Asia’s largest real estate investment trust by market capitalization-Link Reit

Abstract: This article introduces Link Reit’s development history and the latest financial result as of the end of March 2021. Finally, I will summarize and give some personal opinions on this reit.

Some basic information of Link Reit

Link Reit is a real estate investment trust. If you do not fully understand what real estate investment trusts are, I suggest you to check the previous article “Advantages of REIT – both stable dividend payout and resistance to inflation“.

Link Reit was listed on the Hong Kong Stock Exchange on November 25, 2005, and was the first real estate investment trust in Hong Kong. Link’s assets were derived from the retail properties and car parks of the Hong Kong Housing Authority (HKHA).

It is the largest real estate investment trust in Asia in terms of market capitalization. It is completely held by individual and institutional investors. This is different from many other Reit’s spin-off by large property developers or large companies. These reits usually remain to be controlled by major shareholders from their original groups. However, since there is no major shareholder behind Link, it can be more independent in the processes of policy making, which is definitely beneficial to Link’s unit holders.

The current company CEO George Kwok Lung HONGCHOY joined Link in 2009 and led Link to achieve continuous growth in distribution for 15 years. The characteristic of Link is that it focuses on investing in necessities-based retail, parking lots and Grade A office buildings, so it often shows resilience in times of poor economic conditions.

Market overview

The current stock price of Link Reit (Hong Kong stock code: 823) is HK$75, the market value is HK$156.14 billion, the price-to-book ratio is 0.98, and the yield is 3.867%. It is now close to a one-year high. Since the market sentiment has fluctuated recently, Link Reit which has a stable performance and a strong balance sheet has naturally become a refuge for funds. In addition, Link has good credit ratings with Standard & Poor’s, Moody’s and Fitch rating at A, A2 and A respectively, all of which are stable ratings.

Investment property portfolio divided by countries or regions

Right now, Link holds a total of 136 properties, of which 127 are located in Hong Kong, 7 are located in Mainland China and 2 are located overseas, accounting for approximately 79.3%, 16.8% and 3.9% of the investment property portfolio respectively. The total value of the investment property portfolio was HK$2070 100 million.

Investment property portfolio divided by property types

The investment projects held by Link mainly include retail, parking and office, which account for 74%, 15.2% and 10.8% of the investment property portfolio respectively.

Hong Kong Property Portfolio

Link Reit mainly focuses on the retail of necessities, providing daily necessities and related services for local residents in Hong Kong, while the parking lot portfolio provides convenience for residents and visitors of public housing estates.

In this fiscal year, Link’s Hong Kong property portfolio has signed more than 400 new leases, while the rent collection rate remained at a high level of 98%, and the revenue of the parking lot recorded a slight decline of 1.5%. The occupancy rate remained stable at 96.8%, but due to property management fee exemption and rent reduction, total retail revenue decreased by 4.5% year-on-year.

Link said that the lease negotiation was still full of challenges during the period, but at the end of the fiscal year, the average renewal rent adjustment rate has rebounded to a positive number. The monthly rent decreased by 3.4% year-on-year to HK$62.4 per square foot.

Although Link’s business is dominated by necessities, local consumption in Hong Kong is still inevitably affected by the closure of some shops and social distancing restrictions. During the year, the total retail sales per square foot of all merchants fell by 9.4%.

Among the retail businesses in Link’s Hong Kong property portfolio, in terms of rental income, the top five retail industries are catering, supermarkets, markets, services and personal care/medical services, accounting for 28%, 21.6%, 16.6%, 10.6% and 5.5%.

In terms of car parks, the average monthly revenue per parking space fell 1.8% year-on-year to HK$2776, while the total valuation of the car park assets and the average valuation of each parking space both fell by 0.7%, falling to HK$31.516 billion and HK$558,000 respectively.

In terms of offices, The Quayside in the Kowloon East continued to attract high-quality merchants and brought stable income to Link. In the second half of the fiscal year, another operator has leased one of the two floors of the office that the shared workspace operator moved out earlier. As of June 2021, the confirmed occupancy rate of the office part of The Quayside was 82.9%.

In terms of property operating expenses, although stricter cleaning procedures have to be adopted, property management personnel costs, security and cleaning expenses have increased by 2.4% year-on-year, as well as the introduction of free parking plans and more activities to revive store business. Moreover, publicity and marketing expenses increased by 23%, Link still managed the expenses effectively, and so the total annual property operating expenses decreased by 3.6%.

In this fiscal year, the total capital expenditure was HK$345 million to complete three enhancement projects – Lok Fu Place, Choi Yuen Plaza and Kai Tin Shopping Centre, with investment returns of 10.1%, 9.1% and 12.1%, respectively.

