Two of the country’s top real estate developers, Ayala Land Inc. (ALI) and SM Prime Holdings (SMPH), recently announced earnings showing year-on-year growth but we believe the Philippine property market as a whole continue to be challenged this 2023, thus reiterating our underweight position on the sector.<\/p>\n\n\n\n
ALI Financial Highlights<\/strong><\/p>\n\n\n\n ALI posted net income of P18.6 Bn (up 52% year-on-year) for 2022 with revenues hitting P126.6 Billion, up 19%. ALI\u2019s property development segment reported revenues of P81.2 Billion, up 7% yea-on-year (YoY), led by the surge in commercial lot sales revenues. <\/p>\n\n\n\n Growth in this segment was dampened, however, by the ~0.5% YoY drop in residential project revenues due to stretched down payments as well as the 16% YoY decline in office- for-sale revenues, driven by the slower take-up on remaining inventory despite the full sell out of Alveo’s Park Triangle Tower in BGC.<\/p>\n\n\n\n SMPH Financial Highlights<\/strong><\/p>\n\n\n\n SMPH, meanwhile, saw its consolidated net income for 2022 reach P30.1 Billion, up 38% YoY, while consolidated operating income hit P49.2 Billion, up 52% YoY. <\/p>\n\n\n\n SMPH\u2019s mall business segment continues to account for the majority (47%) of its consolidated revenues as it generated P49.8 Billion (+107% YoY) revenues for 2022 due to the 92% YoY growth in local mall rental income amid the resumption of full rental fees.<\/p>\n\n\n\n SMPH\u2019s residential business saw a ~13% decline in revenues while its reservation sales rose by 3% last year. Notably, the residential business was able to launch 3 new developments last year in Cagayan de Oro, Pampanga and Cavite.<\/p>\n\n\n\n SMPH\u2019s office and hotel and convention center businesses – which accounts for only 10% of consolidated revenues – posted a 59% YoY revenue growth in 2022. Particularly, the office segment recorded P6.1 Billion in revenues (+22% YoY) while the hotel and convention center business saw its revenues nearly triple to P4.3 Billion.<\/p>\n\n\n\n Analysis of ALI’s Performance<\/strong><\/p>\n\n\n\n ALI\u2019s performance remains resilient, with net income beating consensus estimates by 7%. Despite the current high cost environment, which led ALI to increase its average selling prices by 6% in 2022, demand remained strong as evidenced by the year-on-year growth in reservation sales. <\/p>\n\n\n\n However, reservation sales have been slowing down quarter-on-quarter as it fell by 1.57% in 4Q 2022. While ALI\u2019s commercial leasing accounts for only ~26% of total revenues, it registered the largest growth among its business segments – emphasizing the positive impact of the continued economic reopening on earnings.<\/p>\n\n\n\n However, cancellations in 2022 was markedly higher at 19%, higher than management\u2019s expectations of 12%. Moving forward, management expects growth to come from (1) higher occupancy and lease out rates in malls and (2) its P110-Billion launches as it targets to spend P85 Billion in capex this 2023.<\/p>\n\n\n\n While ALI did present strong 2022 results, its net income is only 52% of its pre-pandemic 2019 net income of P33.2 Billion – showing how the company still has a long way to go in its recovery. <\/p>\n\n\n\n Analysis of SMPH’s Performance<\/strong><\/p>\n\n\n\n SMPH\u2019s mall business continues to drive the property company\u2019s strong earnings. As we expected back in the 3rd quarter of 2022, SMPH\u2019s mall business segment drove the company\u2019s earnings due to the robust consumer spending during the last quarter.<\/p>\n\n\n\n The growth in the office and hotel and convention center segment was also anticipated as the economy continued to return to face-to-face activities and Philippine tourism improved. SMPH\u2019s residential business saw a decline in revenues in 2022 indicating that the high inflation, interest rates, mortgage rates and construction costs has indeed taken its effect on the sector. W<\/p>\n\n\n\n ith SM set to hold their analyst\u2019s briefing this February 28, it would be interesting to know how SMPH has been handling these economic headwinds, as well as get a clearer picture on vacancy rates and to what extent they have raised their rental prices and average selling prices.<\/p>\n\n\n\n We continue to reiterate our underweight position on the property sector, as we expect stubbornly high inflation and rising interest rates to challenge earnings in the near-term.<\/p>\n\n\n\nAnalysis and Recommendation<\/h2>\n\n\n\n