FREE Stock in Focus: Filinvest REIT Corp. (FILRT) – 2 Sept 2024 by Regina Capital Development Corp.

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Summary of Broker’s Recommendation

We reaffirm our BUY rating for FILRT with a price target of P4.90/share despite lower occupancy as the recent 25 bps (0.25%) rate cut by the Philippine central bank should boost the attractiveness of REITs like FILRT, especially for their steady dividend payouts.

Analysis and Opinion

Lower costs and expenses upped bottomline

FILRT’s 2nd quarter (2Q) 2024 bottomline improved by 16% year-on-year (y/y) to P297 million despite its revenues dropping by 9% y/y to P713 million on significantly lower cost and expenses recorded during the quarter. The revenue hit came from lower rental rates, with new tenants filling spots left by those downsizing due to hybrid work setups. Still, BPOs took the lion share of its tenant mix, followed by the traditional occupants.

Impact of POGO ban

In Colliers’ latest property market report, office transactions in Metro Manila surged by 52% y/y to 459k sqm in the first half of 2024. Despite this positive momentum, the vacancy rate remained high at 18.3%. About 85% of FILRT’s property assets are located in Alabang, where the vacancy rate currently stands at 29.2%.

Following the full POGO ban, Colliers forecasts this rate to slightly increase to 30.5%. Although FILRT has no exposure to POGOs, the additional vacated spaces will contribute to Metro Manila’s overall available supply, and it is likely that developers may be compelled to slow down their new project launches on areas with elevated vacancies.

Dividends lower by 10%

The company recently declared cash dividends amounting P0.0620 apiece with a yield of 2.02%. Given the weak rental income booked by FILRT, its 9-month (9M) 2024 dividend declaration is lower by 10% y/y than that of its issued cash dividends in 9M 2023. For 2024, we expect FILRT’s cash dividends to drop by 11% y/y on the back of its declining rental income.

BSP cuts policy rate

Last August 15, the Philippine central bank decided to slash benchmark rates by 25 bps (0.25%) for the first time in four years in a bid to stimulate the economy. This move could propel the appeal of REITs, which are known as reliable source of cash dividends.

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