IPO Review MREIT (MEG REIT) | Regina Capital

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MREIT, Inc.’s (MREIT) portfolio is made up of 11 buildings with a total GLA of 224,430.80 sqm as of end-March 2021. All of the buildings are PEZA-accredited and located in MEG’s mature townships. The portfolio includes 5 buildings in McKinley Hill, 3 in Eastwood City, and 3 in Iloilo Business Park. The firm also plans to pursue the acquisition of 4 buildings (total of 71k sqm of GLA) for future growth. It plans to finish the cash acquisition of 3 out of the 4 growth assets no later than 4Q21. The last asset is expected to be added to MREIT’s portfolio within 24 months after the IPO.

MREIT targets to double its current GLA or hit roughly 500k sqm by 2024. In addition to this, it plans to expand further and reach 1mn sqm as early as 2027 or at the latest by 2030. As of end-1Q21, MREIT’s overall occupancy rate stood at 93.20%. According to management, this increased to 100% as of end-Aug 2021. The firm’s top 10 tenants are BPOs and occupy 40.70% of its total portfolio.

Cash dividend projections for fiscal year 2022 and 2023 are P0.91/sh and P0.98/sh, respectively. Annualized dividend yields at these figures are 5.34% and 6.02% for the calendar period 2021 and 2022. Note that these figures do not include MREIT’s potential for inorganic growth. We expect actual dividends declared to be higher than this next year once MREIT finishes the planned growth asset acquisitions.

Estimated NAV is at P50.43bn, meaning NAV/sh should be around P19.92. This is at a significant premium to the final offer price of P16.10/sh.

Breaking down MREIT. As of the submission of its prospectus, MREIT had 224,430.80 sqm of GLA with an aggregated appraised value of P49.32bn. The portfolio is composed of 11 buildings—all of which are located inside MEG’s mature townships. Half of MREIT’s portfolio is located in McKinley Hill, Taguig City. Meanwhile, about 40% of its total GLA is located in Eastwood City, QC. The balance of roughly 10% is situated in Iloilo Business Park.

MREIT owns all the buildings in its portfolio, but leases the underlying land from MEG. All of its buildings are PEZA-accredited. On 10 June 2021, MREIT entered into an MOU with MEG for it to pursue the acquisition of four buildings for future income and capital growth. These are: Techno Plaza 1 (15,057.5 sqm), Cyber One Building (27,236.1 sqm), One Fintech Place (18,232.9 sqm), and Two Techno Place (10,808.9 sqm). MEG and MREIT have agreed to execute the definitive agreements for the cash acquisition of 3 out of the 4 assets no later than 4Q21, meaning additional rental income will be realized as early as 1Q22. The acquisition is to be funded primarily by debt. Note that as of the filing of its prospectus, MREIT had zero debt. The last growth asset is expected to be added to the firm’s portfolio within 24 months after the IPO.

Stable rental income, detailing the firm’s inorganic growth potential. Based on MREIT’s carve-out financial statements, rental income from the 11 buildings remained stable at an average of P2.07bn since 2017. In 2020, despite the pandemic, MREIT’s rental income declined by just -3.26% y/y to P2.04bn. For the projection year 2022, MREIT plans to generate P2.5bn in total revenues, with a net operating income of P2.3bn. This forecast does not include the potential rental income that would stem from inorganic growth—the addition of 3 buildings to its initial portfolio.

MREIT targets to double its current GLA or hit roughly 500k sqm by 2024. In addition to this, it plans to expand further and reach 1mn sqm as early as 2027 or at the latest by 2030.

As of end-1Q21, MREIT’s overall occupancy rate stood at 93.20%. According to management, this increased to 100% as of end-Aug 2021. The firm’s top 10 tenants are BPOs and occupy 40.70% of its total portfolio.

For the 9 months ended 31 March 2021, BPOs accounted for almost 50% of MREIT’s rental income. Notably, MREIT has no POGO exposure. Despite the ballooning vacancy rates across the country due to the protracted pandemic, we expect the firm’s rental income to remain stable on the back of their relatively attractive locations—which provide synergies with MEG’s other properties in its townships—coupled with the firm’s relatively high retention rates. In 2020, MREIT’s properties had an 87.70% retention rate. For 2021, YTD retention rate was at 71.10% as of 5 June.

  • As rental income is expected to remain stable despite the pandemic, profitability is to trend the same way. Based on the carve-out financial statements, ROE is expected to remain above 13% at least until 2022E—not counting the potential for inorganic growth. Stable rental escalations are expected to push MREIT’s EPS to 0.45 next year.
  • Given the nature of MREIT’s business, margins are slightly elevated. Cost of services as a percentage to rental income averaged 17% in the past four years.
  • We expect an improvement in asset turnover after the pandemic-induced 2020 dip as the operations of MREIT’s tenants start to normalize.
  • MREIT’s average PER, assuming its current portfolio and at the offer price of P16.10/sh, is roughly 35x. This is higher than that of the latest REIT IPOs: RCR 26x, FILRT 18x.
  • MREIT’s cash dividend projections for fiscal year 2022 (July 2021 to June 2022) and 2023 (July 2022 to June 2023) are P0.91/sh and P0.98/sh, respectively. Annualized dividend yield at these figures are 5.34% and 6.02% for the calendar period 2021 and 2022.
  • We expect actual dividends declared to be higher than this next year once MREIT finishes the planned growth asset acquisitions.
SOURCERegina Capital Development Corp.
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