To invest or not to invest in Ayala Land’s REIT?

Last February, I wrote about buying real estate investment trusts or REITs as a more affordable way to own income-generating assets such as apartments, offices, malls, warehouses and hotels. I said buying REITs would allow investors to enjoy higher yields compared to time deposits and bonds.

Very soon, the Philippines will finally have its first REIT as the Securities and Exchange Commission (SEC) on July 9 approved the listing of Ayala Land’s REIT or AREIT.

AREIT is a subsidiary of Ayala Land that owns three commercial properties in Manila namely, Solaris One, Ayala North Exchange and McKinley Exchange. These properties have a total gross leasable area (GLA) of 152,756 square meters.

Ayala Land will sell up to 502.6 million shares or 49 percent of AREIT at a maximum price of P30.05 per share. Since about 10 percent of the shares to be sold are primary shares, the IPO will raise up to P1.4 billion for AREIT, which will help the company fund the acquisition of Teleperformance Cebu. Ayala Land in turn will raise up to P13.7 billion for selling its shares in AREIT to the public.

Based on the timetable submitted to the SEC, AREIT’s public offering will be on July 27 to 31 and listing in the Philippine Stock Exchange (PSE) will be on Aug. 7. This is still subject to the PSE’s approval.

There are many reasons why AREIT makes an attractive investment. First, all of its assets are office buildings and most of its tenants belong to the business process outsourcing or BPO industry. Out of its total GLA of 152,756 sqm, about 59 percent is leased out to BPOs. Note that despite the COVID-19 pandemic, demand for office space from BPOs remain resilient as foreign companies based in developed countries continue to outsource their operations to reduce labor cost. Moreover, because of social distancing requirements, BPOs now require a larger floor area for the same number of employees.

AREIT also enjoys a stable cash flow base given the high occupancy rate of its projects and the lengthy lease contracts of its tenants. Solaris One and Ayala North Exchange are fully leased out while McKinley Exchange is 98.4-percent occupied. The length of its office lease contracts ranges from five to 10 years with built-in annual escalation of 3 percent to 10 percent. It is comforting to know that based on the current lineup of tenants, no lease contract is up for renewal this year, while only 1.2 percent and 8.3 percent will expire in 2021 and 2022, respectively.

Another factor making AREIT attractive is that 36 percent of its office portfolio is Peza (Philippine Economic Zome Authority)-accredited. The benefits enjoyed by tenants of Peza-accredited facilities coupled with the difficulty of securing new Peza accreditation in Manila is another reason why AREIT’s offices should continue enjoying high occupancy rates going forward.

Finally, AREIT has no long-term debt. This gives the company room to borrow funds needed to acquire other projects including Teleperformance Cebu. This will help the company grow its leasing income, benefiting owners of AREIT as cash divi­dends also increase.

While AREIT looks like an attractive investment, there are also some risks. According to the Philippine Amusement and Gaming Corp., two Philippine Offshore Gaming Operator (Pogo) licensees and 13 service providers offering call center operations, telemarketing, systems and hardware support, live dea­ler video streaming and other online games recently left the Philippines due to unresolved disputes with tax authorities.

Although AREIT does not have any Pogo tenants, a significant increase in office vacancies brought about by the closure of Pogos could put a downward pressure on office lease rates in general. Note that Pogos accounted for a significant share of office lea­ses during the past few years.

Moreover, AREIT does not own the land where its buildings are constructed. Nevertheless, the risk that the land where its buildings are located will be sold is minimal given that Ayala Land owns both the land and majority of AREIT.

The final pricing of AREIT is still unavailable. Assuming that AREIT is offered at its maximum price of P30.05 per share, the estimated dividend yield is only 4.6 percent this year and 4.9 percent next year, which is too low in my opinion. Although the said yield is higher compared to the government’s 10-year bond yield of 2.8 percent, it is almost at par with the 4.75 percent to 4.8 percent yield of the recently issued 10-year dollar denominated corporate bonds of Jollibee and ICTSI. Although AREIT is fundamentally attractive, it should still provide a higher yield compared to corporate bonds since the value of bond coupons is guaranteed while the value of cash dividends on REITs is not. INQ