Company Reports

No-moat Link REIT announced the acquisition of the remaining 50% interest in Qibao Vanke Plaza in Shanghai. The estimated consideration of CNY 2.4 billion is based on an agreed property value of CNY 5.2 billion, which represents a 26.3% discount to the appraised property value of CNY 7.1 billion as of end-January 2024. With a monthly passing income of CNY 40.6 million from the mall and the car park, we estimate an attractive net property income yield of around 7%. After updating our model for this acquisition, we raise our fiscal 2025 and 2026 (ending March) distribution per unit forecast slightly to HKD 2.63 and HKD 2.86, respectively, implying a fiscal 2025 distribution yield of 6.9%. We maintain our fair value estimate of HKD 59 as we previously assumed that the rights issue proceeds would be redeployed for acquisitions.

We maintain our fair value estimate of HKD 59 for Link REIT after a tour of the trust’s retail assets in Guangzhou, Shenzhen, and Hong Kong. In our view, Link REIT’s malls are professionally managed with a tenant mix that is well curated and carefully positioned across the malls. We think this is an important differentiating factor in mainland China where there are many shopping malls competing for shoppers. Within Guangzhou and Shenzhen, we visited Link CentralWalk, Link Plaza Guangzhou, and Link Plaza Tianhe. Of these three malls, we like Link Plaza Guangzhou the most as it is well connected by two subway lines and serves local residents. There is also potential to capture tourist shoppers as the mall is near popular tourist destinations YongQing Fang and Shamian Island. According to management, the mall’s current footfall has already surpassed its pre-COVID-19 level and we expect this to grow further as new residential developments in the area are completed, coupled with a recovery in tourism.

We maintain our fair value estimate of HKD 59 for Link REIT following the largely in-line first-half fiscal 2024 (ending March) results. Revenue and net property income grew 11.3% and 10.4% year on year, respectively, driven mainly by the contribution of the newly acquired Singapore assets. While general and administrative expenses were slightly higher than expected, these were offset by a lower-than-expected net finance cost, due to 1) higher interest income on the fixed deposits; 2) borrowing cost of 3.74% coming in below previous guidance of 4%; and 3) net gain on derivative financial instruments for hedging. As such, the interim distribution per unit of HKD 1.30 was slightly above our expectations. We have adjusted our general and administrative expenses and net finance cost assumptions based on the latest numbers, and raised our fiscal 2024 earnings per unit by 7% to HKD 2.61. Assuming a 100% payout ratio, our fiscal 2024 distribution per unit forecast of HKD 2.61 implies a distribution yield of 6.8% as of the Nov. 8 close price, and we think Link REIT is currently undervalued.

Link REIT is one of the world’s largest retail-focused REITs. Its portfolio contains 154 properties across Hong Kong, mainland China, Australia, Singapore, and the United Kingdom. The Hong Kong retail properties make up over 50% of portfolio value. Its retail space in Hong Kong can be categorized into three subsegments. Destination or flagship properties are malls with an enhanced trade mix and unique branding, while community malls are midsize, serving as local community hubs. Smaller properties are at a neighborhood level, providing essential goods and services for daily living. With the majority of its overall portfolio in community and neighborhood malls, Link is a dominant player in the more resilient district center-type assets.

We lower no-moat-rated Link REIT’s fair value estimate to HKD 59.00 from HKD 62.30 after the pre-blackout meeting. We trimmed our rental growth assumption on the Hong Kong and China retail and office portfolio, given the slower-than-expected retail recovery in Hong Kong and the weaker economic outlook in China. We also increased our borrowing cost assumption for fiscal 2024-26 (ending March) as interest rates remain elevated. While we continue to see the 11% revenue growth in fiscal 2024 to be supported by the contribution of newly acquired Singapore retail assets and China logistics assets, we cut our distribution per unit, or DPU, forecasts for fiscal 2024-26 by 5%-7%, as we expect the finance cost to weigh on the bottom line. Our fiscal 2024 DPU forecast of HKD 2.45 implies a distribution yield of 6.7%, as of the Oct. 5 close price.

