New asset injection to benefit AREIT

Last November, AREIT announced plans to acquire another P30 billion in assets, including Ayala Triangle Tower 2, Greenbelt Mall 3 and 5, Holiday Inn and Suites Makati, SEDA Ayala Center Cebu and SEDA Lio in El Nido from Ayala Land and an industrial land in Zambales from AC Energy. The acquisition is expected to be completed in the third quarter of next year.

Following the announcement, shares of AREIT fell by as much as 16 percent from its November peak. We think the market’s negative reaction was unwarranted for numerous reasons.

The acquisition of P30 billion worth of assets will grow AREIT’s asset portfolio by another 34.5 percent from P87 billion to P117 billion. This will cement its position as the country’s biggest real estate investment trust (REIT). After AREIT, the next biggest REIT is RL Commercial REIT, which has an asset portfolio of around P74 billion.

Moreover, the acquisition will further diversify AREIT’s asset base. From 89 percent, its exposure to the office sector will drop to 76 percent. The reduction is beneficial given the prevailing oversupply situation.

On the other hand, AREIT’s exposure to the retail sector will increase from 6 percent to 11 percent, while industrial lots will account for 7 percent of its asset base, up from 1 percent. Although rental income from malls, industrial lots and hotels is more volatile, it will address this problem by entering into an agreement to lease back the said properties to their operators at fixed rates.

The weighted average lease expiry (WALE) of AREIT is also set to improve. Although its current WALE is nine years, most of the new assets it will acquire have a WALE of 25 years as they will be leased back to their operators. A higher WALE means better stability for both earnings and cash dividends, benefiting shareholders.

Finally, the acquisition will be dividend accretive. Following the completion of the acquisition, quarterly dividend per share is projected to increase by another P0.022 per share from P0.55 per share currently.

At AREIT’s current price of P31.90, dividend yield is also set to increase to around 7.2 percent. That is very attractive, as it is one percentage point above the current 10-year bond rate of 6.2 percent.

Despite the favorable impact of the upcoming acquisition, AREIT’s shares were sold off, most likely due to expectations that it would need to do a share placement to maintain a minimum public float of 33.33 percent, a requirement for all REITs.

Note that its current public float is already at 33.76 percent. This means that it cannot push through with the acquisition (which it plans to do largely by issuing new shares to Ayala Land and AC Energy) without its sponsor also selling shares to the public. Based on our estimates, AREIT’s sponsor Ayala Land will need to sell around 270 million secondary shares to complete the asset-for-share swap.

Shares were also sold off in November, most likely due to concerns that Ayala Land will be forced to sell shares at a steep discount for the deal with AREIT to push through.

Nevertheless, we don’t think AREIT’s shares will need to be priced too cheaply for its share placement to succeed. Note that after the deal, its market capitalization will increase to around P100 billion, making it the 25th largest company in the Philippine Stock Exchange (PSE). This increases the likelihood that it will be added to the benchmark index. If this happens, funds that track the index will have no choice but to buy shares of AREIT, even if shares are not priced too cheaply.

Given the numerous benefits of the upcoming acquisition and the strong likelihood that it will eventually be added to the index, there’s no reason why shares of AREIT should trend lower and stay depressed.

As such, pullbacks are opportunities to buy the stock at a cheaper price, especially for investors who are focused on locking in high yields. INQ