Result analysis : Prefer unit buybacks to one-off discretionary distribution
Link REIT’s FY22 distribution income rose 6.8% to HK$6.42bn (FY21: HK$6.01bn), c.4% below our estimate primarily due to the shortfall in discretionary distribution for 2HFY22. Excluding the discretionary distribution in both years, distribution income would have improved 9.7%, thanks to higher rental earnings, partly offset by higher finance cost. Final DPU was 1.5% lower at HK$1.46. Including the interim DPU, full year DPU was HK$3.06, up 5.4% y-o-y.
In Nov-19, Link REIT budgeted a discretionary distribution of c.HK$0.14/unit p.a. in FY20-22. Instead of distributing the remaining HK$0.07/unit in 2HFY22 which amounted to HK$150m in total, Link REIT has earmarked this amount for unit buybacks in FY23, subject to market conditions. Total revenue increased 8% to HK$11.6bn thanks to maiden contributions from newly acquired properties in China and Hong Kong, increased overseas office income and revenue recovery from Hong Kong and China retail portfolio.
Retail revenue from Hong Kong rose 2.7% to HK$7.1bn mainly due to recovery in property management and air conditioning fees which went up 16.9% in the period. Base rental income from shops was 1% higher, supported by positive reversionary growth and higher average occupancy. On the back of domestic consumption recovery in 2H21, Hong Kong retail reversionary growth further advanced to +4.8% in FY22 from 1HFY22’s +3.4%. This was mainly underpinned by remarkable rental reversions of 19% (1HFY22: 14.2%) from markets/cooked food stalls. Shops and education tenants also registered solid reversionary growth of 2.9% and 6.7% (1HFY22: 2.3% and 4.3%) respectively. This brought the average monthly unit rent up 0.5% y-o-y to HK$62.7psf. Overall occupancy of Hong Kong retail portfolio climbed to a record high of 97.7% in Mar-22 from Sep-21’s 97.5%.
COVID resurgence in early 2022 has taken a toll on the Hong Kong retail market with the F&B sector taking the hardest hit. In Feb-22, Link REIT announced a new round of its tenant support scheme amounting to HK$120m. The scheme was then upsized to c.HK$220m. A range of support measures including rental concessions, rent-free periods, late payments and service charge waivers, were offered on a case-by-case basis. The amount has been reflected fully in FY22. Nonetheless, rental collection rate in the reporting period was high at 98%.
Despite disruptions led by the fifth wave of pandemic, overall carpark income rose 10.5% to HK$2.1bn with hourly carpark income recording stellar growth of 24%. Two newly acquired carpark/car service centres and godown buildings in Hung Hom and Chai Wan made their maiden contribution of HK$52m in FY22.
Committed occupancy of The Quayside in Kwun Tong further advanced to 96.6% as of May-22 from Oct-21’s 93.8%.
Rental receipts from China retail portfolio was 24.4% higher at HK$1.3bn mainly led by new contribution from Happy Valley Shopping Mall in Guangzhou and positive reversionary growth. This was despite income shortfall from Link CentralWalk in Shenzhen which underwent renovation work during the period. Tenant sales at stabilized malls in Beijing and Guangzhou registered positive growth supported by domestic consumption recovery. This underpinned solid reversionary growth of 8.8% for the five wholly owned shopping malls in China in FY22 (1HFY22: 12.1%). Meanwhile, the newly acquired minority-owned property, Qibao Vanke Plaza, continued to deliver robust rental reversion of 27.5% (1HFY22: 31.3%) brought by tenant mix optimization. Retail occupancy in China stood at 88.5% (Sep-21: 91.5%) as of Mar-22, or 92.3% (Sep-21: 96.2%) excluding Happy Valley Shopping Mall which will undergo asset enhancement.
Notwithstanding the lingering competition in Shanghai office market, rental decline upon renewal for Link Square narrowed to 8.1% in FY22 from 1HFY22’s 12.1%. The property was 97% let as of Mar-22 (Sep-21: 96.7%). Acquired in Oct-21, the two modern logistics properties in Dongguan and Foshan generated a rental income of HK$32m in FY22. Both assets were fully let to reputable tenants as of Mar-22 with respective WALEs of 2.5 and 3.4 years.
Fully occupied by blue-chip tenants, 100 Market Street in Australia and The Cabot in UK delivered a total rental income of HK$482m in FY22 (FY21: HK$371m). Rental collection rate was high at 97% during the period. Acquisition of a JV interest in five Australian office assets was just completed. Subject to regulatory approval, the transaction for the three Australian retail assets is expected to complete shortly.
With the overall NPI margin edging down to 75.6% (FY21: 76.7%), net property income rose by a smaller 6.5% to HK$8.8bn. In 1HFY22, Link REIT completed the asset enhancement works at Hing Wah Plaza and Tai Wo Plaza with respective ROI of 13.2% and 3.6%. With total capex of RMB286m, AEI at Link CentralWalk in Shenzhen was completed in Jan-22. This has raised the total number of shops by 20% and improved the circulation and layout of the mall. ROI for the project was 11%. Link REIT is planning an asset enhancement work at Happy Valley Shopping Mall in Guangzhou, aiming to enhance the efficiency and attractiveness of the mall. Conducted in phases, the first phase is scheduled to commence in FY23 with estimated capex of >RMB150m. In addition, asset enhancement at Tai Yuen Market, Lok Fu Market and Tak Tin Market are underway with a total capex of HK$127m.
Total debt rose to HK$50.2bn in Mar-22 from Sep-21’s HK$42.5bn mainly due to acquisitions in Hong Kong and China. This translates into a gearing of 22% (Sep-21: 19.5%). After adjusting for the acquisition of 50% interest in three Australian retail assets, 49.9% stakes in five Australian offices and three logistics assets in China, Link REIT’s pro-forma gearing is estimated at c.25%. Approximately 61.4% of interest cost was hedged to fixed rate as of Mar-22.
Despite sluggish retail scene in 1QCY22, overall tenant sales at Link REIT’s Hong Kong retail portfolio recorded 7.8% growth in the period from Apr-21 to Mar-22, outperforming the Hong Kong retail market of 5.9%. This resulted in overall occupancy cost ratio trending down to 13.1% in FY22. With the improving pandemic situation and distribution of first batch of electronic consumption vouchers, overall retail sales in Hong Kong rebounded 11.7% in Apr-22 on the back of domestic consumption recovery. Further relaxation of social distancing measures and distribution of remaining electronic consumption voucher should bode well for retail market recovery. All considered, we expect Link REIT’s retail reversionary growth in Hong Kong to remain positive in FY23.
Link REIT is trading at distribution yield of 4.4-4.7% for FY23-24. This translated into a yield spread of 1.6-1.9%, against its 10 year average of 2.5%. Link REIT is on the road to recovery underpinned by positive reversionary growth amid an improving retail scene in Hong Kong. While the lockdown in Shanghai has caused short-term disruptions to its portfolio, the overall impact should not be material considering contribution from Shanghai retail property only accounted for c.3% of its distribution income. Link REIT’s acquisition-led growth strategy should not only enhance its distribution yield but also diversify its income base. The unit buyback program could lend support to its unit price. Any positive news on the disposal of Stanley Plaza should prompt share price appreciation. Hence, we maintain BUY with DDM-based TP of HK$81.80.