News alert: Long-awaited yield accretive acquisition post-rights issue
- Acquiring remaining 50% equity interest in Shanghai’s Qibao Vanke Plaza
- Acquisition is immediately yield accretive with initial gross yield hitting 9.4%.
- Exploring a tie-up with strategic partner for co-investment; China allocation targeted at c.15%
- First yield-accretive acquisition following the rights issue, maintain BUY with HK$49.80 TP
Acquiring the remaining 50% stake in Qibao Vanke Plaza. Link REIT has agreed to acquire the remaining 50% stake in Qibao Vanke Plaza, Shanghai from its JV partner, China Vanke, for a total consideration of Rmb2.38bn (or HK$2.59bn). This marks its first acquisition following the rights issue in Mar-23. Upon the deal completion, expected in late Feb-24, Link REIT will become the sole owner of the mall. Back in Mar-21, Link REIT entered the Shanghai retail market by acquiring a 50% equity interest in Qibao Vanke Plaza from GIC for Rmb2.77bn.
A prime retail asset in a strategic location, with infrastructure upgrade to further boost foot traffic. Completed in 2016, Qibao Vanke Plaza is a 5-storey mid-to-high end regional mall together with 1,477 parking spaces on three basement levels. Total GFA of 233,872sm comprises 148,853sqm for retail space and 85,019sm for car park and other use. Strategically located in the high density residential Qiabo Town in Minhang District, one of the most populous administrative districts in Shanghai, Qibao Vanke Plaza is directly linked to Qibao metro station. This enables it to serve residents and workers within a 3km radius and along Metro Line No.9 and a population within 5km radius from the Hongqiao Transportation Hub, Caohejing Hi-tech Park and Qibao Eco Business Park. The upcoming Airport Connection Line and Jiamin Line, which links Qibao metro station with completion slated by end-2024 and 2027 respectively, should give a further boost to the mall’s daily foot traffic.
Solid operational statistics. As of Jan-24, occupancy of the mall was high at 94.5%, with fashion and F&B trades occupying 35.9% and 29.2% of the mall’s NLA respectively. Thanks to its high quality and well-diversified tenant base, the property has demonstrated rapid post-pandemic recovery with a robust reversionary growth of 11.2% in 2023. Rental income was Rmb502.5m in 2023, up 16.9% from 2021’s Rmb430m. With a healthy occupancy cost ratio at 16-17%, positive reversionary growth is expected to stay in the near term to underpin rental growth. Potential AEI initiatives should allow room for further rental uplift.
China asset allocation to reach 14.4% post acquisition, introduction of strategic partner possible. The acquisition would be fully funded by internal cash resources. Factoring in the interim distribution in Dec-23 and the acquisition, Link REIT’s pro-forma net gearing should reach 20.4% from Sep-23’s 18.0%. Meanwhile, China assets, including retail, office and logistics, should account for 14.4% of Link REIT’s total portfolio valuation, up from Sep-23’s 13.3%. Link REIT is also exploring the introduction of strategic partner for Qibao Vanke Plaza. Longer term, the portion of China assets is expected to be c.15% of the REIT’s total portfolio valuation.
First post-rights issue acquisition is immediately yield accretive. The agreed property value was set at Rmb5.2bn, representing a 26.3% discount to its appraised property value of Rmb7.06bn as of Jan-24. Based on its monthly passing income of Rmb40.6m and agreed property value, initial gross yield is high at 9.4% or 6.8% NPI yield assuming a rental margin of c.73%. Though the DPU accretion is limited given the size of acquisition, the deal has demonstrated the REIT’s capability to deliver value-accretive acquisitions. Meanwhile, the REIT’s valuation is attractive, trading at 6.6-6.9% distribution yields for FY24-25. Yield spread stands at 2.4-2.8%, above its 10-year average of 2%. Any interest rate pivot should boost sentiment towards the counter. Maintain BUY with TP of HK$49.80.