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Financial Adviser: 5 Things Every Investor Needs to Know About Injap Sia's DoubleDragon REIT IPO

It's the second REIT IPO in the country.
ILLUSTRATOR WARREN ESPEJO
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DoubleDragon Properties’ REIT (PSE: DDMPR) will be the first company that will go public this year after it obtained approval from regulators to raise up to P14.7 billion in an initial public offering (IPO).

DDMPR will sell up to 6.5 billion shares or 36.7 percent of the company to the public, consisting mainly of secondary shares from its owners, DoubleDragon Properties and the Yujuico family, at selling price of P2.25 per share.

The offering period of DDMPR shares will run from March 10 to 16 with a target listing date on March 23, 2021 and market capitalization of P40 billion.

DDMPR will be the second real estate investment trust (REIT) in the country after the Implementing Rules and Regulations (IRR) of the REIT Law of 2009 was approved by regulators in 2019. The Ayalas’ AREIT was the first.

Under the new law, a REIT company is required to distribute at least 90 percent of its distributable income as dividends. In exchange, a REIT can claim the dividends as allowable deductions against its taxable income, making it practically tax-free.

Because of the strict guidelines on dividends, REITs provide a steady stream of income to investors, unlike ordinary stocks which do not pay regular dividends.

REITs can also offer competitive dividend yields against preferred stocks because of its ability to expand and grow its income base, resulting to long-term share price appreciation.

But like any investment, not all REITs are created equal.

Some REITs may be riskier than the others because they have less predictable income stream due to their asset quality or financial condition.

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If you are planning to buy REIT stocks, it is important that you are not only buying it for the dividend yield. You must also understand the business of the company.

When you know the fundamentals, you will also have a better handle of the risk and return that you can expect from investing in a REIT.

Here are the top five things every investor needs to know about DDMPR’s IPO:

1| Know the background of the company

DDMP REIT, Inc is a property company organized as a real estate investment trust (REIT) that owns and invests in income-producing commercial portfolio such as office, retail, industrial and hotel properties.

Previously known as DD-Meridian Park Development Corp, DDMPR is 70 percent owned and controlled by DoubleDragon Properties (PSE: DD) and 30 percent owned by the Yujuico family.

DDMPR, which began operating in 2017, has a property portfolio consisting of three commercial properties in the 4.75 hectare-mixed use development it owns called DD Meridian Park in Bay Area, Manila.

DoubleDragon Plaza is the largest of the three properties, which has four 11-storey towers with total gross leasable area of 139,240 square meters.

This is followed by DoubleDragon Center West, which has an 11-storey tower with total gross leasable area of 16,815 and DoubleDragon Center East, which has a total leasable size of 16,197 in an 11-storey tower.

DDMPR is also leasing out a portion of its land to DoubleDragon Tower and Ascott-DD Meridian Park, which are scheduled to begin operations sometime this year.  

These three income-generating properties, which has a total gross leasable area of 172,252 square meters, together with the land ownership, are valued at P41 billion based on the IPO valuation.

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Assuming all the shares are sold including the overallotment options, it is expected that, after the offering, DD’s effective control of DDMPR will fall from 70 percent to 44.3 percent.

DD, however, disclosed in the prospectus that it intends to increase its ownership up to 66.7 percent of DDMPR in the near future, which should provide long-term market support to the stock.

2| Know the financials of the company

DDMPR’s total recurring income has been growing consistently with the expansion of its gross leasable spaces as occupancy increased from P188.9 million in 2017 to P1.8 billion in 2019.

By September of 2020 last year, DDMPR’s total recurring income reached P1.45 billion at 99.5 percent occupancy rate.

We estimate that by end of 2020, total recurring income should have increased to P1.9 billion, which represents an increase of 7.4 percent from the previous year.

DoubleDragon Plaza, which accounts for about 80.8 percent of DDMPR’s total gross leasable spaces, contributes about 75 percent of the company’s total rental revenues.

The twelve largest tenants of DDMPR accounts roughly about 83.3 percent of total rental revenues, while no more than 15.6 percent of total revenues is derived from any one tenant.

Although majority of DDMPR’s tenants belong to the gaming industry, its sole POGO tenants account only for 10.3 percent of its total gross leasable area.

Most of DDMPR’s tenants in the gaming industry are PAGCOR-accredited BPO companies.

Moreover, DDMPR’s plan to acquire the two new properties owned by its parent company, the DoubleDragon Tower and Ascott-DD Meridian Park, in the near future should help minimize its risks in the gaming sector.

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The acquisition of the two new properties, once they start contributing significant cash flows, will not only reduce DDMPR’s exposure in gaming related tenants from 55.6 percent to 39 percent of its total gross leasable areas, but also boost its total revenue growth.

