Financial Adviser: 5 Things Every Investor Needs to Know About Manny Villar's VistaREIT's IPO and How to Profit from It

Vista Land’s REIT company, VistaREIT (PSE: VREIT) will be the sixth company that will go public this year after it obtained approval from regulators to raise up to P4.8 billion in an initial public offering.

VREIT will sell up to 2.75 billion secondary shares owned by Vista Land’s subsidiaries, representing 36.7 percent of the company, at P1.75 per share.

VREIT initially planned to raise up to P9.1 billion by selling 3.6 billion shares at P2.50 per share, but had to cut its offering price last week by 30 percent to improve market demand.

VREIT also lowered its maximum shares offering by 25 percent from 3.6 billion shares, representing 48.95 percent of the company to 2.75 billion shares.

At the revised offering price of P1.75 per share, VREIT will become the smallest REIT company in the sector with a projected market capitalization of P13 billion.

The offering period of shares will run from May 30 to June 3 with a target listing date on June 15, 2022.

VREIT will be the seventh 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 in 2020.

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.

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 VREIT’s IPO:

1| Know the background of the company

VREIT became a REIT company after its sponsor Vista Land, through its subsidiaries, transferred a portfolio of 10 community malls and 2 office buildings via a property-for-share swap transaction.

VREIT is the flagship office and mall REIT of Vista Land, one of the largest integrated property developers in the country, that is majority owned and controlled by the family of business tycoon and former senator Manny Villar.

The 12 properties, which were valued at P35.9 billion, have a collective Gross Leasable Area (GLA) of 256,403 square meters. The properties are divided into 10 malls and two office buildings.

The mall properties, which contribute 86 percent of total GLA, are located in Las Piñas City, Bulacan, Pampanga, Cavite, Rizal, and Cebu City. The two office buildings, on the other hand, which are Vista Hub Molino and Vista Hub BGC are located in Bacoor, Cavite and Taguig City respectively.

The land on which the 12 properties are located is leased by VREIT from Vista Land’s subsidiaries, namely, Manuela Corporation, Masterpiece Asia Properties Inc, Vista Residences Inc, Crown Asia Properties Inc., and Communities Pampanga Inc, for 15 to 25 years.

2| Know the assets of the business

VREIT’s mall and building portfolio has an average overall occupancy rate of 90.86 percent and average lease of 5.09 years.

VREIT’s 10 retail malls typically have a total size of about 30,000 square meters in Gross Floor Area (GFA) occupied by essential retail formats, such as supermarkets, home improvement/appliance stores, drug stores, food establishments, and financial services.

Seven of VREIT’s malls are Vista Malls, while the three other malls are Starmalls. VREIT’s two office buildings are PEZA-registered which are occupied by BPO companies.

VREIT’s top 10 tenants account for 77.33 percent of its total portfolio GLA, which contribute about 86.5 percent of its total rental income, but most of these tenants are owned by the Villar group.

VREIT’s sister companies account for 63.4 percent of its total GLA portfolio, which contribute about 74.5 percent of its total rental income.

These related companies are AllHome Corporation (PSE: HOME), which account for 42.6 percent, followed by AllDay Marts (PSE: ALLDY) with 8.9 percent; Vista mall cinema operator Parallax, Inc, 4.7 percent; Vista mall department store operator Family Shoppers unlimited, 4.4 percent; Vista mall food operator, MSTAR Management, 1.8 percent and Kinder City, 1.07 percent.  

VREIT keeps an arm’s length transaction with all its affiliated companies where it charges an average annual escalation rates of five to 10 percent.

VREIT’s properties comprise only 23 percent of Vista Land’s investment properties, which have a total of 31 malls, seven office buildings, and 69 commercial centers.

Future asset expansion of VREIT will most likely come from Vista Land’s remaining properties.

3| Know the financials of the company

VREIT’s total rental revenues have been growing by an average of 13.7 percent for the past three years, from P1.5 billion in 2018 to P2.3 billion in 2021. The steady growth in rental revenues has enabled VREIT to grow its net income base by an average of 30.8 percent per year, from P460 million in 2018 to P930 million last year.

In preparation for the IPO, VREIT’s investment properties were appraised that resulted to additional booking of profit due to adjustment in fair value amounting to a net increase of P2.0 billion.

In total, VREIT’s net income for 2021 was adjusted from P930 million to P2.864 billion.

VREIT enjoys a strong balance sheet with zero debt ratio with a return on equity ratio of eight percent based on the adjusted net income.

Given its zero-debt position, VREIT could leverage its equity position by borrowing up to P70 billion, assuming a debt-to-equity ratio of 1.5 times, to finance its asset acquisition growth in the future from Vista Land.

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.

VREIT’s investment properties, which have a book value of P15.9 billion, have been appraised at P35.9 billion. If we use this appraised value in the balance sheet, VREIT’s total assets will increase from P20.0 billion to P36.9 billion.

Minus payables of P928 million, we can derive VREIT’s net asset value at P36.4 billion or P4.86 per share.

At the IPO price of P1.75 per share, current pricing of the stock offers a 64 percent discount against its net asset value per share.

VREIT’s Price-to-NAV ratio at only 0.36 is 60 precent cheaper than the 0.89 average Price-to-NAV ratio of the REIT sector.

VREIT compares favorably to the top three cheapest REIT stocks today in terms of Price-to-NAV ratio today.

These are Filinvest REIT (PSE: FILRT), which has a ratio of 0.81, followed by Double Dragon REIT (PSE: DDMPR) at 0.83 and Megaworld REIT (PSE: MREIT) at 0.85.

If we price VREIT equal to the sector’s average Price-to-NAV ratio at 0.89, we should expect the stock to trade up to P4.33 per share, which offers a potential 147 percent return.

But REIT stocks do not typically trade based on NAV alone. There are other factors that we need to consider in pricing a REIT and one of them is the dividend yield.

5| Know the dividend yield of the offer

VREIT expects to earn a net income of P721.6 million for the remaining eight months of the year from May to December 2022, which translates into adjusted funds from operations (AFFO) of P721.6 million also, representing 100 percent dividend payout ratio.

If we divide VREIT’s projected AFFO of P721.6 million by its shares outstanding of 7.5 billion shares, we will get dividend per share of P0.10.

At P0.10 per share dividend for 2022, VREIT’s prospective dividend yield at IPO price of P1.75 per share shall be 5.7 percent.

If we annualize this yield to get the full year dividend, we can derive an estimated yield of 8.5 percent.

At this yield, VREIT’s dividend yield will be higher than the REIT sector’s average dividend yield of 5.9 percent.

Assuming VREIT’s yield will regress to the sector’s average, the stock should rise to P2.54 per share, which translates to a potential return of 45 percent on IPO price.

VREIT is also projecting that its full year total rental revenues next year will reach P3.3 billion, which will generate a total distributable income of P1.18 billion or P0.16 per share.

At this projected income, VREIT’s prospective dividend yield at current IPO price is 9.1 percent, which is slightly higher than this year’s estimated annual yield.

Buying a REIT 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