The Hong Kong-registered Link Real Estate Investment Trust(0823:HKEx) is the largest REIT in Asia. Listed on Hong Kong Stock Exchange in 2005, Link’s primary focus is developing retail properties and other businesses like car parks and offices.
The nature of the investment portfolio generally indicates the city’s economic performance to a certain extent. As the pandemic is under a more controlled condition, Hong Kong business activities are gaining momentum. We take a look at Link’s potentials, given a mid-to-long-term investment.
Profile
Link REIT has no single majority shareholder, and all shares are free float; that is, they are not subject to any restrictions or conditions.
Besides being a member of the Hang Seng Index, Link REIT is also one of the constituents of the following indexes: Hang Seng Sustainability Index, Dow Jones Sustainability Asia Pacific Index, and FTSE4Good.
Link REIT gets three quality ratings: “A” from Standard & Poor’s, “A2” from Moody’s, and “A” from Fitch. The outlook is all “Stable.”
Asset Geo-distribution
After one and a half decades’ operation, Link has one hundred and thirty-six projects under management.
Of these projects, one hundred and twenty-seven are in Hong Kong, while seven properties are in mainland China, and the other two are in Australia and the UK. The pro forma value is HK$207 billion.
Business Model
Link’s objectives are creating portfolio growth and capital appreciation. Link adopts three business strategies to fulfil the two goals:
1. Asset Management: Link uses pro-active management techniques to increase property value by using professional skills in managing properties. They include a good community relationship between Link and tenants. Besides, the management promotes and markets corporate image, charity, and sports event sponsorship. One thing to note: Link uses its subsidiary – Link Asset Management Limited to manage its assets. The benefit is total commitment and no extra cost of outsourcing.
2. Asset Enhancement: Link is always looking for an embedded value, like additional retail space, of its properties and finds ways to release them. The ultimate goal is to increase profits and capital growth potential. One strategy is to redesign and renovate properties to meet customers’ needs. Besides, technologies are also in use to help customers to locate favourite shops. Up until now, Link has completed the enhancement of eighty-eight projects since 2005 and is still actively doing more.
3. Asset Investment: Link is also seeking quality assets for the acquisition. The strategy aims to bring more stable income streams and capital potential. The target locations are Hong Kong, tier-one cities in mainland China and markets overseas like Australia and the UK. Except for the local market, Link has made diversification of its portfolio its aim. In recent years, Link has acquired whole-interest properties and partnership interests in cities like Beijing, Shanghai, Guangzhou, and Shenzhen in China. Link has purchased assets in Sydney, Australia, and London, the UK.The total asset investments have amounted to about HK$57 billion since April 2011.
Vision 2025
Link REIT aims to increase the portfolio value by integrating with a culture of excellence and creativity. Among these, an interactive platform of “Business as Mutual” is in the process.
The platform serves as an interactive system for stakeholders as Link, business partners, employees, tenants, communities, non-government organizations to find out problems and co-solve together. The solutions are therefore best for stakeholders.
Moreover, Link strives for a high single-digit CAGR(compound annual growth rate) by 2025. The management target the following objectives:
1. Organic Portfolio
- Achieve the >95% portfolio occupancy
- Focus on enhancing portfolio assets and creating value.
2. Inorganic drivers
- Achieve four acquisitions outside Hong Kong.
- Make use of “core” and “core-plus” + “value-add” strategies to increase growth.
- Target acquisition opportunities in Hong Kong, tier-one cities, and the surrounding delta areas in mainland China and overseas markets.
3. Financial strength
- Maintain the rating “A” from three rating agencies.
4. Management guidance of targeted portfolio distribution
- Hong Kong – 70%-75%; Mainland China – ≤ 20%; Overseas – ≤ 10%; Office – ≤20%.
Read more reviews about Suntec REIT and AIMS APAC REIT.
Reaction to the pandemic
Link REIT establishes a HK$300 million scheme to help small to mid-sized tenants alleviate operating pressure in response to the crisis. They are in the form of rent concessions and remodified lease contracts.
Performance
Year 20/21 is a challenging year for enterprises, and Link REIT is no exception.
