Analysis

What is a A REIT?

A real estate investment trust (REIT) is a stock corporation created for the purpose of owning and managing income-generating real estate such as office buildings and shopping centers, among others. REITs make money from their income-generating assets, most commonly through recurring rental income. In the case of an “office REIT” like the DDMP REIT, revenues will come from the rental income through its office buildings located in the Bay Area.

Investors can earn by investing in REITs through: (1) regular dividends and (2) price or capital appreciation. REITs are required by law to distribute at least 90% of their distributable income as dividends. Since REITs trade like an ordinary stock, investors can also earn through price appreciation.

About DDMP REIT

DoubleDragon Properties Corp. (DD) will be doing its REIT offering through DDMP REIT, Inc., a real estate company established to operate as a real estate investment trust. This will be the second REIT in the Philippines after Ayala Land REIT was listed last August 2020.

DDMP REIT will be 44% owned by DD, 19% by Spouses Yujuico (Benedicto and Teresita Yujuico) and 37% by the public after the initial public offering (assuming the full exercise of over-allotment option).

DDMP REIT gave an indicative offer price of P2.25 per share.

DDMP REIT will initially have three (3) commercial properties having a total of six (6) office buildings in its portfolio, namely DoubleDragon Plaza, DoubleDragon Center East and DoubleDragon Center West, with a total of around 172k sq.m. of gross leasable area (GLA) as of 2Q 2020, all located in the Bay Area in Pasay City.

Fund and Property Managers

A REIT is required by law to engage the services of fund and property managers. DDMP REIT Fund Managers, Inc. will be the one to implement the investment strategies, manage assets and liabilities, and make recommendations as to the value-adding acquisitions the REIT can make. DDMP REIT Property Managers, Inc., meanwhile, will be the one responsible for the day-to-day management of the properties including the management of the physical buildings, equipment and common area services, and janitorial, technical and security services.

Both the fund and property managers are wholly-owned subsidiaries of DDMP REIT. The fund management team will be led by Rene Buenaventura (Chairman) and Marriana Yulo (President and CEO), while the property management team will be led by Joselito Barrera, Jr. (President).

Portfolio of properties

DDMP REIT will initially have three (3) commercial properties having a total of six (6) office buildings in its portfolio, namely DoubleDragon Plaza, DoubleDragon Center East and DoubleDragon Center West, with a total of around 172k sq.m. of gross leasable area (GLA) as of 2Q 2020. These properties are located in the Bay Area in Pasay City, which is expected to be the fastest growing CBD location in Metro Manila until 2023, according to Colliers.

All properties are rated as “Grade A,” which means the buildings have above average rental and capital value. Despite the three properties having Grade A status, applications for PEZA-accreditation are still pending for all buildings, which we think is a disadvantage and may not look as attractive to prospective BPO clients should some office space be vacated. The appraised value of the properties is P35.4B (Asian Appraisal).

DoubleDragon Plaza – This property consists of four (4) 11-storey towers with a retail area on the ground floor. DoubleDragon Plaza has approximately 139,240 sq. m. of gross leasable area, designated for office leases. DoubleDragon Plaza commenced commercial operations in 2017 and was completed in 2018.

DoubleDragon Center East – This property is an 11-storey tower with a retail area on the ground floor. DoubleDragon Center East has approximately 16,197 sq. m. of leasable space. DoubleDragon Center East was completed and commenced commercial operations in 2019.

DoubleDragon Center West – This property is an 11-storey tower with a retail area on the ground floor. DoubleDragon Center West has approximately 16,815 sq. m. of leasable space. DoubleDragon Center West was completed and commenced commercial operations in 2019.

Occupancy

As of the second quarter of 2020, properties of DDMP REIT are 99.5% occupied. This is higher versus the average occupancy in Bay Area according to Colliers. We believe the properties will continue to have above average occupancy moving forward given the good qualities of the buildings (e.g. ease of access, having a retail component, etc.) and low vacancy rates in the Bay Area. We think the low vacancy situation will benefit DDMP REIT in terms of negotiating prices, more specifically, its lease rates offered to current and prospective tenants.

Tenants

DDMP REIT’s properties mostly cater to office tenants, such as corporate and BPO clients. According to office type, BPO and HQ offices account for 82% of the properties’ total leased GLA as of 2Q20. Based on industry sector, gaming-related BPOs account for 55% of the total leased GLA, while a POGO tenant accounts for 10% in the same period. We think the concentration to the gaming-related sector poses a risk, especially that the industry is facing government scrutiny over taxes as well as capacity limitations due to the imposition of lockdown.

Dividends

REITs are required by law to distribute at least 90% of its distributable income. DDMP REIT expects to distribute 100% of its adjusted funds from operations (greater than 99% of its distributable income) in 2021E and 2022E.

Based on DDMP REIT’s forecast and projected statements of comprehensive income found in the prospectus, the base case projected dividend yield for 2021E will be at 5.0% and 5.5% for 2022E at the offer price of P2.25 per share. DDMP REIT’s yield for this year is higher relative to average dividend yields of office REITs in Japan, Hong Kong and Taiwan.

This is also higher versus PH government bond yields of ~1.6% for a 1-year tenor, ~2.9% for a 10-year tenor, and higher versus BSP’s inflation forecast of 3.2% this year. This is also at par versus the yield of dividend paying index issues we cover of around 4.3-5.5%. DDMP REIT intends to distribute dividends on a quarterly basis.

Valuation

The appraised net asset value (NAV) of DDMP REIT is at P35.5 Billion, translating to a NAV per share of P1.99. This means the indicative offer price of P2.25 per share reflects a 13% premium to NAV.

We believe this premium stemmed from the land DDMP REIT holds since land prices have almost doubled from close to P200,000 per sq. m. in 2017 to P390,000 per sq. m. in 2019 in the Bay Area. Although investors could benefit from a potential appreciation of the land, the implied premium this brings could be offset by tenancy risks.

Note that POGOs and gaming-related BPOs lease 65% of the total GLA of DDMP REIT’s properties. The market may put a discount to NAV due to the “POGO risk” considering the negative impact of the pandemic to the sector (halted gaming operations due to lockdown), travel ban (POGO employees cannot go back to PH), as well as the tax issues the industry is facing. Holiday Park Scotland

Although we have yet to estimate DDMP REIT’s fair value, we think a “comfortable” price is P2.00 per share or below, giving a yield close to 6%.

Summary

DoubleDragon Properties Corp. (DD) will be doing its REIT offering through DDMP REIT, Inc., a real estate company established to operate as a real estate investment trust. This will be the second REIT in the Philippines after Ayala Land REIT was listed last August 2020.

DDMP REIT holds office assets in its property portfolio, situated in the fast-growing Bay Area, having a Grade A status, high occupancy rates and annual rental escalations. We believe an offer price at or below P2.00 per share is more comfortable given tenancy risks (relatively high exposure to gaming related tenants) and the lack of PEZA-accreditation of the buildings under its portfolio.

The appraised net asset value (NAV) of DDMP REIT is at P35.5 Billion, translating to a Net Asset Value (NAV) per share of P1.99. This means the indicative offer price of P2.25 per share reflects a 13% premium to NAV. Although we have yet to estimate DDMP REIT’s fair value, we think a “comfortable” price is P2.00 per share or below, giving a yield close to 6%.

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