April 24, 2022

GMA7

GMA7’s net income has dropped by as much as 27% year-on-year hence the dividend dropped as well. The net income was a result of lower gross revenue coupled with increased production costs. The drop in revenue was expected to happen since big advertisers like Nestle, Unilever, and Unilab cut back television ad time and the presidential campaign is over. What was not expected is the high inflation rate environment to happen. That said, almost all segments in the production cost have increased significantly such as talent fees, facilities, rental, transportation, and production supplies to name a few. Even though GMA7’s net income decreased in 2022, it is still higher than in those years that they were fighting for market share when ABS was still around. 

With the above said, the high dividend yield from GMA7 was not sustainable in the first place. The broadcasting market playing field has changed ever since GMA7 monopolized the industry. Investors did expect GMA7 performance to do better but it was difficult to gauge how much better they get. Now that much of the noise in the market that is affecting GMA7 is subsiding, it is giving a clearer picture of what would be a sustainable dividend relative to the income. Some investors believe that the 2022 net income is the new regular income moving forward and would get better when the inflation rate drop. On the other hand, other investors remain cautious since at least 95% of GMA7’s revenue is through television advertising yet the future of advertising will continuously be disrupted by social media. That said, there is a high probability that more clients of GMA7 in their advertising segment will cut back television ad time in the future. Somehow, GMA7’s monopoly in the broadcasting market is not making sense since they do not technically monopolize the advertising business. 

DDMPR

DDMPR and FILRT are the only 2 REITs whose dividends are on a steep decline year-on-year. DDMPR declared dividends a week ago which is 16% lower than a quarter ago. Looking at DDMPR’s financial statement, revenue from rent remained stable but cost and expenses have increased most probably due to inflation. That said, the 2022 distributable income is lower than it used to be.

If we are however to follow the news, many reported that DDMPR ended with a 2022 net income of 12 billion PHP from a low of 7 billion PHP a year earlier. Dividend investors are not amused since the improvement in net income did not reflect in the dividends. This should not come as a surprise since the DD management has a reputation for making their financial statement look good even if things are not that great. The reason why the net income ended up higher is that they added unrealized gains from the fair value of properties and income tax benefits as part of the income. However, these unrealized gains and income tax benefits are not part of the distributable income.

The future of DDMPR is currently uncertain. DDMPR’s average occupancy rate remains at 95% in the year 2022 but it might not be the same moving forward since at least 35% of leases are going to expire this year. The DD Tower which has been recently completed is still looking for tenants and the Ascott-DD Meridian Park is seen to be completed in 2024. LPC (Leechiu Property Consultants) reported the Bay Area has the highest vacancy rate in Metro Manila. Although 72% of the demand is in Metro Manila, only 11% are interested in the Bay Area.

Unlike RCR and MREIT whose net income is in the negative due to decreased fair value of properties, DDMPR remained positive. That is not to say that DDMPR’s property valuation was not affected by inflation, they were affected but the decrease in valuation is not as severe as RCR and MREIT. DDMPR’s assets in the Bay Area may have positively contributed due to its prime location. The fair value of properties as we know are unrealized gains and/or losses and is not usually important for REIT investors since we do not earn dividends from it. However, in DDMPR’s case, the fair value of properties might be important since they own both the building and the land and it is part of DDMPR’s strategy to consider divesting mature and non-core properties.

FILRT

Continuing the above discussion with regards to LPC’s 2023 first quarter research, 72% of the demand is in Metro Manila and the rest is in the provinces. Within the provinces, 74% of the demand is in Cebu, and most are from the IT-BPM sector. This is good for FILRT since some of their assets are in Cebu but the only downside is that only 6% of the assets are in the said province. At least 90% of FILRT’s assets are concentrated in Alabang and only 8% were interested in the said location despite the research showing that the bulk of the demand is in Metro Manila. Moreover, demand from the IT-BPM sector in Metro Manila is just at 25%.

