EUR 850.00 For Business Accounts Only

Morningstar | Link REIT's Interim Results Slight Beat, but Shares Overvalued With Slowing DPU Growth, Rising Rates

Link REIT reported interim fiscal 2019 results with a distribution per unit of HKD 1.3062, up 7.5% year on year. This amounts to 52% of our full-year estimate, slightly better than expected. Distributable income was HKD 2.76 billion, up 6% year on year, slightly ahead of our full-year estimate of HKD 5.24 billion. The small outperformance was due to marginally higher revenue growth across portfolios in Hong Kong and China as well as lower selling, general, and administrative expenses year to date. We expect the pace of growth to slow, continuing the existing trend. We maintain our fair value estimate of HKD 64 and our narrow moat rating.

Across the entire portfolio, revenue and net property income were both up around 7% year on year, respectively, on a like-for-like basis due to asset disposals. In Hong Kong, the retail portfolio saw revenue up 7% but operating expenses also up 9% year on year, both on a like-for like basis. Average monthly rent increased to HKD 66 per square foot, up 5% from last fiscal year-end, while the occupancy rate inched lower to 95.5%. The increase in monthly unit rent is expected as asset disposals were tilted towards smaller assets. Tenant sales were up 7% while the occupancy cost ratio increased slightly to 13%. For the city, during the first nine months, total retail sales were up 11% year on year. The company’s retail assets in Hong Kong have recovered earlier than the overall market, given their nondiscretionary nature. As expected, the outperformance has been subsumed as the city’s overall retail sales bounce off the trough on the strength of renewed tourism. In China, the portfolio saw revenue and net property income up 23% and 26% year on year, respectively, attributed to strong rental reversion of retail assets. The lease expiry for China’s portfolio is small for the remainder of the fiscal year, so we don’t expect much further upside for the fiscal year.

Net gearing was 10%, down from 13% at last fiscal year-end. The decline in gearing was partially supported by the valuation gain of HKD 6.7 billion. During the period, there was no further rate compression as capitalization rates remained steady across the portfolio. The effective interest rate was 3.2%, up 30 basis points from last fiscal year-end.

DPU growth of 7.5% slowed from 8.7% seen a year ago, signaling the maturation of the Hong Kong retail portfolio after more than a decade of growth. Future growth will be more dependent on newly acquired assets in China and Hong Kong, which will probably offer less upside impact, given the size of their earnings contribution.