We discussed earlier that the AREIT public offering is a value crystallization exercise of Ayala Land, Inc. ($ALI). The AREIT offering was a way for ALI to unlock the value of its assets. The AREIT public offering will raise about 13.6 Billion Pesos for ALI which ALI badly needs. ALI is facing current debt repayment of 52.1 Billion Pesos. The AREIT public offering is a fund raising exercise of ALI.
As we have discussed in our earlier blog, ALI has one of the best and brightest management among the companies in the Philippines. Facing a 52.1 Billion current debt repayment, they have to unlock the value of their assets. Selling those assets outright in this time is near to impossibility. The best route to unlock the value is the REIT offering, thus, the AREIT.
Why did ALI not do the AREIT when the stock market was buoyant and the economy was on the run? Because they don’t have the need for it. In a healthy economy they can raise funds easily.
AREIT is a good way of raising 13.6 Billion Pesos without losing control of the underlying assets and its corresponding cash flows. And we believe that the value crystallization exercise with respect to those assets will not stop at the AREIT public offering. ALI pressured by the effects of the pandemic, might have to tap to the rich cash flows of AREIT to alleviate the financial pressures of ALI. Certain costs of ALI could be passed on to AREIT, thus lowering the net income distributable to the AREIT holders, in effect lowering the yield of AREIT. This is a scenario which we hope will not happen but could happen especially that ALI retains control of AREIT and ALI is in an immense pressure.
Going back to the AREIT public offering, Inquirer.net headlines the report: “AREIT completes landmark IPO, 2x oversubscribed.” It was reported that The IPO was oversubscribed by twice the base offer, with “high-quality” domestic and international institutional investors participating in the book-building notwithstanding the continuing coronavirus (COVID19) pandemic.
About 70% of the shares were offered to qualified institutional buyers domestic and foreign. 20% went to the REIT-eligible trading participants/brokers. Only 10% were given to the local small investors (LSI). We believe that the 20% allocated to the eligible brokers also went to their institutional clients as there was a strong demand for the AREIT shares. This is evident based on the fact that the broker directs you to the PSE Easy website to subscribe to the IPO. Because if the broker will be distributing their allocations they won’t direct you to the PSE Easy website, they will allow you instead to subscribe directly to them. They will allow you to subscribe directly to them if they are pressured to distribute their 20% allocations. Since there is a strong demand from their institutional clients, their 20% allocations are done, and retail clients will have to go to the 10% allocation via PSE Easy.
Clearly this depicts a squeeze on the small investors, allocations to small investors is limited. On the listing date, on the first day of trading retail clients/small investors who were left out because of the limited allocations will scramble for shares which is being held mostly by the institutional investors. The scramble for shares by the small investors will drive the price up and if the price will reach to a point where the capital gains is considered extra-ordinary, then the institutional investors will cash out. But it will not be long because you know the small investors fire power are limited and cannot take up the massive holdings of the institutional investors. The share price will correct and goes down again to the appropriate price.
There is a potential for a capital loss here among the AREIT holders. At the current IPO price the estimated yield for the AREIT could be at 2.8% to 3.5%, which might be considered as low for a REIT. The share price might have to moved downward and settle to a yield at around 5.5% to 7%. The price movement downward could set a massive permanent capital loss.
To sum it up. AREIT being a value crystallization exercise of ALI is for the financial strengthening of ALI. Go position for ALI. Leave the AREIT to the institutional investors.
Disclaimer: This is an independent analysis with the objective of informing readers about company fundamentals. Accuretti Systems Inc. does not own any shares of AREIT and ALI.