Company Reports

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%.

Champion REIT Hong Kong portfolio consists of Three Garden Road in Central in Hong Kong's central business district, and the office and retail portion of Langham Place, a mixed-use complex in Mongkok.

Champion REIT Hong Kong portfolio consists of Three Garden Road in Central in Hong Kong's central business district, and the office and retail portion of Langham Place, a mixed-use complex in Mong Kok.

We transfer and resume coverage of Champion REIT with a fair value estimate of HKD 2.84, implying a price/book ratio of 0.4 and a fair distribution yield of 6%, in line with the 10-year historical average. We assign Champion REIT a no moat rating, down from narrow previously. This is due to Three Garden Road’s inferior location in the Hong Kong central business district, which has resulted in the asset underperforming the market during downturns and saw tenants leaving for more centrally located office buildings. This is evidenced by Three Garden Road’s occupancy rate of 82.2% as at June 2023 compared with the overall CBD Grade A office occupancy rate of 90.6%, according to JLL.

We are placing Champion REIT under review pending a change in analyst. We will provide further updates on coverage resumption in January 2023.

Champion REIT Hong Kong portfolio accounts for over 95% of its overall portfolio. It consists of Three Garden Road in Central in Hong Kong's central business district, and Langham Place, a mixed-use office, retail, and hotel complex in Mongkok.

Champion REIT reported weak first-half net property income of HKD 1 billion, declining 8.2% against the same period last year, with the underlying trends within expectation. With uncertainties in the economic environment and the Hong Kong border remaining closed, Three Garden Road continues to struggle from a quiet leasing market. Occupancy was weaker than expected, declining to 83.8% from the 2021 level of 89.0%. On a positive note, the recovery of Langham mall was slightly ahead of our expectation, with turnover rent increasing to HKD 51 million from HKD 15 million, although negative rental reversion persisted as pressure on base rent remains. As such, we have fine-tuned our assumptions to reflect weaker demand for Three Garden Road offices, partly offset by a quicker-than-expected recovery in Langham Place mall. We lower our fair value estimate slightly to HKD 3.90, but our 2022 distribution per unit forecast of HKD 0.21 is unchanged. First-half distribution of HKD 10.64 cents represented a 11.1% decline on the same period last year. While we think Champion’s shares are undervalued with a 11% discount to our fair value estimate and a 6% 2022 distribution yield, as of market close on Aug. 19, we think the timing of a full recovery remains uncertain as both the retail and office segments depend on border reopening. We continue to prefer Link REIT, given its focus on the more resilient nondiscretionary trade.

We continue to expect Champion REIT’s retail portfolio will benefit from a domestic recovery in the second half of 2022, and our long-term view on the REIT is unchanged. Previously, we noted that we expect Link REIT, Champion’s close peer, to benefit from a local recovery in the fiscal year ending March 31, 2023, given its Hong Kong retail portfolio consists mostly of suburban malls that rely more on domestic consumption. We believe Champion REIT’s performance is likely to lag that of Link REIT, as we think Langham Mall is more dependent on tourist consumption, and we expect recovery in the Three Garden Road office, in line with the rest of the market, to lag that of retail properties. That said, we expect the relaxation of COVID-19 measures from late April is likely to benefit overall Hong Kong retail assets.

Champion REIT Hong Kong portfolio accounts for over 95% of its overall portfolio. It consists of Three Garden Road in Central in Hong Kong's central business district, and Langham Place, a mixed-use office, retail, and hotel complex in Mongkok.

Narrow-moat-rated Champion REIT’s full-year result was weaker and consistent with our view as we had anticipated lower rental for its property portfolio. As management is wary of the impact from the latest pandemic restrictions, fiscal 2021 distribution payout ratio was lowered to 90% from 95% previously to preserve capital. As such, full-year distribution per unit has declined 8.7% to HKD 0.23 in line with our forecasts. Given the latest COVID-19 wave, we expect recovery to be pushed back and our fair value estimate for Champion REIT is lowered to HKD 4.00 from HKD 4.30. However, our long-term thesis is unchanged as we expect the trust’s properties to maintain a high level of occupancy during an economic downturn, due to the location and quality of the properties. This was reflected in an improvement in occupancy levels for both Three Garden Road, and Langham Place office, in the second half of 2021. Similar to previous lockdowns, management also noted that rental concessions may be granted to tenants on a case-by-case basis.

