MREIT–Last but by no means the least

MREIT will be the last real estate investment trust (REIT) sponsored by a big integrated property developer to list on the Philippine Stock Exchange in 2021.

Despite being the last, it is by no means the least. In fact, it has numerous qualities that merit it a spot in every Filipino investor’s REIT portfolio.

Like other existing REITs sponsored by big property developers (AREIT, Filinvest REIT or FILRT and Robinsons Land Commercial REIT or RCR), MREIT owns a diversified portfolio of 10 Grade A office buildings with Peza (Philippine Economic Zone Authority) accreditation. As of this month, these buildings enjoyed an occupancy rate of almost 100 percent. MREIT also boasts of good quality tenants that are mostly BPOs (business process outsourcing) and large multinational companies. In fact, MREIT does not have any Philippine Offshore Gaming Operation (Pogo) tenants.

Large portfolio

However, what makes MREIT stand out from the rest is the large portfolio Peza accredited office properties owned by its sponsor, Megaworld, giving it a long runway for growth. Outside of the 10 buildings in MREIT’s portfolio, Megaworld still owns 1.1 million square meters of Peza-accredited office space that it can sell or inject into MREIT in the future. This is almost five times the size of MREIT’s current office building portfolio of 224,431 square meters. On top of this, Megaworld has another 177,700 square meters of office space under development. While the sponsors of other REITs also have large portfolios of office properties, none have as much Peza accredited office space as Megaworld.

The advantage of having Peza accredited offices in Manila cannot be underestimated. Given the challenges brought about by the pandemic, the exodus of Pogos, and the influx of new supply, office vacancy rates are expected to increase to around 15 percent while rental rates are expected to drop by 20 percent this year according to Colliers. However, Peza accredited office buildings will most likely be spared because of their limited supply and the continuous growth of the BPO sector which requires Peza accredited offices. Recall that the government already stopped awarding new accreditations a few years ago in a bid to reduce congestion in Manila. Given these factors, offices with Peza accreditation in Manila are expected to maintain high occupancy rates and premium rents despite the gloomy situation of the office leasing sector in general.

MREIT is also expected to capitalize on its sponsor’s lucrative portfolio by acquiring several assets right away. In June, MREIT and Megaworld entered into a memorandum of understanding for MREIT to pursue the acquisition of four office buildings owned by its sponsor with a total size of 71,335.4 square meters. In fact, an agreement is already in place for MREIT to acquire three of the four buildings with a total gross leasable area of 44,100 square meters by the first quarter of next year, financed by debt.

Office assets

Aside from this, MREIT will be acquiring another 50,000 square meters of office assets from Megaworld by the second half of next year, either financed by debt or through an asset for share swap. These acquisitions will increase MREIT’s office leasing portfolio by 42.4 percent to 319,500 square meters by the end of 2022, giving dividends a boost.

Admittedly, at its initial public offering price of P16.10 per share, MREIT’s projected fiscal year 2022 dividend yield of 5.65 percent is lower compared to those of FILRT and RCR which are 6.38 percent and 5.96 percent, respectively. However, the risk is on the upside as MREIT’s projected fiscal year 2022 cash dividend of P0.91 per share is based on the assumption that occupancy rate would only be 96 percent even though the occupancy rate of MREIT’s 10 buildings is now close to 100 percent.

The dividend projection also does not include the potential contribution of the 44,000 square meters of office space that MREIT plans to acquire by the first quarter of next year and the company’s plan to pay out its retained earnings as of end June 2021.

Based on COL Financial’s estimates, these factors could push up fiscal year 2022 cash dividends from P0.91 to P0.98 per share, resulting to a much higher dividend yield of 6.09 percent. Dividends could even be higher if MREIT pushes through with the acquisition of another 50,000 square meters of office assets from Megaworld by the second half of next year.In summary, although MREIT will be the last REIT sponsored by a big integrated property developer to list this year, it still deserves investors’ attention because it has the longest runway for growth, which could allow it to grow its cash dividends faster than the rest.

Moreover, MREIT’s projected cash dividends could surprise positively in the next two years given the higher than expected occupancy rate of its existing buildings and plans to acquire several buildings as soon as next year. INQ