Interesting nuggets from AREIT’s analyst briefing

AREIT [AREIT 35.10 unch] held an analyst briefing, and as these things usually go, the AREIT management team took questions from analysts at the end. Here are some of the interesting takeaways from the question period. (1) AREIT’s CEO Carol Mills said that the asset-for-share swap is “the most efficient mechanism” for portfolio growth, but that they would consider acquiring assets with debt “when interest rates are better.” (2) Ms. Mills said that in FY23, AREIT’s average cost of debt was just 3.14% (which she described as “low” due to the bonds that expired in December), but that its current cost of debt has risen to “about 5.8%” (which she referred to as the re-financed rate). (3) The asset mix of AREIT’s portfolio of assets will likely mimic that of its sponsor, Ayala Land [ALI 35.60, down 4.3%]. Ms. Mills said that AREIT is “dominant with offices” right now, but that they “project to have more malls, hotels, and possibly more industrial assets” in the next “two to three years.” 

MB BOTTOM-LINE: Provided the asset-for-share swaps are done in a way that is a net benefit to the dividend, as they always have been so far with AREIT, then it’s really not a big issue for retail traders. Under dividend accretive conditions (when the deal adds to the dividend), the dilution that comes when a REIT pays for properties with newly issued shares is only a concern for shareholders whose interest is large enough to have significant voting power. To the average shareholder who owns something like 0.0006% of AREIT’s outstanding shares, the dilution that drives that stake down to 0.0005% shouldn’t register as a problem. Switching gears, the talk about using debt to buy assets was interesting. Most of the PSE’s REITs are sitting on a wealth of untapped debt quota, and the explanation here makes sense that the average cost of debt has risen considerably and that makes debt a more expensive (less efficient) option. Given that it seems like we’ll need to wait longer than anticipated for a rate drop, and perhaps even longer still for a significant drop, it’s just something to stash in the back of your mind for maybe FY25 if and when rates come down. By my calculations, AREIT has about P24 billion of debt quota that it could use under its 70% debt cap that it could still use to expand its portfolio.

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