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Financial Adviser: 5 Things Every Investor Needs to Know About Filinvest REIT Corp's IPO

It’s the country’s third IPO of the year.
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Filinvest REIT Corp (PSE: FILRT) will be the third company that will go public this year after it obtained approval from regulators to raise up to P12.6 billion in an initial public offering.

FILRT will sell up to 1.8 billion secondary shares owned by parent company, Filinvest Land to the public at P7 per share.

The offering period of FILRT shares will run from July 26 to August 3 with a target listing date on August 12, 2021 and market capitalization of P32.4 billion.

FILRT will be the third real estate investment trust (REIT) in the country after the Implementing Rules and Regulations (IRR) of the REIT Law of 2009 were approved by regulators last year.

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.

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.

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

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

1| Know the background of the company

FILRT was formerly known as Cyberzone Properties, Inc., a wholly owned subsidiary of Filinvest Land that provides office spaces for the BPO industry mainly in the 18.7 hectare Northgate Cyberzone IT park in Filinvest City, Alabang.

Cyberzone Properties, Inc was transformed into a REIT company after it transferred some its assets back to its parent company by a series of property dividends.

The first property dividends involved the transfer of Axis Tower 2, a building that has been operational for less than three years; Axis Tower 3 and 4, which are under construction in Northgate Cyberzone, and a parcel of land in South Road Properties, Cebu City.

The second property dividends transferred four more existing buildings, which were Concentrix Building and an IT school in Northgate Cyberzone; the Filinvest Building at EDSA, Mandaluyong City, and the Cebu Tower 2 in Filinvest Cyberzone Cebu, which has been operating for less than three years.

The restructuring of assets left Cyberzone Properties with a portfolio of 17 highly occupied office buildings with an aggregate size of 299,159 sqm gross leasable area and 2,204 sqm of retail area.

FILRT will sell up to 36.7 percent of the company to the public for P12.5 billion where 100 percent of the proceeds will go to its parent company, Filinvest Land (PSE: FLI).

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2| Know the assets of the business

Among FILRT’s 17 fully operational, Grade A office buildings, 16 are located in Northgate Cyberzone, a PEZA-registered IT zone in Filinvest City, Alabang, and one office building, Cebu Tower 1, located in Filinvest Cyberzone Cebu in Cebu City.

FILRT’s building portfolio has an overall occupancy rate of 90.3 percent and average lease of 3.9 years as of April 30, 2021. Its top 20 tenants, which are all multinational BPO companies, account for about 79.2 percent of its total gross leasable area.

FILRT also enjoys an overall average contractual rental escalation of 5.0 percent per year while it pays land leases based on percentage of gross rental income.

FILRT leases the land on which its Northgate Cyberzone buildings are located from its parent company, Filinvest Land at 10 to 15 percent of gross rental revenues, while it pays two percent of gross rentals to the Cebu Provincial government to lease the land on which its Cebu building is located.

FILRT’s building assets, which have a book value of P9.3 billion, have been appraised for REIT IPO purposes at P45.4 billion, an increase of 388 percent.

3|  Know the financials of the company

FILRT’s total rental revenues from the 17 properties increased by 23.2 percent to P2.9 billion in 2019 from P2.3 billion in 2018. This increased total net income by 16 percent to P1.6 billion in 2019 from P1.4 billion in 2018.

But in 2020, during the pandemic outbreak, total revenues grew only by 7.1 percent to P3.1 billion but still managed to increase net income by 14 percent to P1.9 billion, due to a one-time booking of gain on sale of investment.

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For the first three months of this year, total rental revenues declined by eight percent to P1.1 billion from P1.2 billion from the same period last year.

The decline in revenues, however, did not affect its bottom line due to one-time accounting adjustments in its deferred income tax, as its total net income increased by 26 percent to P639 million from P506 million last year.

FILRT enjoys a strong balance sheet with debt-to-equity ratio of 1.01 times by end of March 2021. It was also able to lower its debt ratio to assets from 54.7 percent in 2017 to only 25.9 percent this year.

The lower debt ratio came as a result of the restructuring that the company did late last year where FILRT assigned its loan payable worth P4.2 billion to its Filinvest Land.

Part of the agreement, a portion of the loan amounting to P3.7 billion, was converted into equity in FILRT by Filinvest Land at a subscription price of P1.46 per share.

FILRT also generates an average return on equity of 24.7 percent for the past four years. In 2020, it generated return on equity of 36.4 percent. This year, it generated a return of 10.8 percent for three months.

FILRT’s return on capital employed (ROIC) has also been increasing over the years from nine percent in 2017 to 14 percent in 2020. This year, its ROIC for three months stood at four percent, which indicates an annualized return of 16 percent.

4| Know the net asset value of the company

One of the best ways to analyze an REIT is its net asset value (NAV). Similar to Price-to-Book (PB) ratio, the NAV is used to measure the actual value of a REIT’s holdings, net of its liabilities.

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Given the appraised value of FILRT’s investment properties at P45.4 billion, its total assets have increased from P23 billion to P52.4 billion.

If we deduct its total liabilities of P8.2 billion, we will derive a net asset value of P44.1 billion or P9.02 per share.

At the IPO price of P7.00 per share, current pricing of the stock offers a Price-to-NAV ratio of only 0.77 times only, or 22.4 percent discount.

This is relatively low if we compare the FILRT’s Price-to-NAV ratio with the two other REIT stocks in the market: Ayala Land REIT (PSE: AREIT), which has a Price-to-NAV ratio of 1.28 times and DoubleDragon’s REIT (PSE: DDMPR), which has a Price-to-NAV of 0.92 times.

If we price FILRT at the average Price-to-NAV ratio of the two REIT stocks in the market at 1.1 times, we should derive a target share price of P9.92 per share.

Now, with a bearish market sentiment, we can conservatively target at only 90 percent of the average Price-to-NAV ratio, which is 0.99 times.

At this ratio, we can estimate share price target for FILRT at P8.93, which offers a potential 27 percent upside at offer price.

5| Know the total return of the offer

FILRT expects to earn net income of P1.04 billion for the second half of the year, which translates into adjusted funds from operations (AFFO) of P1.07 billion after accounting adjustments, representing 125 percent dividend payout ratio.

At P1.07 billion projected dividends for the remaining months of 2021, FILRT’s prospective dividend yield for this year is 3.13 percent.

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By next year, FILRT expects its full year AFFO to reach P2.3 billion, which translates into a dividend yield of 6.6 percent.

Now, the other way to look at it is by simply inverting the dividend yield into Price-to-AFFO multiple. At 6.6 percent yield, FILRT’s Price-to-AFFO will trade at 15.2 times.

If we compare this against the average Price-to-AFFO ratio of AREIT and DDMPR at 18.3 times, we will find that FILRT is underpriced by 16.9 percent.

At Price-to-AFFO of 18.3 times, we can target a minimum price target for FILRT at P8.42 per share.

At P8.42 per share, FILRT has potential upside gain of 20.3 percent plus expected dividend yield of 6.6 percent at IPO price for total return of 26.9 percent.

Buying the stock for competitive yield and long-term capital returns can be a good defensive investment strategy to navigate this crisis.

Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on Twitter @henryong888 

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