Our market will soon launch its first real estate investment trust (REIT). First in line will be Ayala Land’s (PSE: ALI) REIT, which will have the code “AREIT” once it gets listed in the Philippine Stock Exchange. Here’s our chance to earn rental income with the Ayalas.
But first, what are REITs?
REIT shares are issued by companies that own and operate income generating real estate properties. Examples of which are malls, office buildings, hotels, condominiums, hospitals, warehouses, even toll roads and company-owned airports. REIT shares are traded in the stock exchange just like common shares, but unlike common shares which are not required to declare and issue dividends, REITs are required to distribute dividends from their rental income.
In the Philippines, REITs are required to distribute 90% of their net income as dividends, so owning REITs is like having a sure dividend income annually. It’s like having a rental property with guaranteed income without deploying a big capital to own and build such property.
Preferred shares have guaranteed dividends annually too, but unlike preferred shares, the dividend income from the REIT is not fixed per year, it depends on the income generated for the year. The higher the rental income, the higher the dividend. The lower the rental income (just like during pandemic), then declared dividend will also go down.
Since REITs are also traded as common shares, then there is a risk that share price goes down, but there’s also opportunity for the share price to go up depending in market demand and future prospects of the rent-generating properties included in the REIT.
Why Would a Company Issue REIT?
Because this is among the many options that the company can raise funds to fuel their expansion programs, cheaper than borrowing money from banks. Then use the proceeds to buy more properties and compound their income. The company issuing REIT will lose some of their rental income (in this case Ayala Land and ultimately Ayala Corp) because they will sell some of its shares to the public (and together with that the entitlement to the dividend). But in exchange, they raise new cash to develop more properties. Besides, ALI will remain a majority shareholder in AREIT so they too will enjoy the dividend income, just not the whole pie this time.
Likewise, they get to enjoy tax breaks as income of REIT is exempted from the 30% corporate income tax. In exchange, the law requires them to give out 90% of their income to the shareholders, including the public who will be minority owners of the REIT. Another advantage for REIT shareholders is the chance to get a share of the income without the headaches and efforts needed to manage and run these rent-generating properties.
Ayala Land REIT
The country’s first REIT will trade under the code PSE: AREIT once it gets listed. Offer period starts this week at P27 per share. Listing date is August 13, 2020.
Take note though that not all rental-income generating properties of Ayala Land is included in AREIT. How I wish they included their super prime properties here. As of offer and listing date, the following commercial properties are included in AREIT:
- Solaris One in Dela Rosa, Makati
- Ayala North Exchange in Ayala Ave corner Salcedo
- McKinley Exchange in Ayala corner Edsa
- Teleperformance Cebu in Cebu IT Park (proceeds of AREIT offering shall be used to purchase this property, then it becomes owned by AREIT and its shareholders)
Based from analysis of AP Securities, dividend yield is expected to be 5.86%. We’ll see what the actual dividend yield will be, and what the price action will be after listing.
After AREIT, Double Dragon (PSE: DD) has also expressed its intent to list its own REIT soon. Here’s a video summary of REITs:
Cover image from AP Secuities Facebook Page.