The AREIT public offering showcases the Ayala Corp. group’s ability to create and realize value. The Ayala Corp. group clearly has a roadmap on creating value. It starts with drawing in and employing the best, brightest, and most competent executives to the conglomerate. Then it adopts best-in-class systems and practices. This results to operational and financial excellence which leads to great returns on investments that results to shareholder value.
Ayala Corp. group’s value creation process stands true even in this time of the COVID-19 pandemic. Its latest exercise is the AREIT public offering. The first Real Estate Investment “Trusts” (REIT) in the Philippines.
The offering will allow Ayala Land, Inc. to raise around 13.6 Billion Pesos out of a roughly 5.4 Billion Pesos of net assets in AREIT. To extract such amount of money out of assets without losing control of such assets is magic. This is just one of the exercise of the Ayala Corp. group’s value creation process.
So what sense does this give to small investors and stock traders?
The exercise is a value creation process of the Ayala Corp. group for Ayala Land, Inc. so that means that the exercise is meant to bolster the finances of Ayala Land, Inc. (ALI) and ultimately the parent Ayala Corp. (AC). The 13.6 Billion Pesos will add liquidity to ALI which as of end of Q1 2020 has 52 Billion Pesos of debt up for repayment in the near term. It has a cash balance on its balance sheet of only 21.7 Billion Pesos.
REITs in advance markets are known for its yield not so much for its capital gains. Since we see AREIT as value creation exercise for ALI then its intention will be the maximum extraction of benefits from AREIT to ALI. The 13.6 Billlion Pesos proceeds is already a windfall for ALI but the value creation process does not stop there. Remember that ALI did not lose control of the underlying assets despite reaping 13.6 Billion Pesos. ALI did not lose control of the cash flow rich assets assigned to AREIT so ALI could take advantage of this by taking out certain costs out of ALI and imputing it to AREIT since AREIT’s assets are cash flow rich. The removal of certain costs from ALI will greatly help the financial position of ALI but will greatly lower the net income of AREIT thus lowering its yield.
AREIT’s fund manager is AREIT Fund Managers, Inc., is a wholly-owned subsidiary of Ayala Land, Inc. while the AREIT’s property manager is AREIT Property Managers, Inc. also a wholly owned subsidiary of Ayala Land, Inc.
We expect lower yield for AREIT so we think small investors should stay out of the AREIT public offering but should instead make a position in ALI and AC because the beneficiary of the AREIT is ALI and ultimately AC. As we said AREIT is a value creation exercise for the Ayala Corporation group so it will ultimately for their benefit.
A link to the AREIT final REIT plan is provided here.
Here are what others are saying about AREIT.
Disclaimer: This is an independent analysis with the objective of informing readers about company fundamentals. Accuretti Systems Inc. presently owns shares of Ayala Corporation.