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Morningstar | Link REIT Full-Year Results a Slight Beat, DPU Growth Slowing

Link Real Estate Investment Trust reported fiscal 2019 results with total distributable amount of HKD 5.7 billion, up 5% year on year. Without the discretionary capital distribution, distributable income was slightly better than our estimate of HKD 5.5 billion. Full-year distribution per unit totaled HKD 2.7117, up 8.6% year on year as buybacks reduced units outstanding by 2%. To account for the slight outperformance as well as the ramp up of new assets in Hong Kong and China, we adjusted our earnings estimate for fiscal year 2020 and 2021. We increase our fair value estimate to HKD 76 from HKD 70, and maintain the company’s narrow moat rating.

Across the entire portfolio, revenue and net property income were up 7.2% and 7.1% year on year, on a like-for-like basis. The growth was attributed to the core retail portfolio in Hong Kong. The retail portfolio’s average monthly rent increased to HKD 68 per square foot, up nearly 9% year on year. The large jump in unit rent was partially attributed to the changing asset mix as the divestment of 12 properties consisted mostly of neighborhood centers with lower unit rental rates. The occupancy rate was unchanged at 97%. Car park revenue growth remained strong, with average monthly car park income reaching HKD 2,719, also up 9% year on year.

Rental growth of the Hong Kong retail portfolio was supported by an increase of 5.4% in tenant sales during the fiscal year, while the occupancy cost ratio increased slightly to 13.5%. During the same period, retail sales were up 4.5% year on year for the city as a whole. The company’s retail assets in Hong Kong have performed slightly better than the overall market, given their nondiscretionary nature. We expect retail sales growth to slow during 2019 as the recovery of the city’s retail sector seemed to have stalled during the first quarter.

The China portfolio saw revenue and net property income up 7.6% and 9.4% year on year, on a like-for-like basis. The retail assets saw reversion of 30% and the office at Link Square saw reversion of 24%.

Net gearing dropped slightly lower to near 10% at fiscal year-end. Total debt was roughly the same as a year ago, and the equity base grew modestly on the back of valuation gain of HKD 12 billion along with a disposal gain of HKD 2.8 billion. Valuation gain mostly reflected the increase in rental income as capitalization rates remained stable for the Hong Kong portfolio. In China, capitalization compressed another 25 basis points for retail assets.
Year-on-year distribution per unit, or DPU, growth, while still robust, is decelerating. For the coming fiscal year, the company guided to buy back 60 million units or 2.8% of the units outstanding to neutralize the prior divestment’s impact on DPU. We expect the company to enter a slower-growth phase with the maturation of the Hong Kong retail portfolio after more than a decade of growth. Future growth will be more dependent on newly developed or acquired assets in China and Hong Kong, which will offer less upside impact, given the size of their earnings contribution. Outlined in Vision 2025, the company expects to target high-single-digit CAGR growth of its investment property portfolio. Given the low capitalization rate currently seen, we expect income growth to be the sole driver.
As the market is increasingly expecting a more accommodative monetary policy from the Fed, yield-driven stocks may seem attractive. However, it is important to remember such a monetary policy is also reflective of a slowing global economy weighed down by the ongoing trade conflict.