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

Megaworld’s REIT company, MREIT, Inc (PSE: MREIT) will be the fifth company that will go public this year after it obtained approval from regulators to raise up to P19.9 billion in an initial public offering.

MREIT will sell up to 1.2 billion secondary shares owned by its parent company, Megaworld Corporation, representing 49 percent of the company, at P16.10 per share.

MREIT will have a market capitalization of P40.7 billion after the offering, making it the third biggest REIT company after Robinson’s REIT (PSE: RCR) at P64 billion and Ayala REIT (PSE: AREIT) at P45.2 billion.

The offering period of MREIT shares will run from September 14 to September 20 with a target listing date on September 30, 2021.

MREIT will be the fifth 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.

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 MREIT’s IPO:

1| Know the background of the company

Formerly known as Megaworld Holdings, MREIT was transformed into a REIT company after its parent company, Megaworld Corporation, transferred a portfolio of 10 PEZA-registered commercial properties through Property-for-Share Swap transaction.

The 10 properties, which were valued at P49.3 billion, have a collective Gross Leasable Area (GLA) of 224,430.8 sqm that is divided into two groups.

The first group, which comprises about 90 percent of total GLA, consists of commercial buildings that are located in Metro Manila.

These properties are One World Square, Two World Square, Three World Square, 8/10 Upper McKinley Building, 18/20 Upper McKinley Building, 1880 Eastwood Avenue, 1800 Eastwood Avenue and E-Commerce Plaza.

The second group, which comprises the balance of 10 percent, consists of properties that are located in Iloilo City. These properties are Richmonde Tower, Richmonde Hotel Iloilo and One Techno Place Iloilo.

The land on which the 10 properties are located is being leased by MREIT from Megaworld Corporation for 50 years.

2| Know the assets of the business

MREIT’s building portfolio has an average overall occupancy rate of 93.2 percent and average lease of 4.7 years.

Bulk of MREIT’s tenants comes from the BPO and traditional office sector, which occupies 89.9 percent of its total GLA. The balance of 10.1 percent comes from retail and hotel tenants.

MREIT’s top 10 tenants, which are all from the BPO sector, occupy about 40.7 percent of total GLA and contribute almost 50 percent of its total rental income.

MREIT also enjoys an overall average contractual rental escalation of 5.0 to 10 percent per year while it pays land leases based on percentage of gross rental income.

MREIT pays only 2.5 percent of rental income for office and retail properties while 1.5 percent for hotel properties.

This is low compared to what other REIT companies are paying for the land leased from their parent companies. For example, Ayala REIT (PSE: AREIT) and Robinsons REIT (PSE: RCR) pay about seven percent of gross rental income, while Filinvest REIT (PSE: FILRT) pays 10 to 15 percent.

Lower land lease rate is good because it means higher distributable income for shareholders.

3| Know the financials of the company

MREIT’s total rental revenues have grown only two percent per year from P2.0 billion in 2017 to P2.1 billion in 2019, resulting to net income growth of three percent from P1.1 billion in 2017 to P1.17 billion in 2019.

In 2020, MREIT suffered 5.1 percent decline in net income to P1.11 billion as its total rental revenues dipped by 3.2 percent.

But this year, for the first nine months of 2021 ending March, MREIT’s total revenues recovered by 6.1 percent to P1.58 billion from P1.49 billion in the same period last year.

The recovery in revenues this year enabled MREIT to increase its net income by 16.4 percent from P819 million last year to P953 million.

MREIT enjoys a strong balance sheet with zero debt ratio with an average return on equity ratio of 13 percent for the past three years.  

This year, for the first nine months generated, MREIT generated return on equity of 11 percent, which indicates an annualized return on equity of 14.7percent.

MREIT is committed to acquire certain assets from its parent company, Megaworld, to grow its income generating asset portfolio within the 24 months after listing date.

Given its zero-debt position, MREIT may leverage its equity position to finance its asset acquisitions in the future from Megaworld, which has office assets of 1.4 million square meters in gross leasable areas.

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.

MREIT’s investment properties, which have a book value of P9.3 billion, have been appraised at P49.2 billion. If we use this appraised value in the balance sheet, MREIT’s total assets will increase from P9.6 billion to P51.5 billion.

Minus payables of P1.06 billion, we can derive MREIT’s net asset value of P50.4 billion or P19.92 per share.

At the IPO price of P16.1 per share, current pricing of the stock offers a 19.2 percent discount against its net asset value per share, or a Price-to-NAV ratio of 0.81.

MREIT’s Price-to-NAV ratio is also 22 percent cheaper than the average Price-to-NAV ratio of the REIT sector.

MREIT’s Price-to-NAV will be comparable to Filinvest REIT (PSE: FILRT), which has current ratio of 0.80 and DoubleDragon REIT (PSE: DDMPR) at 0.91.  

If we price MREIT solely based on average Price-to-NAV ratio of the sector, we can expect the stock to trade up to P20.72 per share.

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

MREIT expects to earn a net income of P2.9 billion by the end of its fiscal year in June 2022, which translates into adjusted funds from operations (AFFO) of P2.3 billion after accounting adjustments, representing 100 percent dividend payout ratio.

At P2.3 billion projected dividends for 2022, MREIT’s prospective dividend yield shall be 5.7 percent.

MREIT’s projected yield is slightly lower than the 6.0 percent yield offered by the two recent REIT IPOs, FILRT and RCR.

For MREIT to effectively generate a 6.0 percent yield, the stock must fall by 6.2 percent to P15.1 per share.

It is interesting to note that if we measure how much the market is paying for every square meter of gross leasable area, we will find that MREIT’s market cap per square meter of P181,646 is slightly higher than the sector average of P179,752.

At IPO price of P16.1 per share, MREIT is priced higher in terms of market cap per square meter compared to RCR’s P150,877 and FILRT’s P117,057, the lowest in the sector.

Even if we measure it in terms of revenue generation, we will find that MREIT’s market cap to revenues ratio of 19.27 is also higher than RCR’s 17.83 and FILRT’s 11.38.

If we compare MREIT with the two recent REIT IPOs based on yields and market cap ratios, we should expect the stock to regress towards the 6.0 percent 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