SM Prime forms REIT vehicle to raise $500 million

MANILA, Philippines - Shopping mall giant SM Prime Holdings Inc. approved yesterday the creation of a real estate investment trust (REIT) unit ahead of a plan to raise up to $500 million from a property trust listing on the Philippine Stock Exchange.

The move comes on the heels of the release by the Securities and Exchange Commission of the draft implementing rules and regulations for the REIT Act, which was enacted into law in December 2009.

Hans Sy, president of SM Prime, said the planned REIT listing would unlock the values of the company’s assets, secure an additional source of capital and ultimately create value for its shareholders.

“We expect that a REIT with SM Prime assets would be a significant and beneficial vehicle for transforming our business model. It will potentially allow us to create a capital-efficient, asset-owning vehicle and acquisition platform to drive our growth and expansion while minimizing borrowing activities and related costs. With a REIT structure in place, we believe that SM Prime would be well-positioned to show the potential value of its assets, which have appreciated tremendously over the years, as a result of operational efficiency, proper maintenance, expansion and introduction of new features and concepts into our existing malls,” Sy said.

Jeffrey Lim, executive vice-president and chief finance officer of SM Prime, said the company is shopping for a financial adviser that will help package the REIT. The firm was originally looking at raising $300 million but noted it might upsize it to $500 million due to strong interest expressed by several parties.

SM Prime is in the process of studying various REIT structures and options available for inclusion of certain of its malls in a REIT as it continually explores various means of raising funds, including enhancing access to international equity investors through a REIT structure.

Lim said around 15 to 18 malls would be included in the asset pool, noting that these are already providing a regular stream of income to the company. He said these exclude the China malls.

He said proceeds from the REIT listing will be used to fund the company’s expansion program and pay down debt.

For 2010, SM Prime is slated to open four new malls — SM City Novaliches in Quezon City; SM City Tarlac; and SM City Calamba and SM Supercenter San Pablo, both in the province of Laguna. This would bring SM Prime’s total number of malls to 40 by the end of the year, of which 16 are located in Metro Manila and the others are spread out nationwide. The 40 malls will have an estimated combined gross floor area (GFA) of 4.8 million square meters.

The company will open this Friday its 37th mall — SM Tarlac, which has a gross leasable space of 60,000 to 70,000 sqm.

Aside from this, SM Prime is scheduled to open its fourth mall in China, SM Suzhou in the fourth quarter of the year. Located in the province of Jiangsu. SM Suzhou will have a GFA of approximately 70,000 sqm.

SM Prime is spending P12.1 billion this year of which P8 billion will go to its domestic expansion while P4 billion will be spent for its expansion in China.

The other two malls targeted for opening in China are in Chonggqing and Zibo which will add to the firm’s three existing malls – SM Xiamen, Jinjiang and Chengdu.

SM Prime is targeting to put up two malls each year in China to bring the total number of malls in the mainland to 10 by 2014 as it seeks to take its malls overseas public.

For next year, SM Prime will start building malls in Gen. Santos City, Commonwealth Avenue in Quezon City, Lanang (second mall in Davao City) and its second mall in Cebu to be located in La Consolacion, South Reclamation Project.

Lim said the company expects to add 300,000 sqm to SM Prime’s current gross leasable area of 4.5 million sqm this year and another 300,000 to 350,000 sqm next year.

While the company refused to say how much it was projecting to earn this year, Sy said he is “very bullish” about SM Prime’s prospects this year due to new mall openings and the expansion of its existing malls.

In the first quarter this year, SM Prime reported a 10 percent growth in consolidated net earnings to P1.9 billion from P1.7 billion while revenues rose 15 percent to P5.4 billion.

Rental fees still accounted for the largest share of SM Prime’s consolidated revenues, amounting to P4.6 billion, representing a 13 percent growth. Cinema ticket sales, on the other hand, went up 28 percent largely due to the sharp increase in IMAX receipts.

Operating expenses, meanwhile, increased 14 percent to P2.5 billion.