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Financial Adviser: 5 Things Every Investor Needs to Know About the IPO of Robinsons Land's REIT

It’s the country’s fourth REIT IPO.
ILLUSTRATOR WARREN ESPEJO
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Robinson Land’s REIT company, RL Commerical REIT, Inc (PSE: RCR) will be the fourth company that will go public this year after it obtained approval from regulators to raise up to P23.5 billion in an initial public offering.

RCR will sell up to 3.6 billion secondary shares owned by its parent company, Robinson Land Corporation, representing 36.7 percent of the company, at P6.45 per share.

The offering period of RCR shares will run from August 25 to September 3 with a target listing date on September 14, 2021.

RCR’s IPO at P23.5 billion will be the largest REIT offering in history after the Ayala REIT (PSE: AREIT)’s P12.3 billion, DoubleDragon REIT (PSE: DDMPR)’s P13.4 billion, and Filinvest REIT (PSE: FILRT)’s P11.4 billion.

RCR will also become the largest REIT company with market capitalization of P64 billion, surpassing blue-chip REIT company AREIT at P42.7 billion.

RCR is the fourth 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.

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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.

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 RCR’s IPO:

1| Know the background of the company

Formerly known as Robinsons Realty and Management Corporation, RCR was transformed into a REIT company after its parent company, Robinsons Land Corporation (PSE: RLC) transferred a portfolio of 14 commercial properties for office leasing.

The 14 properties, which have a collective Gross Leasable Area (GLA) of 425,315 sqm, are divided into three groups.

The first group, which comprises about 69.8 percent of total GLA, consists of commercial buildings that are located in Metro Manila.

These properties are Robinsons Equitable Tower, Robinson Summit Center, Cyberspace Alpha, Cyberspace Beta, Tera Tower, Cyber Sigma and Exxa-Zeta Tower.

The second group, which comprises about 9.3 percent of total GLA, consists of properties that are located outside of Metro Manila. These properties are Robinson Cybergate Cebu, Galleria Cebu, Luisita BTS 1, Cybergate Naga and Cybergate Delta 1.

These two groups, which have a total of 12 properties, were assigned by Robinsons Land to RCR via property-for-share swap.

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The third group, which contributes about 20.8 percent to the total GLA, consists of two buildings: Robinsons Cybergate Center 2 and Robinsons Cybergate Center 3 that are both located in Mandaluyong City.

These two buildings are being leased by RCR from Robinsons Land on long-term basis.

2| Know the assets of the business

RCR’s building portfolio has an impressive overall occupancy rate of 99 percent and average lease of five years.

Bulk of RCR’s tenants comes from the BPO sector, which occupies 68.9 percent of its total GLA. Its second largest tenant group, the traditional office sector, takes up about 19.4 percent for a total of 88.3 percent.

RCR’s tenants from POGO, hotel and retail, which were badly affected by the pandemic comprise only 5.9 percent of total GLA.

RCR 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.

RCR leases the land from Robinsons Land on which majority of the buildings are located at seven percent of gross rental revenues. The company also pays the same seven percent rate for the lease of two Cybergate buildings.

3| Know the financials of the company

RCR’s total rental revenues have been growing consistently from P2.0 billion in 2017 to P3.6 billion in 2020. This increase in revenues has doubled its net income from P989 million in 2017 to P1.8 billion by end of 2020.

For the first six months of this year, RCR’s total rental revenues continued to grow, increasing by six percent to P1.9 billion from P1.8 billion in the same period last year.

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Total net income, on the other hand, increased by 31 percent to P1.2 billion from P899 million in 2020 due to lower income taxes.

RCR enjoys a strong balance sheet with zero debt ratio. Its return on equity ratio has been increasing from 17 percent in 2017 to 22 percent in 2020.

This year, RCR’s return on equity for six months generated 14 percent for an estimated annual return of 28 percent.

Given its zero-debt position, RCR will likely leverage its huge equity base to finance its asset acquisitions in the future.

Assuming a debt-to-equity ratio of 1.0x, RCR can potentially borrow roughly P9 billion in fresh capital to acquire more assets to boost its rental income portfolio.

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 market value of a REIT’s holdings, net of its liabilities.

RCR’s investment properties, which have a book value of P8.7 billion, have been appraised at P59 billion. if we use this appraised value in the balance sheet, RCR’s total assets will increase from P10.4 billion to P60.7 billion.

Minus payables of P2.1 billion, we can derive RCR’s net asset value of P58.5 billion or P5.89 per share.

At the IPO price of P6.45 per share, current pricing of the stock offers a 10 percent premium over its net asset value per share, or a Price-to-NAV ratio of 1.1 times.

Although this is relatively higher if we compare RCR’s Price-to-NAV ratio with the REIT sector’s average at only 1.0x, RCR is 14 percent cheaper compared to Ayala Land REIT (PSE: AREIT)’s Price-to-NAV ratio of 1.28 times.

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Considering that RCR’s prospective net income of P2.8 billion this year, which is almost double of AREIT’s net income, RCR warrants to trade at higher premium.

If we price RCR equal to AREIT’s Price-to-NAV ratio at 1.28 times, we should derive a target share price of P7.53 per share, which offers 16.7 percent upside potential at offer price.

Being the largest REIT stock in the market, RCR may also possibly trade at a higher premium over AREIT in the near future.

5| Know the total return of the offer

RCR expects to earn a net income of P1.2 billion for the last four months of the year beginning September, which translates into adjusted funds from operations (AFFO) of P1.19 billion after accounting adjustments, representing 98 percent dividend payout ratio.

At P1.19 billion projected dividends for the remaining months of 2021, RCR’s prospective dividend yield for this year is 1.9 percent.

By next year, RCR expects its full year AFFO to reach P3.8 billion, which translates into a dividend yield of 6.0 percent.

Now, the other way to look at this is by simply inverting the dividend yield into Price-to-AFFO multiple. At 6.0 percent yield, RCR’s Price-to-AFFO will trade at 16.7 times.

If we compare this against the average Price-to-AFFO ratio of REIT stocks in the market at 19.1 times, we will find that RCR is underpriced by 12.6 percent.

At Price-to-AFFO ratio of 19.1 times, we can target a minimum price target for RCR at P7.35 per share.

At P7.35 per share, RCR has potential upside gain of 13.9 percent plus expected dividend yield of 6.0 percent at IPO price for total return of 20 percent.

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Again, because RCR is the larger REIT in the sector that deserves a higher premium, we can price the stock at AREIT’s Price-to-AFFO ratio of 22.9 times.

At this ratio, we can derive a target price for RCR at P8.81 per share.

At this price target, RCR should offer a potential capital appreciation gain of 36 percent at IPO price plus expected dividend yield of 6.0 percent for total return of 42 percent over the long-term.

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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