Link REIT is one of the world’s largest retail-focused REITs. Its portfolio contains 154 properties across Hong Kong, mainland China, Australia, Singapore, and the United Kingdom. The Hong Kong retail properties make up over 50% of portfolio value. Its retail space in Hong Kong can be categorized into three subsegments. Destination or flagship properties are malls with an enhanced trade mix and unique branding, while community malls are midsize, serving as local community hubs. Smaller properties are at a neighborhood level, providing essential goods and services for daily living. With the majority of its overall portfolio in community and neighborhood malls, Link is a dominant player in the more resilient district center-type assets.

We are transferring coverage of Link REIT with a lower fair value estimate of HKD 62.30 (from HKD 77.00), after switching to an exit cap rate method and baking in yield expansion ranging from 50 basis points to 100 basis points to compute the terminal value of its investment properties at the end of the forecast period. This is to reflect our view that yields will expand in the current high interest-rate environment, and leading to a lower expected real estate value that can be crystallized by the trust through an asset sale. We also assign Link REIT a no-moat rating, down from narrow previously, as we are uncertain as to its ability to achieve the high return on invested capital as it did historically, due to the current high interest-rate environment. We are also concerned that future acquisitions outside Hong Kong could be dilutive to the efficient scale moat source, as opportunities to reinvest capital at returns above its WACC are limited. We think units are undervalued, with 27% discount to our new fair value estimate as of the May 31 closing price. We expect unit price to remain under pressure, with potential upward rerating when the trust demonstrates its ability to acquire accretively to justify the rights issue.

Link REIT is one of the world’s largest retail-focused REITs. Its portfolio contains 154 properties across Hong Kong, mainland China, Australia, Singapore, and the United Kingdom. The Hong Kong retail properties make up over 50% of portfolio value. Its retail space in Hong Kong can be categorized into three subsegments. Destination or flagship properties are malls with an enhanced trade mix and unique branding, while community malls are midsize, serving as local community hubs. Smaller properties are at a neighborhood level, providing essential goods and services for daily living. With the majority of its overall portfolio in community and neighborhood malls, Link is a dominant player in the more resilient district center-type assets.

We lower our fair value estimate for Link REIT to HKD 77 from HKD 83 to factor in the impact of its 1-for-5 rights issue. The subscription price of HKD 44.20 per rights unit represents a 29.6% discount to the Feb. 9 closing price of HKD 62.80. This represents a theoretical dilution of 5% to the unit price. Our fiscal 2024 distribution per unit, or DPU, forecast is lowered to HKD 2.95 from HKD 3.27 as a result of the enlarged share base, implying fiscal 2024 dividend yield of 5%, based on the theoretical ex-rights price of HKD 59.70. The rights issue is expected to raise HKD 18.5 billion after expenses. Of this, HKD 8 billion-HKD 10 billion will be used to repay upcoming debt maturities in 2023 and 2024, and the balance is expected to fund future acquisitions to capture future opportunities. Overall, we believe that Link REIT’s decision to pre-emptively raise equity (for the first time since its initial public offering in 2015) and dilute its unitholders is a bold move that can only be justified if the right investment opportunities arise in the next 12 months. Hence, we think the unit price performance may be under pressure in the near term. That said, we continue to see its units as undervalued, as the theoretical ex-rights price represents a 22% discount to our fair value estimate, and we expect Link REIT to benefit from an increase in footfall and tenant sales in the Hong Kong and mainland China retail portfolio as border restrictions are lifted and China recovers from the COVID-19 situation.

Link REIT is one of the world’s largest retail-focused REITs. Its portfolio contains 154 properties across Hong Kong, mainland China, Australia, Singapore, and the United Kingdom. The Hong Kong retail properties make up over 50% of portfolio value. Its retail space in Hong Kong can be categorized into three subsegments. Destination or flagship properties are malls with an enhanced trade mix and unique branding, while community malls are midsize, serving as local community hubs. Smaller properties are at a neighborhood level, providing essential goods and services for daily living. With the majority of its overall portfolio in community and neighborhood malls, Link is a dominant player in the more resilient district center-type assets.

