Morningstar | Link REIT Acquires Another China Retail Asset; a Bit Expensive With Rising Financing Cost
Link REIT announced the acquisition of Jingtong Roosevelt Plaza, a retail mall in Beijing, for CNY 2.6 billion, including the accounting for the mortgage. This is the company’s fourth acquisition in China. The mall has total retail gross floor area of 67,500 square meters as well as 400 car parking spaces. The gross rental yield is 4.8%, based on a passing rent of CNY 10.26 million as of October. The net property income yield based on 2017 results was only 2.95%. We believe the acquisition is on the expensive side and unlikely to be immediately yield-accretive, especially as the company’s funding cost in Hong Kong is rising. We maintain our fair value estimate of HKD 64 along with our narrow moat rating.For the previous three acquisitions in China, gross yield was 4.6% for Corporate Avenue, 6.3% for EC Mall, and 4.7% for Metropolitan Plaza. While Corporate Avenue is a higher-quality office asset in a prime location, EC Mall and Metropolitan Plaza are comparable retail assets. This is especially true for EC Mall, given its comparable location, size, and terms of land use rights.
Jingtong Roosevelt Plaza opened for business in 2014, so it is now entering the second leasing cycle, with lease expiries of 33% and 19% in 2019 and 2020, respectively. Assuming that over the second leasing cycle the company achieves positive rental reversion of 30% and improves NPI margin from the current 64% to 70%, the NPI yield would rise to 4.2%. Based on the latest interim fiscal-year results, the current portfolio has an aggregate NPI yield of 3.6%. As the company’s effective interest cost has risen to 3.2%, the transaction is not going to be accretive in terms of distribution per unit before the completion of the second leasing cycle.
The company will fund the purchase through internal cash resources and existing debt facilities. Net gearing will rise from 10.3% to 11.6%. The acquisition brings Link REIT's total exposure in China by gross asset value to 9.5%, against the company's guided maximum exposure of 20%.
Link Real Estate Investment Trust is a collective investment scheme constituted as a unit trust that invests primarily in retail and carpark operations.
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