> Quick answer: Yes, DDMPR’s ownership of land “matters”, but maybe not in some of the ways that you might think. For some background, the question comes out of the fact that DDMP [DDMPR] owns the buildings that make up the DoubleDragon Meridian Park development, and the land beneath those buildings. While there are other REITs that have significant land holdings, like Citicore Renewable Energy REIT [CREIT], DDMPR is the only commercial REIT that owns substantially all of the land underneath its buildings.
> Is that good? It’s not necessarily better, but it does come with certain advantages. For starters, if DDMPR ever sold the land, the capital gain would be considered distributable income and DDMPR would be legally required to distribute at least 90% of that to shareholders. Importantly, though, this rule would only apply to proceeds that are not reinvested into qualified real estate investments within the year. Owning land also gives DDMPR executives a higher-quality asset to borrow against, which would (in theory) give DDMPR shareholders more cash that could be used to develop or acquire new properties for the REIT.
> Does it add to the dividend? No, owning land doesn’t add to the quarterly dividend directly. The impact of the land’s appreciation can be seen in the fair market value adjustments that impact net income, but this is an unrealized gain that is non-cash and therefore excluded from the pool of distributable income that DDMPR must dividend out to shareholders. It could be something that indirectly adds to the dividend, though, if management borrowed against the land to acquire new assets that would increase the dividend.
MB bottom-line: In the REIT context, think of land ownership as a tool. And like any tool, its usefulness is limited by the skill of its user. I’m not saying that DDMPR is unskilled with its land use, but I disagree fully with the management team’s positive framing of its “zero” debt-to-equity ratio. If I squint, the lack of debt during this inflationary period could be seen as a positive, but it doesn’t take long for the little voice in the back of my mind to start whispering: “But what if it used debt to buy a truckload of income-generating assets three years ago, wouldn’t that be better, higher rates or not?” DDMPR feels like a ship without power, adrift in the ocean, and the only messages we get from it are these weird periodic transmissions from the crew about how great it is to just feel the push and pull of the waves without the pesky sounds of the engine to spoil the experience. If I were a DDMPR shareholder, I’d be tired of this experience. Yes, owning land is something that makes DDMPR interesting and somewhat unique, but I don’t think simply having the land is all that beneficial to shareholders. It’s not negative, but it’s not positive: like a hammer on the shelf, gathering dust.
--
Merkado Barkada is a free daily newsletter on the PSE, investing and business in the Philippines. You can subscribe to the newsletter or follow on Twitter to receive the full daily updates.