We raise our fair value estimate for Link REIT to HKD 83 per share from HKD 82 following the company’s acquisition of Jurong Point and Swing By at Thomson Plaza in Singapore for SGD 2.2 billion from Mercatus. Overall, we are positive on the transaction as we think that these are high-quality assets with good fundamentals. Jurong Point covers a population catchment of roughly 6% of Singapore’s population and is one of the 11 integrated transport hubs in Singapore, which we think could reinforce Link REIT’s efficient scale moat source. The deal is expected to be completed by the end of March 2023. We have added in the rental contribution from the two properties and fee income from managing AMK Hub from the fiscal year ending March 2024, partly offset by a slight increase in general and administrative costs, given absorption of around 140 employees from Mercatus, as well as a higher funding cost. We have raised our distribution forecast for fiscal 2024 to HKD 3.27 per unit from HKD 3.23.

Link REIT is one of the world’s largest retail-focused REITs. Its portfolio contains 154 properties across Hong Kong, mainland China, Australia, Singapore, and the United Kingdom. The Hong Kong retail properties make up over 50% of portfolio value. Its retail space in Hong Kong can be categorized into three subsegments. Destination or flagship properties are malls with an enhanced trade mix and unique branding, while community malls are midsize, serving as local community hubs. Smaller properties are at a neighborhood level, providing essential goods and services for daily living. With the majority of its overall portfolio in community and neighborhood malls, Link is a dominant player in the more resilient district center-type assets.

The trends in Link REIT’s first-half results were generally in line with our expectations. Revenue increased 4.6% year on year to HKD 6.0 billion, driven by a gradual recovery in Hong Kong and the contribution of newly acquired assets, partly offset by a weaker mainland retail and office portfolio. We have adjusted our assumptions to factor in the earlier announced development project at Anderson Road, with expected completion in 2027, as well as the COVID-19 uncertainties relating to the mainland retail portfolio. Our fair value estimate of HKD 82 per unit and distribution forecast for fiscal 2023 of HKD 3.10 per unit are unchanged. An interim dividend of HKD 1.55 per unit was declared, in line with our full-year forecast. The share price has reacted negatively to the result, which we think is related to the uncertainty around Link’s China portfolio. That said, we continue to see resilience in Link’s main operating segment in Hong Kong retail and we expect Link to outperform local peers in the near term, as the timing to a full border reopening remains uncertain, given its focus on local spending. We note that retail sales in the fourth quarter might trend weaker, as the third quarter benefited from the distribution of consumption vouchers, and higher level of outbound travel.

Link REIT is one of the world’s largest retail-focused REITs. Its portfolio contains 152 properties spanning across Hong Kong, mainland China, Australia, and the United Kingdom. The Hong Kong retail properties make up over 50% of portfolio value. Its retail space in Hong Kong can be categorized into three subsegments. Destination, or flagship properties are malls with enhanced trade mix and unique branding while community malls are midsize, serving as local community hubs. Smaller properties are at a neighborhood level, providing essential goods and services for daily living. With the majority of its overall portfolio in community and neighborhood malls, Link is a dominant player in the more resilient district center-type assets.

Link REIT’s fiscal 2022 results were largely within our expectations. Revenue of HKD 11.6 billion was close to our forecast of HKD 11.8 billion and Refinitiv consensus of HKD 11.7 billion, representing an 8% year-on-year increase. Revenue growth was attributable to its acquisition and improving business sentiment in Hong Kong prior to the fifth wave. While Hong Kong has reopened domestically and some cities in mainland China are also gradually easing restrictions, we expect Link REIT’s assets in mainland China will remain affected for the first few months of fiscal 2023. As such, we have revised our growth assumptions slightly lower as we factor in the impact of the lockdowns.