The valuation for Hong Kong real estate stocks remains attractive, in our view. With economic recovery expected in 2022, the near-term positive catalyst for the sector is the reopening of borders with mainland China, then internationally. We expect the share prices of landlords with larger retail exposure to rally ahead of any news of border reopenings. At a 15% discount to our fair value, Wharf REIC is our preferred pick and we expect the landlord to benefit the most as close to 90% of operating income is derived in Hong Kong, mainly from its two flagship properties in Harbour City and Times Square. Link REIT, Swire Properties and Hongkong Land would also benefit though the latter two have a smaller proportion of retail contribution. A recovery in office rents is likely to be the driver for Hongkong Land and Swire Properties, though a recovery in office should lag retail as corporates need to confirm their business plans after the reopening of borders, in our view. Swire Properties and Hongkong Land are trading at close to a 24% discount to their respective fair values while Link REIT’s more defensive portfolio sees the trust trading at a narrower discount to its fair value.

Champion REIT Hong Kong portfolio accounts for over 95% of its overall portfolio. It consists of Three Garden Road in Central in Hong Kong's central business district, and Langham Place, a mixed-use office, retail, and hotel complex in Mongkok.

Champion REIT Hong Kong portfolio accounts for over 95% of its overall portfolio. It consists of Three Garden Road in Central in Hong Kong's central business district, and Langham Place, a mixed-use office, retail, and hotel complex in Mongkok.

Champion REIT’s first-half result was largely within our expectations but management’s outlook was weaker than anticipated. Net property income of HKD 1.14 billion is down 4.8% year on year. The decline was largely driven by negative rental reversions across the REIT’s core portfolio in Hong Kong. The decline in rents and net property income sees interim distribution at HKD 12 cents, representing a 2% year-on-year decline, and management noted a downward trajectory for distribution per unit was expected. We have factored in the more cautious outlook and lowered our fair value estimate to HKD 4.30 from HKD 4.60. Our distribution per unit forecasts for fiscal 2021 and 2022 have declined slightly to HKD 22.90 cents and HKD 23.40 cents, from HKD 23.50 cents and HKD 25.10 cents previously. This represents a decline of around 2.5% and 6.7% respectively, and implies a distribution yield of 5.2%.

Champion REIT Hong Kong portfolio accounts for over 95% of its overall portfolio. It consists of Three Garden Road in Central in Hong Kong's central business district, and Langham Place, a mixed-use office, retail, and hotel complex in Mongkok.

Ahead of the first-half result, we incorporate Champion REIT’s earlier acquisition of a stake in 66 Shoe Lane in London into our forecast, but there is no change to our fair value estimate of HKD 4.60.

Champion REIT’s weaker second-half 2020 result was largely within our expectation. While occupancy level declined slightly more than our expectation for both 3 Garden Road and Langham Office, rental for the full year remained resilient, particularly for Langham Place Office. Since our last update in November 2020, base and variable rent at Langham Mall come in 4% lower than our forecast, mainly due to another lockdown in early December. This was offset by lower promotional expense in the second half of 2020 as economic activities improved after a decline in coronavirus cases between July and early December. Overall net property income declined 5.4% to HKD 2.35 billion for the full year, slightly ahead of our forecast of HKD 2.24 billion. Second-half distribution per unit of HKD 0.1275 per share was slightly ahead of our forecast that takes full-year distribution to HKD 0.25 per share, a 6% decline against last year. A non-cash revaluation loss of HKD 4.7 billion was booked in the second half, driven by lower rental. There was no change in capitalisation rates against the first half. With a conservative gearing level, we did not expect any decline in asset value to have an adverse effect on the REIT’s capital position. Total debt to asset was 23% and below regulatory limit of 45%.

While Champion REIT’s mandate is open to investments in commercial and retail properties across Asia, it has been largely quiet on the acquisition front. The focus has been asset enhancements to its two existing properties in Three Garden Road and Langham Place. Management remains on the lookout for acquisitions, with interest in Hong Kong and the Greater Bay Area. Potential changes to the REIT code, allowing larger proportion of a REIT's asset base for development or minority investments, may provide more investment options.

While Champion REIT’s mandate is open to investments in commercial and retail properties across Asia, it has been largely quiet on the acquisition front. The focus has been asset enhancements to its two existing properties in Three Garden Road and Langham Place. Management remains on the lookout for acquisitions, with interest in Hong Kong and the Greater Bay Area. Potential changes to the REIT code, allowing larger proportion of a REIT's asset base for development or minority investments, may provide more investment options.

After a recent call with management, we maintain our fair value estimate for narrow-moat Champion REIT at HKD 4.75 per unit. The unit price has generally improved in line with a more positive outlook on the COVID-19 situation. However, a sharp increase in COVID-19 cases in recent days may see Champion’s unit price weaken as sentiment deteriorates. We think that this may present a buying opportunity, as we assume the risk of deviation to our base case view to be low. Our thesis on the REIT is unchanged and we remain positive on the long-term outlook for both of Champion’s properties.