Company Update: Decent disposal gains to lift bottom-line earnings
- Substantial gains from office disposal at One Island East
- Negative rental reversion is working its way through Hong Kong office portfolio
- Rising contribution from retail malls in China and Hong Kong
- Stock offers good long-term value, BUY with HK$19.64 TP
Swire Properties expects its underlying profit for FY23 to be c.30% higher primarily due to decent gains on sale of office floors at One Island East. In Nov-23, Swire Properties agreed to sell twelve office floors at One Island East in Quarry Bay to Securities and Futures Commission (SFC) for HK$5.4bn or c.HK$18,200psf. These comprise 42-54/F, excluding 49/F which is used a refugee floor and kept unoccupied, with GFA of 296,000sf. SFC is the existing tenant of 45- 54/F and the transaction of these floors was completed in Dec-23. Disposal of 42/F, 43/F and 44/F will be completed in 2028, 2026 and 2027 respectively. This divestment is estimated to generate total gains of HK$4.36bn, of which c.HK$3.3bn was in 2H23.
Based on disposal price and total net rental income of HK$178m in FY22, the exit yield is estimated at 3.3%. Overall, we see the deal as positive to Swire Properties. The exit yield, though slightly higher than those for Cityplaza One in 2020 & Cityplaza Three and Cityplaza Four in 2018, remains attractive considering the current high funding cost.
Elsewhere, Swire Properties sold c.690 parking spaces in the Taikoo Shing residential development for c.HK$1bn in 2023. This brought total number of car parking spaces sold to >2,140 thus far.
Disposal proceeds could be used to fund new investments with better growth prospects. This enables Swire Properties to execute its HK$100bn investment plan without over-stretching its balance sheet.
In Sep-23, Swire Properties entered into an agreement to acquire a 40% interest in Yangjing and New Bund plots in Shanghai for Rmb9.7bn. Construction works of New Bund mixed-use development is currently underway. Response to the pre-sale of the residential portion has been encouraging. About 80% of total units has been sold.
The Pacific Place and Taikoo Place portfolios recorded negative office reversionary growth of 13% and 8% respectively in 9M23. One Island East/One Taikoo Place fared better than other Taikoo Place office towers with mild negative rental reversion of 3%. Going forward, office rental reversion should remain in the negative territory.
The Pacific Place portfolio’s office occupancy stayed firm at 97% in Sep-23. Excluding the newly built Two Taikoo Place where the commitment rate remained unchanged at 56% since Mar-23, the overall office occupancy of Taikoo Place portfolio fell 2ppts q-o-q to 92% in Sep-23. Elsewhere, commitment rate at Six Pacific Place has improved to c.30%.
Thanks to the revival of tourist spending amid the re-opening of the border with Mainland China, tenants’ sales at both The Mall, Pacific Place, and the Citygate Outlets rebounded 50.1% and 51.2% respectively in 9M23, which compared favourably with the overall retail sales growth in the corresponding period. Of particular note, tenants’ 9M23 sales at The Mall, Pacific Place exceeded the pre- COVID level by 9.4%. On the other hand, tenants’ sales at Cityplaza grew only 8.8% in 9M23 and was 11.6% lower than pre-COVID levels. With healthy occupancy cost ratio in the teens, retail reversionary growth should turn positive.
In China, retail tenants’ sales growth remained positive but moderated amid sluggish economic outlook, excluding Taikoo Li Chengdu. Overall, their tenants’ sales are >50% higher than in 2019. Retail reversionary growth was positive. Due to tenant upgrade, Taikoo Li Chengdu’s tenants’ sales growth accelerated to 36.1% in 9M23, from 1H23’s 27.2%. Swire Properties is also upgrading the tenant mix at Taikoo Li Saniltun North and HKRI Taikoo Hui. Despite the rent void led by renovation, this initiative should unlock the earnings potential of these malls.
The stock is trading 70% below our assessed current NAV, near the low end of its historical trading range. Estimated dividend yield stands at 7% for FY23 and 7.3% for FY24. Valuation is appealing. Portfolio expansion should brighten its long-term growth prospects, thus justifying higher valuations. BUY with HK$19.64 TP, based on target discount of 60% to our Dec-24 NAV estimate.
