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Stock Commentary

How does your REIT “Buying Power” metric work?

Merkado Barkada
How does your REIT âBuying Powerâ metric work?

I’ve had a few questions on this, and I think I didn’t do a great job explaining what this is about. Allow me this second chance!

The Buying Power metric is meant to quickly (and roughly) estimate the maximum value that a REIT might be able to purchase, using all of its available debt and equity resources, without exceeding the debt cap or dropping below the 33.33% minimum public ownership requirement.

To help illustrate this, let me compare AREIT [AREIT 37.60 2.73%] and RL Commercial REIT [RCR 6.49 0.93%].

The MB REIT Tracker has AREIT with a Buying Power of around P28 billion, while RCR has a Buying Power of around P40 billion. But what accounts for the big difference?

On the debt side of the Buying Power metric, both AREIT and RCR are able to borrow up to 70% of the value of their deposited properties (they're the only two REITs that are able to exceed the default 35% cap because of their PRS Aaa debt rating), but AREIT already has P7.8 billion in liabilities against P50 billion in deposited property, while RCR only has P1.5 billion in liabilities against P59 billion in deposited properties.

That difference right there accounts for a huge difference in Buying Power. Using debt, AREIT could use about P27 billion to buy properties, while RCR can use closer to P40 billion.

On the equity side, AREIT has 33.64% of its outstanding shares in public hands, which gives it the ability to issue only about 29 million “new” shares as part of a property-for-shares swap before it would need to conduct some kind of new sale of shares to the public. That amount is worth about P1 billion.

RCR has a public ownership of 36.51%, so it could issue 1,058 million shares, worth about P6.1 billion to buy properties before being forced to conduct some similar sale of shares to the public.

Put that debt amount together with the equity amount, and you have AREIT being able to “spend” about P28 billion, and RCR being able to "spend" about P46 billion.


MB BOTTOM-LINE

RCR’s pending acquisition of the Cyberscape Gamma building from Robinsons Land [RLC 17.28 2.61%], which it will purchase using new shares, is a great example of the usefulness of the Buying Power metric.

When the transaction is complete, the 777,807,133 shares that will issue to RLC will bring RCR’s public ownership down to 33.86%, and it will reduce the equity portion of RCR’s Buying Power from around P6 billion to a little under P1 billion.

The addition of the Cyberscape Gamma building will add another P6 billion to the value of RCR’s deposited properties, which should also give it access to an additional P4 billion in debt under its 70% limit.

The net result of the transaction would see RCR’s Buying Power drop from P40 billion to P39 billion (minus P5 billion in equity buying power, plus P4 billion in debt buying power). I don’t know if this kind of stat is used in other jurisdictions.

I made this up myself, to provide a better perspective on the capabilities of each of the REITs, but I am very open to feedback on ways to make this statistic better or more accurate. Hope that helps!

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Merkado Barkada is a free daily newsletter on the PSE, investing and business in the Philippines. You can subscribe to the newsletter or follow on Twitter to receive the full daily updates.
Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.

AREIT

REIT

ROBINSONS LAND INC

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