On Dec 28, Link REIT turned out to be the successful bidder of the assets that Mercatus Co-operative, the retail mall arm of NTUC, put up for divestment. Link REIT stands out in Asia because of two glaring differences between it and other listed Asian REITs. First off, Link REIT is the one and only Asian REIT that is internally managed. That is, the asset management, property management companies and the properties themselves are owned by Link REIT and its unitholders.
Investors of S-REITs will be aware that for S-REITs, the asset management and property management companies are usually owned by the sponsor of the REIT, which also has a significant stake in the REIT.
The second difference between Link REIT and the other Asian REITs is its size. It is Asia’s largest REIT in terms of market capitalisation and assets under management (AUM).
A third difference between Link REIT and S-REITs is its much lower aggregate leverage. As at Sept 30, 2022, Link REIT’s 1HFY2023, aggregate leverage was 22.7% as at Sept 30, 2022. In addition, Link REIT had HK$13.2 billion of undrawn committed facilities as at Sept 30, and HK$2.1 billion cash and bank balances.
The Singapore portfolio where Link REIT was the successful bidder comprised Jurong Point to be acquired at $1,988.90 million, and Swing By @ Thomson Plaza (formerly Thomson Plaza) for $172.53 million, or $2.161 billion in total. The acquisition is likely to be financed by Link REIT’s cash and debt facilities, and the transaction is scheduled for completion in March
“We'll still use Singapore dollar loans for this asset, for a natural hedge, We tend to do that for our overseas assets,” says George Hongchoy, CEO of Link REIT, in a recent interview.
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“Our overseas acquisitions and investments are principally funded by local currency borrowings and natural hedges where feasible and cost-effective. For the [distributable] income, when we sign off our budget in March, we'll forward hedge for one year. At least then, we know there is no volatility in terms of currency, but volatility always comes from the business side,” Hongchoy explains. Link REIT owns retail malls and offices in Hong Kong, China and Australia, and logistics properties in China.
DPU accretive acquisition
Ng Kok Siong, Link REIT’s CFO indicates that the REIT has access to Singapore dollar funding at 4.2%. The portfolio’s net property income (NPI) of $106 million on a historical basis, including property tax but excluding income tax translates into an NPI yield of 4.9%.
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As part of the transaction, Link REIT will manage AMK Hub. The REIT takes on board around 140 staff of which around 100 are operational staff at the property level.
Based on the NPI yield of Jurong Point and Swing By @ Thomson Plaza, the accretion to DPU is likely to be around HK$0.04 while the fee income less costs for AMK Hub is likely to add a further HK$0.02 to DPU, