FREE Stock in Focus: Filinvest REIT Corp. (FILRT) – 13 July 2023 by RCBC Securities

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Summary of Broker’s Recommendation

At FILRT’s current price, we believe that the office industry risks (ie., rising office vacancy, potential rental rate decline) have been largely priced-in. FILRT now offers 2024 dividend yield of 9.0%, which is 230bps above the 10-year Bloomberg Valuation (BVAL) yield of 6.7%, and 230bps higher than the average 2024 dividend yield of REIT peers in our coverage. We maintain our target price of Php4.00 but upgrade our investment rating of FILRT from HOLD to BUY.

Analysis and Opinion

FILRT to add 12,400sqms worth of new leases…

FILRT recently disclosed that it is planning to add 12,400sqms worth of new leases to offset the rising office vacancy. Certain BPOs and co-working facility operators commit to take up 7,000sqms of new leases. FILRT is also negotiating with an American professional services firm in New York, and an existing BPO company in Europe, who will take up the remaining 5,400 sqms of office GLA. The duration of the new leases is longer than FILRT’s weighted average lease expiry (WALE) of 7.1 years as of 1Q 2023.

…which could improve office occupancy rate

Based on our estimates, a 12,400sqms increase in occupied GLA could potentially increase its occupancy rate to 87% (vs. 83% as of end-1Q 2023). Management expects additional leases to be reflected in its revenues starting 3Q 2023 onwards. Given this, we estimate that a +4ppts improvement in occupancy rate would raise our core net income and dividend per share (DPS) forecasts by 2.2% and 4.4%, respectively.

Maintain 2023/2024 dividend yield of 8.6%/9.0%

Note that we have not yet factored this to our estimates pending the additional details of the new lease contracts. Further, we are also cautious of the potential tenant backouts that could happen this year.

We maintain our forecasted 2023/2024 DPS of Php0.30/Php0.31 as we assume an occupancy rate of 83% in 2023-2024 (vs. 88% in 2022) and impute a rental decline of 2% p.a. over the next 2 years. Even if the impact of new leases is excluded in our forecasts, FILRT still offers a decent 2023/2024 dividend yield of 8.6%/9.0% (vs. 10-year BVAL of 6.7%).

Rising WFH trend still a downside risk

We are still mindful of the impact of rising work-from-home (WFH) trends to the take-up of office properties. Among the REITs in our coverage, we still believe that FILRT is most susceptible to office vacancy risks due to its geographical concentration in Alabang. Based on Colliers’ estimates, Alabang has an office vacancy rate of 30%, which is higher than the Metro Manila industry-wide office vacancy rate of 19%.

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