Bullish on RCR
Aside from lower interest rates (which make real estate investment trusts, or REITs, more attractive), there are many reasons to be excited about RL Commercial REIT (RCR).
In a media briefing last month, RCR chief financial officer Kerwin Tan said the company has a three-year target to make RCR “as big as possible.”
This is exciting news as REITs typically expand through acquisitions that are dividend-accretive, meaning each new property it buys contributes to higher dividends for shareholders.
Management also confirmed that RCR has the potential to triple the size of its market capitalization from P100 billion to P300 billion, depending on market conditions. RCR sponsor Robinsons Land (RLC) currently has around P200 billion worth of rental assets, comprised of malls, offices, hotels and warehouses, which can still be injected.
Although there is no guarantee that RCR will indeed triple in size in the next three years, I am confident that it can grow by at least 28 percent in the near term.
Note that RLC had already successfully distributed 1.04 billion shares of RCR to the public in April. This is important because one of the main obstacles facing REITs in acquiring assets from their sponsor is the SEC’s 33.3-percent minimum public float requirement. With the placement, RCR’s public float is now 42.57 percent, enabling it to acquire as much as P28.5 billion worth of assets from RLC without going below the SEC’s minimum public float requirement.
As it becomes bigger, RCR also has the potential to be added to the Philippine Stock Exchange Index. This in turn will push up RCR’s share price as fund managers who track the index buy shares of the REIT.
Finally, I am excited about RLC’s potential asset injections. Although details are currently unavailable, I expect RLC to infuse more malls into RCR, given that it still has 1.7 million square meters of malls versus only 793,000 square meters of offices left in its portfolio. Incorporating more malls into RCR’s portfolio would reduce its reliance on offices, which is beneficial in my opinion. Given the current oversupply in office spaces and the associated risk of declining rental rates, diversifying into malls—where lease rates are buoyed by resilient consumer spending—would enhance the stability and upside potential of dividend payments.
The main risk to RCR’s growth trajectory is the potential rise in interest rates. While the Philippine government doesn’t face the same fiscal challenges as the US, domestic interest rates could also go up if US rates go up due to concerns over its widening budget deficit and increasing debt levels.
If this happens, prices of all REITs including RCR could go down, and RCR may find it hard to triple its size in the next three years.