DDMPR should be able to support this given its debt-free position. Assuming the company follows the average gearing ratio of 35 percent among REIT companies in Asia, DDMPR can potentially raise additional funding in the future of up to P16 billion to grow its property portfolio.

At a minimum of eight percent rental yield, DDMPR should be able to generate at least P1.3 billion in new rental revenues from the additional acquisitions.

Higher rental income growth means increased dividend payouts in the future, which should also translate to higher share price.

3| Know the net asset value of the company

DDMPR’s prime properties, which are Grade A and LEED Certified, has enjoyed consistent capital appreciation over the years.

Its investment property has increased its value annually by 24 percent from P17.6 billion in 2017 to P41.4 billion in 2020.

This increase in valuation has resulted to a net asset value of P35 billion after deducting payables, or P1.97 per share.

Given the IPO price of P2.25 per share, current pricing offers the stock a Price-to-NAV ratio of only 1.14 times.

This is relatively low if we compare the DDMPR’s Price-to-NAV ratio with the other listed REIT stock in the market, AREIT, which has Price-to-NAV ratio of 2.7 times.

At 2.7 times Price-to-NAV ratio, DDMPR appears to be grossly underpriced by 58 percent.

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If we price DDMPR at only 70 percent of AREIT’s Price-to-NAV ratio, we can derive a target Price-to-NAV multiple for DDMPR at 1.9 times or P3.72 per share, which offers a potential 65 percent upside at offer price.

Again, we have to remember that DDMPR’s properties continue to appreciate annually. If we assume that DDMPR’s investment property will increase by 12 percent next year, its net asset value will have grown to P2.20 per share.

Using the same Price-to-NAV ratio target, which is consistent at 30 percent discount to AREIT’s valuation, we can expect DDMPR’s pricing to trade at P4.20 per share.

4| Know the total return of the offer

DDMPR expects to earn net income of P2.07 billion this year, which translates into distributable income of P2.02 billion after accounting adjustments.

But because DDMPR follows the Adjusted Funds from Operations (AFFO) approach, wherein the reported net income shall add back its depreciation expenses and deduct any capital expenditures and rental adjustments, the available amount for dividend distribution is higher at P2.03 billion.

DDMPR plans to payout 100 percent of this amount, higher than the 90 percent minimum dividend payout required by the REIT law.

At P2.03 billion projected dividends, DDMPR’s prospective dividend yield for this year is 5.07 percent.

By next year, DDMPR expects its distributable income to grow by 7.5 percent to P2.185 billion, which will give dividend yield of 5.45 percent.

Remember that the total return of REIT stock is dividend yield and capital appreciation.

If we look at AREIT’s performance since its IPO last year, its share price has appreciated by 24 percent because of growth prospects, which cut down its dividend to only 3.7 percent today.

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If we apply the same yield target for DDMPR at 3.7 percent, the stock price should be valued at P3.08 per share at this year’s target dividend and P3.31 per share at next year’s projected dividend.

The other way to look at it is by simply inverting the dividend yield to Price-to-AFFO multiple. At 3.7 percent, AREIT’s Price-to-AFFO is trading at 27 times.

If we compare this to DDMPR, its Price-to-AFFO ratio is only 18.5 times, which is 31 percent discount to AREIT’s multiple.

At Price-to-AFFO of 27 times, we can target the same price at P3.31 per share for DDMPR at next year’s adjusted funds from operations.

Assuming we buy at P2.25 per share, the potential return can be the 5.04 percent dividend plus the 47 percent capital appreciation at P3.31 per share.

5| Know the intrinsic value of the stock

The dividend discount model (DDM) is a quantitative method based on the theory that its present-day price is worth the sum of all of its future dividend payments.

Given the prevailing risks and growth prospects of the market, we can estimate the fair value of DDMPR by discounting its future dividends to present value.

If we use prevailing 10-year bond yield of 3.914 percent and assume a risk beta of 0.50, which is higher than DoubleDragon Properties’ (PSE: DD) actual volatility beta of 0.36, we can derive DDMPR’s discount rate at 6.41 percent.

By using this model, which is also known as Gordon Growth Model invented by the great American economist, Myron Gordon, we can simply divide the next year’s dividend of P0.1226 by the difference between the stock’s discount rate and projected growth.

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If we assume conservatively the long-term growth of economy will just be 3.0 percent, we can derive the intrinsic value of DDPMR at P3.59 per share.

If we are more generous with growth and say, we expect long-term growth to be at 4.0 percent, the intrinsic value that we can derive for DDMPR shall be P5.08.

At whatever assumption, both valuation exercises show there is potential for DDMPR value to appreciate over the long-term.

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