Lok Fu Place before renovation

Lok Fu Place after renovation

Kai Tin Shopping Centre before renovation Image source: https://zh.wikipedia.org/wiki/%E5%95%9F%E7% 94%B0%E5%95%86%E5%A0%B4

Kai Tin Shopping Centre after renovation Image source: https://www.hkmarket.com.hk/zh-hant/markets/%E5%95%9F%E7%94% B0%E5%B8%82%E5%A0%B4/

Mainland China Property Portfolio

The total income and net property income of Link’s Mainland China real estate property portfolio decreased by 6.3% and 6.9% year-on-year, respectively. This was mainly due to the loss of revenue due to the asset enhancement project in Shenzhen’s Link CentralWalk (expected to be completed by the end of 2021 and provide double-digit return on investment) as well as rent relief plan. However, it can be seen that business quickly recovered. About 200 new leases were signed during the year. The overall rent collection remained stable, recording a high level of 98%, and there were no serious rent arrears during the year.

https://www.linkreitchina.com/tc/about/link-centralwalk/

https://www.linkreitchina.com/tc/about/link-centralwalk/

In retail, the average renewal rental adjustment rate for shopping malls during the year was 11.1%, and the average retail occupancy rate fell slightly by 1.5% to 96.3%. Except for Link CentralWalk, the retail sales of the other three properties in April 2021 have been increased. It has returned to about 90% of the level before the Covid-19 pandemic.

In terms of offices, as of the end of March 2021, the occupancy rate of Link Square, a Grade A office property in Shanghai, remained at 95.8%. However, due to the rapid increase in the supply of new offices in Shanghai, the renewal rent adjustment fell to -8%. However, due to the superior location and quality of the property, it continues to be attractive to merchants. Therefore, Link successfully renewed its contract with major merchants for 10 years. The new lease term will start in July 2022 after the completion of the major upgrade project.

On April 2, 2021, Link completed its sixth investment in Mainland China, acquiring a 50% interest in Qibao Vanke Plaza in Shanghai, a 149,000-square-meter commercial development property located in Minhang District, Shanghai. Completed in 2016, it is an eight-storey commercial development property with high-quality specifications, with an occupancy rate of 97.8%. The reorganization of the merchant portfolio and rent increases will drive rent growth.

On June 4, 2021, Link completed its seventh investment and acquired Happy Valley Shopping Mall in Guangzhou for RMB 3.205 billion. It was located in Zhujiang New Town in 2012. It is the only large-scale shopping mall in the region, covering an area of 90,000 square meters. Integrating commercial, residential and education in one, further expand the retail business in Mainland China. Its weighted average lease expiry date is short and the current occupancy rate is only 70.3%. It is expected that the retail portfolio reorganization and upgrading project will have a greater growth potential. As the neighboring horse racing field is undergoing reconstruction, the property will further be benefitted by the growth of working and residential groups of customers and thus drives the sustainable revenue growth.

Overseas property portfolio

Although this fiscal year is still a period of volatility in the real estate market, Link decisively purchased The Cabot, a property located in Canary Wharf, London, completing the company’s second acquisition project outside of Greater China. The Grade A office building has been fully leased out. In addition to contributing to Link’s income immediately, it will also make the property portfolio more diversified in the long run.

The two investment properties 100 Market Street in Australia and The Cabot in the UK started to generate rental income in April 2020 and August 2020 respectively. During the year, net income and property income were HK$371 million and HK$270 million respectively.

As of March 31, 2021, the rent collection rate of the two properties was 90%, and the weighted average lease expiration dates were 8 years and more than 10 years, respectively, which are highly defensive.

15 years of portfolio transformation（Excerpted from Link 2020/21 Annual Report-Strategy Report）

Since 2005／2006（Link with roots in Hong Kong）

• IPO of 180 shopping centres and car parks in Hong Kong
• Enriched shopping experience via asset enhancement
• Modernised fresh markets
• Developed robust asset management expertise

2011/2012 (First Acquisitions in Hong Kong)

• Nan Fung Plaza and Martime Bay

Source: https://www.mpfinance.com/fin/instantp2.php?node=1578027492729&issue=20200103

Source: https://www.facebook.com/NanFungPlaza/photos/

2014/2015 (Expanded Investment Mandate to Include Property Development)

• Acquired a Greenfield site for property development through a joint venture which was developed into The Quayside in Kowloon East.

2014 – 2016 (Started Portfolio Optimisation and Expanded Footprint to Mainland China)

• Sold an aggregate of 57 assets over five rounds of divestment to optimise portfolio
• Acquired Link Plaza – ZGC in Beijing and Link Square in Shanghai

2017 – 2019 (Strengthened Presence in Mainland China Tier One Cities)

• Acquired Link Plaza – Guangzhou
• Acquired Link Plaza – Jingtong in Beijing and Link CentralWalk in Shenzhen.