The revenue increased to HK$10.7 billion by 0.2%. The net property income(NPI) also increased to HK$8.2 billion by 0.2%. The distribution per unit(DPU) is HK$2.8999 per unit, increased by 1%. But the net asset value(NAV) per unit is HK$76.24 per unit, reduced by -1.8%.
As of March 2021, the retail occupancy rates for Hong Kong and China are 96.8%(as of June 2021 and 96.3%. The office occupancy rates for Hong Kong, Mainland China, and Overseas are 82.9%, 95.8%, and 100%.
The rental reversion rates for Hong Kong and Mainland China are -1.8% and 11.1%.
The rental collection rates for Hong Kong, Mainland China, and Overseas are 98%, 98%, and around 90%.
Breakdown of Hong Kong and China Markets
Hong Kong
- Retail (as of March 31, 2021)
Although the occupancy rate is at 96.8%, the revenue growth is -4.5%, the reversion -1.85, the average unit rent growth -3.4%. The rental collection and arrears are still at a healthy level.
- Office
The occupancy rate is 82.9%(as of June 2021)
- Car Parks(year-on-year)
The revenue growth is -1.5%, income per space per month -1.8%, average valuation per space -0.7%
Challenges:
- The negative growth is due to the tenant support scheme.
- Leasing sentiment is slow to improve.
Mainland China
- Retail/ Shopping Centres
The revenue growth sees less by -7.8%; however, the occupancy is at 96.3%, the reversion rate is positively 11.1%. The recent purchase of “Happy Valley Shopping Mall” in Guangzhou, China, is Link REIT’s typical asset investment approach to increase the portfolio’s value.
- Office
Though the occupancy rate is 95.8%, the reversion retreats to -8%.
Challenges:
- Partial properties closure and asset enhancements to Futian, Shenzhen, and rental concessions due to the Covid-19.
- Shanghai market faces the issue of over-supply.
Capital Management
Link REIT has a strong balance sheet. Apart from the strong ratings issued by the three rating agencies, Link has HK$12.5 billion average liquidity for operating and other purposes.
The average borrowing cost for the group has lowered to 2.66% by 86 basis points. The gearing ratio is only 18.4%.
The fixed-rate debt ratio is moderate by 63.5%. The average debt maturity is 4.3 years. However, Link faces an unsteady debt maturity profile.
Link targets low debt ratio and sufficient debt headroom for future acquisitions.
Link continues to manage currency risks and protect investment returns by using hedging tools.
1. Dividend Payout and Buyback
Link is committed to a 100% payout ratio. That means full distributive income payout to unitholders.
Link will pay out HK$14 cents of discretionary distribution until 2021/2022.
Buyback depends on market conditions and regulatory requirements.
2. Valuation
As Link adds two new office assets from Australia and the group’s overall value has increased 3%.
Link REIT’s China-based assets have increased by 7.3% in value due to the appreciation of RMB.
The Hong Kong portfolio’s value has decreased by 2.4% due to rental market assumptions.
3. Fitch Rating
Fitch comments Link REIT’s Hong Kong portfolio remains resilient under the current situation. Although the group’s financial profile may weaken, the leverage and coverage will remain the rating threshold “A”. The outlook remains “Stable”.
Fitch expects the financial management remains prudent with a strong liquidity policy.
Our Verdict
Given the resilience Link poses in the past year, we are optimistic about the outlook despite the market and political uncertainties. We are confident the management remains prudent on financial policy and flexible on operations strategies.
Key Takeaways:
Link REIT actively manages its portfolio and uses an internal property management subsidiary to increase efficiency and commitment.
- Regarding the pandemic and oversupply markets, the management seeks to be engaged in flexible business policies to minimize the loss.
- Link is committed to a low debt gearing ratio and sufficient cash reserve and facilities, given the solid financial position and ratings “A.” The management will remain prudent on financial policies.
- Despite market changes, Link is still committed to a 100% distribution payout. It has consecutively increased the distribution per unit(DPU) for fifteen years.
- Two overseas assets add impetus to the portfolio. The management makes overseas expansion on one of its priorities.
- Hong Kong portfolio growth may slow due to the pandemic and political issues.
Investors should weigh on factors above and their individual ones when considering investment decisions.
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