Things might not be looking good for FILRT currently, some investors have already cut their losses, and the rest are taking risks and banking on prospects. As per FILRT’s last disclosure, they were able to renew 32% of leases that are to expire this year which is not good enough to at least maintain their 89% average occupancy rate. There are still no updates concerning the 8 buildings in the pipeline that were identified for infusion sometime between 2023 to 2025. The infusion of property from Boracay was unexpected and FILRT is starting to diversify its portfolio outside the office lease segment to lessen risks. Currently, 80% of FILRT’s tenants are from the BPO sector and they now have plans to infuse mall assets in the future. Infusing malls is probably a good plan since lockdown restrictions have been removed and foot traffic has increased. 

VREIT

VREIT declared its 3rd quarterly dividend a week ago. There was a 6% increase in dividend quarter-on-quarter and an 80% increase as compared to the 1st dividend they declared after the IPO. We shouldn’t be misled by the parabolic increase in dividends since the 1st dividend after the IPO only covered 2 months’ worth of rent.  Nevertheless, props to VREIT for maintaining the dividend income despite being in a high inflation environment. Their annual report has not been released yet but it would be interesting how they were able to grow the dividends. For context, office REITs like AREIT and MREIT were able to grow dividends through the infusion of assets, FILRT’s dividend dropped due to lower rental revenue coupled with increased cost and expenses, and DDMPR's drop in dividend was due to increased cost and expenses but was able to maintain rental revenue.

Malls have been picking up foot traffic ever since lockdown restrictions have been removed. The profit from the mall segments of Ayala, Megaworld, and Robinsons are all up. That said, it is not surprising for VREIT to have at least maintained their rental revenue and occupancy rate considering that at least 60% of the tenants are businesses under Villar themselves. What’s surprising is that they were able to grow the dividend since there was no infusion of an asset. At the very worst, investors were expecting a lower dividend since the costs and expenses to maintain and operate the assets usually increase in a high-inflation environment. 

April 10, 2022

MREIT

The long wait is over. The asset-for-share swap that has been executed last year in April has been finally approved by the SEC a week ago. MREIT now has an increased asset portfolio size of 325,000 square meters. The supposed target dividend of MREIT is to reach 1 PHP/sh in 2022 and that is if the infusion has been approved earlier. A dividend of 0.02 PHP/sh was needed to complete the targeted dividend. That said, a dividend of at least 0.02 PHP/sh is probably going to be added to MREIT’s current distributable dividends with the assumption that occupancy and rental rates have been maintained.

Investors are still waiting for a new round of infusions since MREIT has a goal of reaching 500,000 square meters of gross leasable space by 2024. With MREIT’s commitment to delivering at least 10% annual total shareholder return, investors are expecting a few more infusions this year. The commitment of the targeted annual shareholder return however is unclear. For sure we cannot speculate that MREIT is talking about capital appreciation as the shareholder return since MREIT’s share price has been depreciating and no insider buying nor buy-backs have happened to support the share price. We can only speculate an annual 10% increase in dividend income as the shareholder return.

RCR

RCR released its 2022 annual financial statement and it ended with a negative net income. The income was pulled down by the fair value in investment properties and the exponential increase in cost and expenses. Due to RCR ending in a negative net income, the EPS (earnings per share) and PE (price-to-earning) ratios became negative as well.

The fair value of investment properties is an estimate that willing buyers would pay for it. The reason why the fair value of RCR’s properties went down is due to our current high-interest rate environment. There are a few reasons why interest rates affect the fair value of properties. First, in a high-interest-rate environment, demand for properties slows down since it is difficult for prospective buyers to take out a loan to finance a purchase. Eventually, if the demand is down, the price sentiment toward properties will go down as well. Secondly, interest rates affect the price of a rental property relative to how much income it produces. Prospect buyers are cautious about purchasing a rental property at a higher price since they foresee that there will be fewer tenants in a high-interest rate environment.

