation and interest rate hikes that pushed yields up. My bet is that the plans to list SMREIT were drawn up years ago, before the huge spike in inflation caused the cost of capital to rise so suddenly. MB readers will remember what happened to REIT yields through H2/22 and all of FY23: they went up as interest rates went up. And when REIT yields rise, share prices fall. And when share prices fall, valuations fall. The “value” of what SMPH would get for its REIT assets kept falling as rates climbed, making a listing less attractive. But what also changed was that in August of 2023, President Marcos ordered all reclamation projects suspended for environmental review, so SMPH halted work on the project. 

> Anything else?  The massive recovery of our malls poured more cash into SMPH’s accounts. 

> Is the SMREIT plan dead?  No, probably not. My bet is that every real estate developer with mature assets has a REIT plan already drafted up, gathering dust, just waiting for the right combination of factors to entice the board of directors to “choose” that Pokemon. The reclamation project was exempted from the president's halt order in late 2023, so that’s still progressing, but with so much cash and “higher for longer” rates still suppressing REIT valuations, my bet is that they’ll just keep that “raise $1 billion super quickly” coupon in their back pocket for some later date when rates are lower and they’ve more thoroughly exhausted their organic cash and debt options.

MB bottom-line:  I don’t expect to see any news about a potential SMREIT IPO while SMPH’s directors and executives are feeling so confident about their cashflows. To me, that tells me all I need to know. They’re not worried about money right now, and with no external pressure to sell, they’re not going to part with any of their malls income stream just for the sake of it. They’re going to wait for a time when investors are willing to pay a better price. For SMPH, there’s a huge difference between pricing an IPO with a 7.5% projected yield and pricing it with a 5.5% projected yield. Why sell to the market now and let investors get the benefit of that two-year pump as rates are projected to fall, when the company can just consume its own cash and debt for now and then harvest the increased valuation in 2025 or 2026? Again, this is all speculation from me, but that’s my take on the situation. I’m even going to remove it from my “Upcoming IPOs” chart.   

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