Marcos bans POGOs; phase out by end of FY24

During his SONA (State of the Nation Address) yesterday after the market close, President Marcos banned all POGOs (Philippine Offshore Gaming Operators) “effective today” [link]. Mr. Marcos immediately clarified the timeline by directing PAGCOR to “wind down and cease all operations of POGOs by the end of the year”, saying that the “grave abuse and disrespect of our system and laws must stop.” While POGOs are predominantly staffed by Chinese nationals and operate gaming schemes meant to appeal to customers in China, the Chinese government has a long history of opposition to our facilitation of the industry. 

> What’s the potential harm?  According to Leechiu Property Consultants, POGOs make up approximately 11% of the total gross demand for commercial office space in the Philippines (75k sqm out of 685k sqm total demand). This is down 15% from the previous year, and down 75% from the 2019 peak when it was thought that POGOs occupied around 300k sqm of office space which at the time was approximately 25% of total demand. So, while real estate firms have been actively reducing their exposure to POGOs over the past five years, the relatively quick loss of such a huge chunk of the demand for commercial real estate will need to be mitigated. In the world of commercial real estate, increased vacancy leads to lower lease rates.

> Impact on the PSE:  The obvious losers of a POGO ban are the commercial real estate developers that have exposure to POGO clients: DoubleDragon [DD 11.92 unch; 32% avgVol], Filinvest Land [FLI 0.69, up 1.5%; 59% avgVol], Megaworld [MEG 1.87, down 0.5%; 96% avgVol], Ayala Land [ALI 31.90, up 0.6%; 111% avgVol], and Robinsons Land [RLC 15.30 unch; 19% avgVol]. Of course, the degree to which each company in that list is a “loser” here will depend on the nature of its exposure to POGOs and the effectiveness of the management team’s efforts to insulate its pricing and occupancy rates from harm. But the impact of the POGO-occupied inventory being dumped back onto the market will be felt by all companies that develop and lease commercial estate, regardless of whether or not they’ve ever tried to partake in the POGO forbidden fruit.

> What about REITs?  They won’t be spared, and in fact, some might be disproportionately exposed. A chart from end-FY22 showed that DDMP [DDMPR 1.16 unch; 194% avgVol] had 65% of its gross leasable area tied up with POGOs, with RL Commercial REIT [RCR 5.60, down 1.9%; 374% avgVol] a distant second with just 2% of its GLA exposed. That was a few years ago, and I’ve struggled to find good updated information from all of the REITs on their exposure to POGOs. DDMPR reported that 48% of its FY23 rental income was from POGOs, but I bet that DDMPR has done additional work to try to bring that number down, and that all of the REITs with commercial office exposure will feel the impact of this ban to some degree due to the downward pressure on office space pricing that the POGO exit is likely to cause. 

> What are REITs going to do?  Well, for starters, it’s important to note that not all REITs are impacted by this announcement. Citicore Renewable Energy REIT [CREIT 2.84, down 0.3%; 51% avgVol] and Premiere Island Power REIT [PREIT 1.90, up 1.1%; 11% avgVol] are only engaged in the lease of industrial lots to power generation companies, and so have no exposure to this POGO issue at all. Beyond that, the rest of the REITs with commercial exposure have been trying to diversify their inventory base as quickly as possible. VREIT [VREIT 1.74, down 0.6%; 52% avgVol] was the first, which hit the market with a mix of majority mall assets with a healthy sprinkling of lesser commercial towers thrown in, but the rest of the once commercial-only REITs have followed suit to inject (or take steps to inject) non-commercial assets into their portfolios. All of the REITs, of course, except for DDMPR, which has not done anything to diversify its holdings or said anything about how it will navigate in a post-POGO world. 

MB bottom-line: Personally, I’m glad POGOs are being phased out completely. While I have a significant stake in AREIT that could be negatively impacted by the announcement, I’m happy to take some short-term pain for the government to correct the Duterte administration’s course on developing (and then completely mismanaging) the POGO industry. I’m a little concerned that the government itself has been the sector that real estate developers have leaned on to replace exiting POGOs over the past few years, but I’m too old and too experienced to get too worked up over thoughts of the potential conflicts of interest that might arise between various government agencies and the incumbent real estate developer families. Zooming out, I’d rather our government agencies lease commercial space from experienced developers than to spend taxpayer money building vanity projects on valuable chunks of land. Evidence for my preference can be seen in the Senate’s ?23 billion (so far) attempt to develop a palace to celebrate its own importance. How much would we save in development and maintenance costs if the Senate simply leased space like any other corporation? I digress. Yes, this will probably cause some RE and REIT pain in the short term, but as with all things in business, the real winners and losers will be decided by how each of the management teams handle this adversity over the long term. 

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