Hong Kong’s Link REIT recorded year-on-year revenue growth of 11.3 percent for the six months ending in September, driven by robust performance in its Hong Kong and overseas retail portfolio, according to interim financial results released by the trust on Wednesday.
Total revenue for Asia’s largest REIT by market cap was HK$6.7 billion in the reporting period, while net property income notched a 10.4 percent year-on-year increase to reach HK$5.1 billion. Strong occupancy and integration of recent acquisitions in Singapore also contributed to the trust’s performance.
“Despite the slower-than-expected recovery of retail consumption in Hong Kong and Mainland China, our portfolio continues to recover and has demonstrated resilience with stable rental income and high occupancy,” Nicholas Allen, chairman of Link REIT said in a release. “The expansion of our portfolio has lifted our net property income by a double-digit percentage increase, making us one of the few REITs in the region that can report both increase in income and total distribution.”
Despite the top line gains, the trust recorded a pre-distributions net loss of HK$3.7 billion, which the trust attributed to change in fair values of investment properties and impairment of goodwill and property, plant and equipment in the reporting period. This compares to a HK$14.0 billion net profit in the same period last year. Excluding the adjustment, the trust’s total distributable amount edged up by 1.7 percent to HK$3.3 billion.
Resilient Hong Kong
Link REIT’s Hong Kong performance bucked the slower-than-expected recovery in Hong Kong retail, with its shopping properties booking revenue of HK$3.7 billion. That figure represents year-on-year growth of 2.4 percent and accounts for 55 percent of the trust’s total revenue in the period.
The Hong Kong retail business saw occupancy remaining at an all-time high of 98 percent, with over 300 new leases signed at an average unit rent of HK$64.3 during the period, an uptick from the previous period. The tenant mix of this segment is anchored by non-discretionary consumption including food and beverage, markets, food stalls, personal care, and services.
The trust attributed the performance to its efforts to secure emergent retailers and growth-exhibiting tenants, noting that tenant sales growth per square foot surpassed pre-pandemic levels during the previous financial year.
Overseas Expansion Continues
Link REIT’s overseas portfolio, which comprises 12 retail and office assets in Singapore, Australia, and the UK, also contributed to the trust’s rising top line, with the segment’s revenue and net property income soaring 206.4 percent and 236.9 percent to HK$861 million and HK$603 million, respectively.
The jump in revenue was driven by the integration of a pair of Singaporean suburban retail assets – Jurong Point and Swing By @ Thomson Plaza – which the trust acquired from Mercatus, the property investment arm of Singapore’s NTUC Enterprise Co-operative, for S$2.161 billion ($1.6 billion) in December 2022.
The trust’s Singaporean and Australian retail assets enjoyed occupancy of 99.3 percent and 98.1 percent respectively, with tenant sales largely recovered to pre-pandemic levels in Singapore and approaching pre-COVID levels in Australia. The trust’s office assets in Australia and the UK recorded blended occupancy of 94.1 percent.
In July, the trust opened a new regional office in Singapore, having pegged the Lion City and Australia as target markets for overseas expansion.
“Over time, it is our intention to grow overseas. The rationale behind this is the benefit of diversification which enables the REIT to ride different growth cycles across geographies and sectors,” said Ronald Tham, chief corporate development officer of Link REIT in a presentation following the earnings release. “Cap rate expansion in Australia has caused capital values in Australia to adjust downwards, which could present us opportunities, particularly where there is significant dislocation in pricing.”
Mainland Rents Sliding
The trust’s Mainland China portfolio achieved less positive results, with the revenue growth in the market holding steady in local currency terms but declining 6 percent in Hong Kong dollars. to HK$594 million. Located in the tier one cities of Beijing, Shanghai, Guangzhou and Shenzhen and surrounding river delta cities, Link REIT’s Mainland China properties include six retail assets, five logistics centres, and one office building.
The lower revenue was attributed to ongoing asset enhancements and stabilisation of two retail assets – Link Plaza Tianhe in Guangzhou and Link CentralWalk in Shenzhen. Despite blended occupancy of 95.8 percent and 95.0 percent in the trust’s retail and logistics assets, Link flagged that average retail reversions declined 5.2 percent, while expressing confidence that the properties would level off by the end of this year.
Sound Capital Position
Link REIT maintained a stable capital position and healthy debt servicing capabilities at the end of September, reporting a 18 percent net gearing ratio and 4.3x EBITDA interest coverage ratio. Despite a rising interest environment, the trust’s average borrowing cost stood at 3.74 percent, with an average debt maturity of 3.4 years.
Following a HK$18.8 billion ($2.4 billion) rights issue in March , the trust had HK$22.2 billion in liquidity at the end of September and does not anticipate further refinancing needs before the end of 2024.
“We have continued to focus on operational excellence in our capital, asset and portfolio management to create unitholder value. Our team has also been carefully managing our capital and financing to lessen the impact of a hawkish rate environment,” said George Hongchoy, chief executive of Link REIT.
The valuation of Link REIT’s overall property portfolio declined by 3.5 percent to HK$229 billion from March, which the trust attributed to market rent adjustments and cap rate expansion of most of its properties to reflect higher market interest rates and uncertain market conditions, as well as foreign currency depreciation.
Going forward, the trust expects continued recovery in its operating performance despite economic uncertainties and the anticipated “higher-for-longer” interest rate environment.
“While turbulent market conditions are expected to persist in the foreseeable future, we will continue to explore new growth avenues under our Link 3.0 strategy prudently and patiently,” Hongchoy said.
Link REIT’s share price closed up 1.3 percent for the day against a 0.6 percent decline in the Hang Seng Index.