Upside remains substantial for RCR and AREIT at current levels. Despite the run-up of RCR and AREIT over the past few months, we still see significant upside from current levels, anchored both on their continued dividend-accretive asset infusions, alongside expectations of further decline in bond yields. <\/p>\n\n\n\n
We therefore reiterate our BUY ratings for RCR with an upward-revised Target Price of P7.01 and AREIT with a Target Price of P45.46 giving them upsides of 19.6% and 22.9%, respectively.<\/p>\n\n\n\n
Significant shifts in bond curve<\/strong><\/p>\n\n\n\n Upon checking the current yields for the entire spectrum of the Philippine government bonds (RPGB) from 3 months all the way to 30 years, we note that a significant average downward shift of 41bps occurred on a MoM basis. The inverse relationship of yields and price leads us to believe that REITs would follow the trend in declining yields as lower risk- free yields would make REITs relatively more attractive, leading to increased demand and price appreciation.<\/p>\n\n\n\n Taking a deeper dive<\/strong><\/p>\n\n\n\n A spread analysis of the BSP\u2019s RRP vs 5Y RPGBs showed that over the past 10 years, the typical spread was around -49bps. A similar spread analysis of the 5Y RPGB yield vs RCR and AREIT\u2019s yields showed a typical spread of 109bps and 61bps respectively.<\/p>\n\n\n\n This supports our narrative that the progression of the BSP\u2019s rate cut cycle would translate to the lowering of yields for the entire yield curve, and eventually trickle down to the REITs.<\/p>\n\n\n\n At current prices, RCR and AREIT\u2019s FY24E dividend yields have a spread of 118bps and 65bps against the 5Y RPGB, indicating that the recent decline in bond yields has not been sufficiently priced in.<\/p>\n\n\n\n Further, adding our anticipation of a total of 125bps worth of rate cuts from the BSP until 2025, we believe that investors still have the advantage to continue locking in significantly higher REIT yields at current prices.<\/p>\n\n\n\n