Ayala REIT (AREIT) My Thoughts

Ayala REIT will be the first REIT that would become available for public investors. Is it a good investment? Let’s find out.

Before anything else, what is REIT?

REIT (Real Estate Investment Trust)

A REIT is a Real Estate Investment Trust. Basically, its like an ETF wherein instead of businesses inside the ETF, they own income generating real estate. So its one of the easiest way for someone to own real estate and not having to mind the management of tenants and maintenance of the property. The REIT management would do all of that for you. What you can expect is a steady stream of income from the property as a form of dividends. Of course, provided that the REIT properties continue to generate income.

The Rules

The rules for the REIT are simple, 90% of the income generated after expenses must be distributed to the owners/investors as a form of dividends. And companies issuing REITs in the Philippines must use the proceeds to invest in the Philippines.

What You Should Know

REITs are like ETF or UITFs. They are like funds and having fund managers manage the money for investing in real estate. Having said that, they have fees too since you have to pay the fund managers. Keep that in mind while you buy REITs.

Since the dividends are income, it will also be taxed by the same way stock dividends are taxed. 10% as of today but it will change soon to 15% as TRAIN law on Dividend income comes into effect.

Fund managers of REITs have an incentive to expand the empire. They are incentivized to expand and acquire more properties. 1% of purchase price and 0.5% of the sold properties are paid to fund managers. So we may see some fund managers will try to buy and sell properties to generate the fees. But if the managers are good, we can see some good results. It will entirely depend on the managers.

Ayala REIT

On to the topic at hand. Ayala REIT will have an IPO price of P30.05 per share. Since this is an IPO, we don’t expect to see much bargains here. But the future might be bright for AREIT since they will use the proceeds to buy another income generating property from their parent company (more on this later).

Current Properties of Ayala REIT

There are currently 3 income generating properties included in Ayala REIT. Here are from the disclosure:

• Solaris One, a 24-storey Grade A, PEZA-accredited commercial building and previously known as E-Services 3 Dela Rosa Building, which was completed in 2008, contains 46,767.95
sq.m. of Gross Leasable Area, and is located at 130 Dela Rosa Street, Legaspi Village, Makati City, the Philippines;

• Ayala North Exchange, a Grade A, mixed-use development owned by our Company, previously known as project City Gate, which consists of two office towers situated on top of a 3-storey retail podium as well as
a collection of serviced apartments branded as Seda Residences Makati. The first tower is a 12-storey HQ Office. The second tower is a 20-storey, PEZA-accredited BPO Office designed for 24/7 operations. Seda Residences Makati contains 293 serviced apartments, which, together with other amenities and the back-ofhouse area, cover 18 floors of the building. There are six levels of basement parking. The HQ Office space was completed in late-2018, while the BPO Office and serviced apartments were completed in the first and third quarters of 2019, respectively. The Gross Leasable Area of Ayala North Exchange is 95,554.35 sq.m. It is located at 6796 Ayala Avenue corner Salcedo Street, Legaspi Village, Makati City, the Philippines; and

• McKinley Exchange, a 5-storey Grade A, PEZA-accredited mixed-use development owned by the Sponsor, which began operations in 2015, with a Gross Leasable Area of 10,687.50 sq. m. , 9,633.32 sq. m. of which is designated for commercial office leasing, and with a gross floor area of 14,598.40 sq. m., on a plot of land with an area of 4,513 sq. m., located along McKinley Road corner EDSA in Makati, Metro Manila’s
preeminent financial business district. The building also incorporates two basement levels for car parking, offering a total of 120 parking slots. On January 31, 2020, our Company entered into a Contract of Lease with the Sponsor for the lease of the office and retail building commencing on February 1, 2020 and ending on December 31, 2054, and initial monthly rent of ₱2,733,079, subject to annual escalation at the rate of 5%.

The last one, McKinley Exchange is still new, and their income is not yet reflected in the financial statements of the company. On the disclosure the income of these properties are as follows:

McKinley’s income is on the 2019 9-month statement. Where the income jumped to almost 1 billion.

AREIT Acquisition

The purpose of the IPO of Ayala REIT is to expand and acquire Teleperformance Cebu office from Ayala Land. This will add a new income for AREIT.

My Thoughts About AREIT

Since this is an IPO for AREIT, I am not expecting much from the core reason why we buy REITs in the first place — dividend income.

And since we are dealing with the future here, its hard to make a prediction of how much we could expect from the dividends. So I’m just going to base this calculation (a table napkin calculation) from what we have now. P1 billion in income with a P35 billion market capitalization. Since 90% is given out to shareholders as dividends, we can expect P900 million in dividends. This is just around 2.5% dividend yield.

Of course, we should not expect much when it comes to IPOs as these issues are usually overpriced. What we can be hopeful for is the future, what are the chances that AREIT can grow its income and thus grow our dividends, by how much and by how fast? Answering this questions correctly will make our investment in AREIT worthwhile in the future.

Source: https://areit.com.ph/