Wharf REIC Issues Profit Warning for 2022 Results on Revaluation Losses

Wharf Real Estate Investment, or Wharf REIC, guided that the group may incur a loss in 2022, due to the revaluation deficit of its investment properties for full-year 2022, which may be more than twice the amount reported in first half 2022 (HKD 5 billion). We will issue an update pending more detailed information from the firm’s final results in March and we think the deficit is likely due to cap rates expansion on the back of the rising interest rate environment.

We maintain our fair value estimate of HKD 46 per share as the revaluation losses are noncash items. Given that the company is fairly valued at the current price, we think that any pullback on Wharf REIC’s share price will be a good opportunity to accumulate the stock as we expect the firm to benefit from the reopening of China and Hong Kong borders and to emerge strongly from the pandemic.

We estimate that the revaluation losses imply an approximate 5% mark-down in the fair value of its investment property portfolio as of June 2022. We think the property that may suffer the biggest write-down is Times Square as it struggled with a 15% decline in revenue in the first half of 2022 compared with the first half of 2021. Notably, its retail rent of HKD 114 per square foot per month registered in the first half of 2022 is almost half its prepandemic high of HKD 200 per square foot per month. We maintain our view that rents at Times Square will not recover to their previous peak in our forecast period due to higher levels of competition for luxury shopping for mainland Chinese tourists.