Result Analysis: FY21 results in line
Wharf REIC’s FY21 underlying earnings dropped 13% to HK$6.5bn, in line with our estimate. The decline was mainly led by lower rental earnings from investment properties, partly offset by higher development earnings from Suzhou IFS undertaken by Harbour Centre Development Limited, and increased dividend income from its equity portfolio. A final DPS of HK$0.64 was declared (FY20: HK$0.69). This brought the full year DPS down 11% to HK$1.31, representing 65% of its underlying net profit from investment properties and hotels in Hong Kong.
Revenue from investment properties fell 8% to HK$10.9bn, primarily due to income drag from retail and office portfolios in Hong Kong. Despite higher turnover rent and occupancies, and reduced impact from amortized rental concessions, retail revenue from Harbour City and Times Square declined 7% and 11% respectively, as a result of negative base rent reversions. Plaza Hollywood also registered 4% decline in rental income.
Hong Kong retail market exhibited 8.1% sales growth in 2021 along with the easing pandemic situation. Thanks to promotional campaigns and strong business recovery from top-tier tenants, both Harbour City and Times Square registered above-market retail sales growth in 2021. As a result, turnover rents more than doubled to HK$709m in FY21.
During the period, retailers took the advantage of soft market rents to setup new stores and expand their presence in Harbour City/Time Squares. These include quality names such as Dior, Piaget, Miu Miu, Salvatore Ferragamo, Cartier, and Alexander McQueen. Hence, occupancies at Harbour City and Times Square improved to 93% and 95% as of Dec-21 from Jun-21’s 91% and 92% respectively.
Negative rental reversions worked its way through the office portfolio in FY21 as office demand remained subdued. This brought the office income at Harbour City and Times Square down 11% and 5% respectively in FY21. In Dec-21, office occupancies at Harbour City and Times Square stood at 85% and 89% respectively, slightly improved from Jun-21’s 82% and 88%.
While higher promotional expenses helped stimulate tenants’ sales, rental margin contracted to 77.7% in FY21 from FY20’s 82.5%. This resulted in rental earnings falling by a larger 13% to HK$8.4bn.
Supported by domestic staycation and long stay demand, operating losses from the hotel division narrowed to HK$356m from FY20’s HK$379m. This was despite the initial loss of newly opened Niccolo Suzhou held by HCDL. The renovated Prince Hotel will reopen upon easing travel restrictions.
Consolidated net debt stood at HK$47.5bn as of Dec-21, down slightly from Jun-21’s HK$50.4bn. This translated into a gearing of 23.1% (Jun-21: c.24%). Financial position remains comfortable in our view. The company also holds a HK$13.9bn equity portfolio, comprising mainly Hong Kong and China property stocks.
The fifth wave of pandemic has disrupted retail market recovery and further delayed the border reopening with Mainland China. This prompted the company to offer new rental concessions to tenants. But the magnitude could be lower than in 2020 given retail rent correction over the past two years. Turnover rent should also fall substantially. These, coupled with negative reversionary growth, should weigh on the company’s retail income. Hotel operations should remain loss-making given new tightening measures.
Moreover, the proposed rental enforcement moratorium should inevitably introduce new uncertainties to its rental cash flow, but the overall impacts should not be overplayed considering its high-quality tenant profile.
Following the recent price correction led by sluggish retail scene, the stock is trading at 44% discount to our current appraised NAV, below its average of 38% since listing. Undoubtedly, the resurgence of COVID cases clouds the company’s core business, But, once the pandemic situation stabilizes, domestic consumption recovery should regain momentum upon strong pent-up demand among local shoppers, with consumption vouchers to give an additional boost. Any positive news on lifting border restrictions should further improve the sentiment towards the counter. With most of negatives discounted following the recent sell-off, we maintain BUY with a TP of HK$40.70, premised on 35% target discount to our Dec-22 NAV estimate.