FY23 final result first take
- Champion REIT’s distributable income fell 13.6% in FY23, in line with our estimate.
- Turnover rent almost doubled at Langham Place Mall, with retail tenants’ sales seeing a 50.5% growth
- Negative rental reversion continued to work its way through the office portfolio
- Higher cash finance costs further weighed down distributable income, Rating and TP under review
Led by lower office rental earnings and higher cash finance cost, Champion REIT’s FY23 distributable income fell 13.6% to HK$1.12bn, in line with our estimate. With a payout ratio slightly higher at 90.2% (FY22: 90%), distribution income dropped by 13.4% to HK$1.01bn. Final DPU decreased 15% to HK$0.0756. This brought the full-year DPU to HK$0.1683, down 13.9% y-o-y.
Total rental income was 2% lower at HK$2.31bn, dragged by weaker contributions from Three Garden Road and Langham Place Office Tower. Negative rental reversions was working its way through these two office properties. Nonetheless, occupancies at Three Garden Road and Langham Place Office Tower were broadly stable at 82.8% and 93.3%, respectively, in Dec-23.
Langham Place Mall was the spotlight. Rental income grew 13.9% to HK$740m on increased turnover rents. Thanks to the strong recovery in the beauty segment, tenants’ sales rose 50.5% in 2023, outperforming the overall Hong Kong retail market, which recorded an increase of 16.2% in 2023. This represented 80-90% of pre-COVID level in 2018. As such, turnover rents almost doubled to HK$224m, more than offsetting the shortfall in base rents. The mall has been enriching its tenant mix with the recruitment of new tenants, which should also underpin its positive reversionary growth.
Net property expenses jumped 11.5% to HK$366m due to increased building management fees, promotion expenses, and rental commission fees. With net expense ratio higher at 15.8% (FY22: 13.9%), net property income fell by 4.2% to HK$1.95bn.
Cash finance costs rose 41% to HK$590m due to HIBOR hikes. Total debt stood at HK$14.6bn in Dec ’23, putting its gearing at 22.8% (Jun ‘23: 22.7%). Interest costs for 54.5% of total debt was on a fixed-rate basis. The hedging ratio is expected to decline noticeably upon the HK$2.9bn IRS expiry in Jun ‘24. Champion REIT is in discussion with banks for refinancing HK$5bn syndicated loans maturing mid-2024. The REIT has standby committed debt facilities of HK$3.6bn which could be used to meet these upcoming refinancing requirements.
Total portfolio valuation was maintained at HK$62.9bn in Dec-23, with capitalization rates for Three Garden Road, Langham Place Office, and Langham Place Mall unchanged at 3.7%, 4.1%, and 4%, respectively.
While Langham Place Mall is expected to continue its income recovery, office reversionary growth should drag the REIT’s rental earnings. This, coupled with expected higher cash finance costs, should weigh on its distribution income in the year ahead.