2020/2021 (First Foray Overseas)

• Acquired 100 Market Street in Sydney and The Cabot in London

2021/2022 (Continued Expansion in Mainland China)

• Acquired 50% interest in Qibao Vanke Plaza in Shanghai.
• Announced to acquire Happy Valley Shopping Mall in Guangzhou.

Vision 2025

Under the guidance of the “Vision 2025”, Link said it is pursuing a culture of excellence and integrating innovative vision into its business to optimize the growth of its property portfolio. It may be due to the fact that Link was often blamed at the initial stage of listing to increase rents sharply on merchants. Although the criticism has been greatly reduced in recent years, I think that the improvement of the public’s optics to Link is because Link does indeed create value for the community and merchants and improve business operations and environment. So you can see that Link’s annual reports in recent years have continuously stressed that they want to build a diversified, harmonious, cooperative and win-win environment, hoping to connect business partners, investors, employees, non-governmental organizations, merchants and businesses in the communities.

Link continues to use Hong Kong as its core market and constitutes the most important part of its property portfolio. The target markets include first-tier cities in Mainland China and their surrounding delta regions, as well as four selected overseas developed markets, namely Australia, Singapore, Japan and the United Kingdom. These markets can promote the growth of the property portfolio and diversify risks. Link has also tried to introduce new services. In addition to providing long-term physical stores, it also has short-term leases, allowing new entrepreneurs to test products and markets at the lowest cost, and provide them with advice on displaying products and attracting customers. In addition, when shop owners have established brand awareness, they can choose to switch to long-term stalls or physical stores. A total of 10 short-term stalls were transformed into long-term stalls or shops in 2020/2021, which shows that this plan has achieved certain degree of success. In addition, more than 50 single shops expanded their business to other location properties under Link Reit this year.

2020/2021 Annual Results

Link Development stated that its performance in the past two quarters has clearly shown that the company is moving in the right direction.

Full-year revenue increased by 0.2% to HK$10.744 billion, net property income increased by 0.2% to HK$8.238 billion, distribution per unit increased by 1% to HK$2.8999, average borrowing cost decreased by 83 basis points to 2.66%, and total asset value increased by 1.1 % to HK$209.885 billion, and the net asset value per unit fell 1.8% to HK$76.24.

Although Link spent HK$9.8 billion for strategic acquisitions in this fiscal year, its gearing ratio only increased by 1.7% to 18.4%, and the group’s total liabilities only increased by HK$4 billion year-on-year to HK$38.6 billion. The maturity date of the debt is distributed in different stages over the next 17 years, and the maturity period of the debt is 4.3 years on average.

In addition, four projects are currently underway – Tai Wo Plaza, Hing Wah Shopping Centre, Link CentralWalk in Shenzhen and Tai Yuen Market. The total estimated capital expenditure is HK$434 million. Link plans to invest more than HK$1 billion in asset enhancement projects, and the expected return on investment is low double-digit.

Repurchase

In this fiscal year, HK$400 million was used and 6 million units were repurchased at an average of HK$63.11 to create value for shareholders.

Valuation

In sum

After 15 years of active development, Link Reit has accumulated valuable experience in the management and operation of real estate such as retail properties and offices in Hong Kong. Now that they are actively expanding outside Hong Kong, we can clearly see that the development direction set by the management is not disorderly expansion. From the past performance, it can also be seen that the management team of Link is absolutely world-class management quality. They are working hard to develop and operate the investment properties, so as to provide investors and other stakeholders such as merchants and consumers with creating value in the long run.

 On the other hand, one important point is that Link is very different from many other reits in Hong Kong, that is, Link is not a spin-off reit from large property developers or large groups, they certainly have less developmental barriers and so they can be more flexible to decide the development direction; on the contrary, you can often see that the split reits often keep purchasing assets from their original groups one after another, and provide funds or loans to the big developers like a cash machine. Of course, this is not necessarily a problem. Sometimes high-quality assets may be injected, but anyway, there will be a lack of independent development direction and opportunities to a certain extent. Link is definitely superior to other reits in this respect. I believe Link can continue to create value for investors in the long run.

Therefore, if you want to hold a certain percentage of reit in your investment portfolio, Link Reit will definitely be my first choice. Of course, the main premise is that you have to be optimistic about the economic development of Hong Kong and mainland China, especially the economic prospects of Hong Kong; if instead you are not optimistic about these markets, you will have a different conclusion. Of course, you may always find well managed reits in other developed markets, such as the United States and Singapore. If you are optimistic about the markets in Hong Kong and Mainland China, and you can hold Link Reit in the long term, I am confident that Link will bring you very good income in the long run.

Comments and sharing

If you have any questions, please feel free to leave a message or comment below, I will reply you. Or if you find anything incorrect in the article, please let me know and learn from you. If you find it interesting or it may help you in any sense, please share with other people.