With the above-said discussion, any change in the fair value of investment properties is an unrealized loss hence it is something RCR investors should not be worrying about. RCR has no intention of selling properties. When interest rates subside, we should expect the fair value to increase. The revenue from rental properties remains in good standing and it gives assurance that the dividend income is not affected.  In terms of cost and expenses, it has increased exponentially year-on-year, but in RCR’s defense, the cost and expenses from a year ago only covered 5 months.

What we can probably learn from here is that dividend investors should not value a REIT stock similar to a common stock. If REIT valuation is heavily dependent on EPS and PE ratios, dividend investors would have probably been missing opportunities. Since REITs are primarily meant for dividends, many investors look at the FFO (funds from the operation) and NAV (net asset value). FFO refers to the recurring cash being generated from rental revenue while the NAV refers to the fair value of the company’s assets minus its liabilities. Due to RCR’s decrease in the fair value of investment properties, the NAV dropped to 5.26 PHP/sh from a high of 6.03 PHP/sh. Then again, the decrease in NAV is not critical since the fair value of investment properties are unrealized gains and/or losses which can fluctuate over time.

April 3, 2023

TEL

After the discovery of the 48 billion PHP budget overrun a year ago, it eventually weakened their financial standing in 2022. The net income decreased by 60% due to the expenses coming from the budget overrun. Total revenue only increased by 6% but their expenses increased by as much as 38%. If the growth of expenses continues to move up at a faster rate than the revenue, then this is not going to end well for TEL as a business.

Due to the significant decrease in net income, TEL’s earnings per share dropped to 48.26 from a high of 121.76 a year ago. That said, at the trading price of 1,350 PHP/sh, this gives a 28x PE (price-to-earnings) ratio. For context, TEL used to average a PE ratio of 15x for the last 5 years and 24x is the highest PE they had so far in that given time frame. As compared to GLO’s average 5-year PE of 14x, many investors find TEL’s current share price to be more expensive and overvalued.

With regards to the dividends, it’s something to be concerned about as well. To maintain or at least grow the dividends to shareholders, TEL has to shell out at least 19.5 billion PHP. The only problem is that their net income for 2022 dropped to 10.7 billion PHP from a high of 26.7 billion PHP a year ago. That being said, the dividend rate is not sustainable. If the dividends do however drop in the future, there is a high probability that many shareholders who have high average costs will start reducing their stake with TEL and we should expect a drop in share price. 

Few investors speculate at the moment that the dividend is what’s holding the share price of TEL at the moment. At the current trading price of 1,350 PHP/sh, the dividend yield is still attractive relative to the inflation rate, but that is within the assumption that the dividend income is sustained or at least grows in the future. TEL did disclose before that the dividends are not affected and that’s what we need to keep an eye on in the next few quarters. After all, they have more towers to sell and they are open to using their bank line to take out a loan to fund their operations. Moreover, the demand for their service remains stable hence revenue is projected to increase but at the usual single-digit rate.

Running a telco business requires high capital expenditure. For 2023, it seems like the focus of TEL is leaning more towards reducing their cost and expenses since it is more difficult to grow revenue. What they’re doing now is lowering the capital expenditure to retain more of the income. They’ve been making settlements with their suppliers that caused their budget overrun and have been making changes in internal policies to avoid such issues to happen again in the future. 

TEL as a business is doing fine but the level of uncertainty has increased since nobody knows if whatever they’re doing now will turn out well, not until we see the result of the 2024 annual financial statement. The risks of investing in TEL now are higher as compared to what was TEL before the budget overrun issue.

SCC, DMC

This discussion would be more about SCC, but since at least 70% of DMC’s 2022 core net income is coming from SCC, then findings from SCC would indirectly affect DMC as well.

Both SCC and DMC declared another record-breaking dividend due to the spike in their income brought on by the volatility of coal prices. Newcastle coal futures, the benchmark of coal prices in Asia, have dropped by as much as 60% this 2023. Moreover, China, the largest customer of SCC has shifted to Russian coal. As a result, coal sales from China dropped by as much as 55%.

