Ayala Land’s (ALI) REIT delayed but still worth buying?

Ayala Land Inc. (ALI) reiterated that they are pushing through with the planned launch of their Real Estate Investment Trust (REIT), although the timetable will have to be modified because of the current coronavirus public health crisis.

ALI confirmed reports that they are still coordinating with the Securities and Exchange Commission (SEC) for the application of AREIT Inc., the country’s first REIT, but the timing of the offering will depend on when the economic environment will stabilize, as many investors are assumed to keep cash and stay liquid for now given current market conditions.

Interested to take part in the country’s first REIT investment? Unfortunately, we’ll all have to wait once the COVID-19 pandemic starts to subside.

ALI REIT: Good to buy?
REIT (Real Estate Investment Trust) is a collective investment scheme which pools money from investors and uses the pooled funds to acquire, manage, and sell residential and commercial properties.

First REIT company in the Philippines

Recall that last February 2020, Ayala Land filed an application with the SEC for AREIT Inc. to raise as much as P14.4 billion by selling up to 507.57 million shares of the company at a maximum price of P30.05 per share. The initial offer will consist of 47.864 million primary shares and 430.775 million secondary shares of AREIT Inc., with an option to issue additional 23.93 million shares based on demand.

Parent company ALI will initially transfer three (3) of its commercial buildings to AREIT Inc., including Solaris One, Ayala North Exchange, and McKinley Exchange — all located in the Makati Central Business District, the country’s financial hub.

The 3 projects have a combined gross leasable area (GLA) of almost 153,000 sq. m.

The biggest AREIT holding is the Ayala North Exchange along Ayala Avenue in Legaspi Village, Makati City. The development consists of two office towers, built on top of a three-story retail center with 10,000 sq. m. of restaurants and shopping spaces. The first tower is a 12-storey building for a company looking for a headquarter-type office, while the second tower is a 20-storey Philippine Economic Zone Authority (PEZA)-accredited building catering to the business process outsourcing (BPO) sector. Also located in the Ayala North Exchange development is the 35-storey Seda Residences Makati, the first serviced apartment under the Ayala-owned hotel brand, consisting of 293 units ranging from studio units up to 3-bedroom units. The entire Ayala North Exchange project has a total GLA of 95,554.35 sq. m.

Another property asset that will be transferred to AREIT is Solaris One, a PEZA-accredited building located at Dela Rosa St., Legaspi Village in Makati. It is a 24-storey building built on over 3,000 sq. m. of prime Makati property, with total Gross Leasable Area of 46,626.57 sq. m. catering to the BPO industry. The Solaris One project includes a mini park and is in the vicinity of commercial shops, retail outlets, and dining establishments at People Support Center IT Building and Convergys One Building.

The third AREIT property is McKinley Exchange Corporate Center, a five-story PEZA-accredited project located along EDSA highway corner McKinley Road. It has total GLA of 10,687.50 sq. m., of which 9,633.32 sq. m. are assigned to commercial office leasing. It currently houses the offices of Telus International’s BPO customer support operations in the Philippines.

After the initial offering, AREIT plans on using the cash proceeds to acquire another property that it will add to its portfolio. It plans to acquire Teleperformance IT Park Cebu from another Ayala company. The building is located in Cebu City’s IT Park and total GLA of 17,947.96 sq. m.

Properties transferred by ALI to its REIT company, AREIT Inc.

ALI’s Financial Performance, 1st Quarter 2020

Ayala Land reported that during the 1st Quarter (1Q) of 2020, its earnings fell by 41%. Net income reached P4.3 billion but is 41% lower compared to the same period last year. This was primarily due to soft residential revenues, lower project bookings, and construction interruptions.

Revenues topped P28.4 billion, but also lower by 28% year-on-year. Commercial leasing (i.e., malls, offices, and hotel business) which declined by 5% and sales reservations which hit P25 Billion but lower 27% compared to last year contributed to the decline in revenue.

For the 2nd Quarter, analysts are expecting a bigger decline in earnings as the ECQ covered the whole months of April and May. The decline will again be led by residential revenues as construction works are temporarily halted and supply chain of construction materials disrupted during the lockdown period. The only positive news seems to come from Office leasing revenues due to continued cash flows from office space tenants, while ALI’s Malls and Hotels business will likely experience bigger declines as the lockdown continued to be extended.

Is it still a good idea to invest in AREIT Inc.? Here are the opinions of the stockbroker partners of PinoyInvestor.

REIT Analysis and Recommendation

News analysis and opinion from stock brokerage firm Unicapital Securities:

“We think that as long as uncertainty clouds the market, ALI will have a hard time pushing through this plan. Although we believe the REIT plan is a good asset due to the prime office buildings attached in the portfolio, attracting investors will be a roadblock in this kind of market.”

News analysis and opinion from property consultants Santos Knight Frank:

“We believe that REITs will unlock a number of opportunities in the property market, such as greater access to real estate investment and revitalization of capital markets. REITs bring about a significant opportunity to democratize the Philippine property market, allowing the small investor to participate in high-value real estate assets alongside major corporate institutions.

REITs have the power to sustain long-term growth for the Philippine economy through investments. We anticipate that REITs will drive an increase in acquisition, consolidation, and property development activities across the Philippines in the coming years. New capital raised by the developers through REITs will enable expansion of the real estate sector not only in Metro Manila but also in the provinces, and with it generate jobs across many sectors.”

News analysis and opinion from stock brokerage firm Regina Capital Development Corp.:

“Several property consultants have stated that now remains as good a time as any to launch REITs in the Philippines. The country’s low interest rate environment is supportive of REITs. Further, the Asia Pacific (APAC) region is a thriving region for these instruments.

According to Goldman Sachs, Australia, Japan, and Singapore are some of the most established REIT markets globally — attracting investors largely due to their highly visible and relatively stable income streams. With the value of the local property market only appreciating and gaining more traction as the years go by, the listing of AREIT can be considered timely.

Majority of the proceeds will be used primarily to acquire Teleperformance Cebu. This will add to AREIT’s current portfolio of three PEZA-accredited office buildings:

  1. Solaris One
  2. Ayala North Exchange; and
  3. McKinley Exchange

The average occupancy of the three buildings is at 98%. Broken down, Solaris One is 96% leased, Ayala North Exchange is 99% leased, and McKinley Exchange is fully leased out.

The potential upside near-term lies in AREIT’s rental escalation, which management pegs at an average of 3-5% annually. AREIT’s net income during the first 9 months of 2019 stood at P1.02 billion, more than triple the amount in the same period in 2018, at the back of strong leasing income. Note that this figure does not reflect operations of McKinley Exchange which was not yet fully operational during the period of financial reporting.

The listing of a REIT vehicle ideally benefits the developer through the possibility of reinvesting capital, improving capitalization rates through lower cost of capital, and overall improved sentiment thus leading to higher perceived valuation.”

NOTE: This report is published in partnership with PinoyInvestor.com. PinoyInvestor is a Philippine-based stock reports subscription service that provides detailed analysis and recommendations by various stockbrokers on how to profitably trade the Philippine Stock Exchange (PSE). Sign up here to get your free PSE stock reports!

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