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Analysis and Recommendation
Wait-and-see on AREIT, but still a BUY for ALI
We view AREIT as the pinnacle of all REITs in the Philippines, and the estimated dividend yield of 7.16% as of last close is the highest yield we’ve seen from AREIT since its listing. However, we would prefer to see first which route the company would take to comply with its public float requirements, and as such we would rate AREIT a HOLD for now.
On the other hand, the capital recycling opportunity this transaction gives to its sponsor ALI would be a positive for ALI’s future cash flows and bolsters our BUY rating on the stock with a Target Price of P41.67.
More properties, more fun
AREIT’s Board of Directors has approved the acquisition of additional properties from its REIT sponsor, Ayala Land, Inc. (ALI). The assets included in the transaction are: Ayala Triangle Tower Two (offices), Greenbelt 3 & 5 (malls), and Holiday Inn & Suites Makati, SEDA Ayala Center Cebu, and SEDA Lio El Nido (hotels).
This acquisition is on top of the 276-hectare industrial land acquisition from a subsidiary of ACEN that was announced earlier in November. The two transactions will be bundled together for shareholder approval on February 12, 2024.
A warmer reception for an on-brand acquisition
AREIT dropped by 11.6% in the days following the announcement of its property acquisition from ACEN, with some market participants viewing it as the Ayalas using AREIT to bolster the cash flows of ACEN. Further, the property is classified as industrial and will be used to house a solar farm to be built by ACEN. This seemed a bit out-of-place when compared to the rest of AREIT’s portfolio of mostly commercial assets.
However, this latest round of acquisitions was more warmly received, with AREIT jumping by 3.6% following the announcement, as it was viewed as being more “on-brand” and as a more typical transaction involving the REIT and its sponsor company.
Here could be dilution
The ACEN transaction was valued at P6.8 Billion, which would involve the issuance of 199.1 Million shares to ACEN’s subsidiary Buena Christiana Holdings. The ALI transaction is valued at around P23.0 Billion, involving AREIT paying P1.2 Billion in cash for SEDA Lio El Nido and 642.1 Million shares to ALI for the other properties. All told, that’s an additional 841.3 Million shares that would reduce AREIT’s public float from 34.0% to 25.1%.
ALI would need to unload 263.6 Million shares, or AREIT would have to issue new shares of the same amount, in order to comply with the 33.3% public float requirement mandated by law for REITs. The best scenario would be a private placement to institutional investors as that would result in lesser dilution, as opposed to a follow-on offer or other forms of issuance.
The transactions, with no primary issuance involved, would result in a 35.5% dilution for minority shareholders while an issuance of new shares would result in a 46.6% dilution.
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