That being said, there is uncertainty whether SCC would be able to achieve the same revenue from a year ago hence there might not be another special dividend in the 4^th quarter of this year if income drops. During SCC’s recent shareholder meeting, to replace losses from China,  the management said that they were able to establish and supply coal to new local buyers in the power and cement plants such as SMC power plants, AP power plants, Northern Cement, and Good Found Cement. They were also able to develop new export markets from South Korea, Cambodia, and Brunei. The coal business will be there as usual but we are not sure if the income from coal will be sustained, we’ll have to keep an eye on the next quarterly reports.

As compared to coal, the power segment of SCC is looking bright. The revenue from the power segment has been increasing by an average of at least 30% year on year in the last 3 years. What makes it interesting is that the cost and expenses remained flattish hence they can keep more of the income. This is understandable since SCC uses its coal to fuel its power plants. The revenue from their power segment seems like not slowing down this 2023. At least 60% of our country’s energy mix still relies on coal and there is only a thin margin of supply available. NGCP has been sending out a warning of a high probability of a yellow alert since the power demand increased. With high demand coupled with limited supply, we expect power rates to be high.  On top of that, PAGASA made a forecast that El Nino will likely persist until 2024. The summer months are usually when SCC’s power segment makes high profits due to hot weather and there is an increased use of air conditioning machines that uses a significant amount of power. If PAGASA’s forecast holds, then SCC’s power segment could be good all year round and coal mining is not going to be disrupted.

There is still no clear trajectory for where SCC is heading. It still does not have any clear prospects in the future, it will however stay in business as long as coal is still the main source of energy. The Philippines is targeting to reduce coal reliance and hoping to have at least 50% of the energy mix coming from renewable energy by 2040. The moratorium on coal plants is still in effect hence there is no room for growth or expansion even if they wanted to. SCC is only spending around 20% of the net income as capital expenditure to maintain the power plant and coal mining operations. The rest of the income is being given away as dividends. For context, their 2022 financial statement reported that around 31 billion PHP of the unappropriated earnings were collected and available for dividends and they paid dividends amounting to more than that in the same year. With a dividend payout ratio exceeding 100%, we shouldn’t be expecting SCC to grow. What’s interesting however is that last 2021, they invested around 1.5 billion PHP for renewable energy projects but these are still to be completed by 2026.

With regards to DMC, they remain conservative in giving out dividends to shareholders since they have increased their capital expenditure for the growth and operations of their other business segments such as construction related to real estate, government-related projects (railway), and water services (Maynilad Water).

LTG

LTG posted a 24% increase in net income for the year 2022. LTG is mostly known for its tobacco business because on average at least 70% of the revenue is coming from it. For the year 2022, the tobacco business has declined such that it only contributed 60% of the overall revenue. It was the banking segment (PNB) that significantly lifted LTG’s revenue to achieve a 24% increase in net income. The only issue is that the revenue that PNB contributed is not a recurring income. That being said, without PNB’s contribution, LTG’s performance would’ve remained flat.

Going deeper into their annual financial statement, the income they’re getting from the tobacco business has started to decline since 2020. The demand is not the problem because the sales remained flat. The cost and expenses are the issues because it has been increasing annually due to inflation, hence, they’re keeping less of the income. The good thing is that income from other business segments such as distilled spirits, beverage, and property development remains in good standing despite the inflation.

With the above findings, what will become of LTG from hereon is uncertain. Investors are keeping an eye on the state of the tobacco business because it is sensitive to inflation. It has been forecasted that inflation will go down this year. Currently, inflation seems like it is at its peak but it is uncertain when will it go into a downtrend.

In another story, some investors speculate that LTG is a possible candidate for removal in the next PSEi rebalancing this coming June. That being said, some investors remain cautious about buying shares even if the dividend yield is attractive at current trading prices. Nobody knows what will happen with the share price if the speculation holds, hence investors would rather wait and see.