Link REIT is one of the world’s largest retail-focused REITs. Its portfolio contains 151 properties spanning across Hong Kong, mainland China, Australia, and the United Kingdom. The Hong Kong retail properties make up over 50% of portfolio value. Its retail space in Hong Kong can be categorized into three subsegments. Destination, or flagship properties are malls with enhanced trade mix and unique branding while community malls are midsize, serving as local community hubs. Smaller properties are at a neighborhood level, providing essential goods and services for daily living. With the majority of its overall portfolio in community and neighborhood malls, Link is a dominant player in the more resilient district center-type assets.

Link REIT is one of the world’s largest retail-focused REITs. Its portfolio contains 148 properties spanning across Hong Kong, mainland China, Australia, and the United Kingdom. The Hong Kong retail properties make up nearly 60% of the portfolio, by value. Its retail space in Hong Kong can be categorized into three subsegments. Destination, or flagship properties are malls with enhanced trade mix and unique branding while community malls are midsize, serving as local community hubs. Smaller properties are at a neighborhood level, providing essential goods and services for daily living. With over 50% of its overall portfolio in community and neighborhood malls, Link is a dominant player in the more resilient district center-type assets.

We believe Link REIT’s AUD 596.1 million acquisition of a 49.9% stake in a joint venture, with Oxford Property Group, for five office properties in Australia, is in line with its overall strategy of diversifying its portfolio away from Hong Kong. Located in Sydney and Melbourne central business districts, or CBDs, and with portfolio occupancy at 92.6%, we view the properties as high-quality and we expect the acquisition to be immediately accretive to DPU. Assuming Link REIT’s stake of 49.9%, appraised property valuation is AUD 1.13 billion, and net property income, or NPI, of AUD 49.6 million represents NPI yield of 4.4%. The leases have built-in annual rental escalation of 4%. Targeted completion is in the first half of 2022 and we estimate 1.6% distribution accretion in fiscal 2023. Our fair value estimate rises to HKD 81 from HKD 80. Our revised fiscal 2023 distribution forecast of HKD 3.23 per unit implies a dividend yield of 4.8%. With Hong Kong currently under another round of lockdown, we think Link REIT’s unit price is attractive relative to our fair value estimate as share prices of real estate companies declined, in line with previous COVID-19 outbreaks. We think Link REIT’s non-discretionary trade focused retail portfolio in Hong Kong is more resilient relative to Hong Kong peers with the city under another round of lockdown. The company is also expected to benefit from continued diversification, with an expanding mainland China and overseas portfolio.

Link REIT’s first-half results are slightly ahead of our expectations. First-half revenue of HKD 5.8 billion represents a 10.4% year-on-year increase, mainly due to a stable occupancy across the portfolio and positive rental reversion of 3.4% and 12.1% respectively in the Hong Kong and mainland retail portfolio. Management noted that the impacts brought by the pandemic have bottomed out and tenant sales have largely recovered to the pre-COVID-19 levels in 2019. We have fine-tuned our car park segment assumptions to factor in higher demand for hourly parking as mall visits increase. Another small positive surprise is the share of profit from the Qibao Vanke joint venture, which saw positive rental reversion of 31.3%. While occupancy level at Happy Valley Mall in Guangzhou remains low at 74.1%, this is attributable to the vacant space from an ex-department store as earlier flagged. Occupancy for the property is expected to remain low as asset enhancement initiatives for the asset are expected to commence later next year. With the trust’s strong retail experience, we think the trust can unlock value in recently acquired properties, and also future acquisitions.

Link REIT is one of the world’s largest retail-focused REITs. Its portfolio contains 143 properties spanning across Hong Kong, mainland China, Australia, and the United Kingdom. The Hong Kong retail properties make up nearly 60% of the portfolio, by value. Its retail space in Hong Kong can be categorized into three subsegments. Destination, or flagship properties are malls with enhanced trade mix and unique branding while community malls are midsize, serving as local community hubs. Smaller properties are at a neighborhood level, providing essential goods and services for daily living. With over 50% of its overall portfolio in community and neighborhood malls, Link is a dominant player in the more resilient district center-type assets.