Champion REIT Earnings: Results In Line; Cautious About the Weak Office Market and Refinancing Risk

No-moat Champion REIT’s 2023 results were in line with our expectations. Revenue dropped by 2% year on year as the recovery in Langham Place mall was not sufficient to offset the weakness in the office assets. Full-year distribution per unit, or DPU, declined by 14% year on year to HKD 0.17 on higher finance costs. We lower our fair value estimate for the trust to HKD 2.54 from HKD 2.84 as we anticipate the office portfolio weakness to persist through 2024 and early 2025, especially given the less favorable location of Three Garden Road compared with peers in the Greater Central area. We also assume finance costs remain elevated in 2024 as we anticipate the expiration of the HKD 2.9-billion lower-rate interest-rate swap contracts in June 2024 to outweigh the positive impacts of expected interest rate cuts. As such, we forecast a 2024 DPU of HKD 0.16, slightly lower than 2023, but still implying an attractive distribution yield of 8.8%.