Another tough year ahead
? WREIC reported a 13% yoy decline in underlying profit, primarily due to weak performance of HK IP which is still suffering from negative rental reversions.
? Both Harbour City and Times Square are suffering from negative rental reversions, which we believe will persist in FY22F.
? We think WREIC will incur high marketing expenses in FY22F, as in FY21, to help its retail tenants drive sales. Reiterate Hold with a lower TP of HK$37.5.
Underlying profit declined by 13% yoy
Wharf REIC (WREIC) reported a 13% decline in FY21 underlying profit to HK$6.5bn (12% below our estimate). Its total revenue was up by 3% yoy to HK$16bn due to the booking of development properties (DP) at Suzhou IFS. However, its marketing expenses increased by 92% to HK$1.1bn due to the launch of its own marketing campaigns, which led to a 13% yoy decline in EBIT from investment properties (IP). FY21 DPS amounted to HK$1.31, still pegged to 65% of its underlying profit from HK IP and hotels.
Harbour City: embattled by negative rental reversion
Revenue from Harbour City (HC) declined by 8% yoy in FY21 to HK$8.0bn. Retail IP saw a 7% yoy decline in revenue despite a rebound in occupancy to 93% at end-2021, due to negative base rent reversion. Revenue from office IP was down 11% yoy as tenants downsized their lease space; occupancy improved by 3% pt hoh to 85% at end-2021. Times Square: facing direct competition from nearby portfolios Times Square (TS) saw an 11% yoy decline in retail IP revenue in FY21, due to negative base rent reversions. TS retail occupancy improved by 3% pts hoh to 95% at end-2021. Revenue from TS office declined by 5% yoy as cost-conscious tenants consolidated their workspace; end-2021 occupancy was 89%. Management admits that TS is operating in a more challenging environment than HC’s due to direct competition from other IP portfolios in Causeway Bay.
High marketing expenses likely to sustain in FY22F
The fifth wave of Covid-19 outbreak in HK has disrupted WREIC’s recovery plan for its HK portfolio. If not for that, management would have expected a large stable yoy operating performance in HK IP in 2022. We expect WREIC to maintain similar marketing expense in dollar amount in FY22F to help solicit sales activities for its tenants, and hence expect operating margin for HK IP to remain under pressure in FY22F. The government’s plans for border re-opening will definitely be delayed to 3Q22 or later; this will lead to a prolonged weak performance of WREIC tourist-centric IP and hotel portfolio.
Reiterate Hold with a lower TP of HK$37.5
We cut FY22F/23F EPS by 17%/14% to factor in slower rent recovery amid the new wave of Covid-19 outbreak in HK. Our TP for WREIC is lowered to HK$37.5, still based on a 35% discount to NAV, as we cut its NAV by 7%. Reiterate Hold; the market has priced in negative expectations for its near-term performance. Key downside risks include further delays in the re-opening of HK’s borders and prolonged negative rental reversion. Faster-than-expected re-opening of HK’s borders is a key upside risk.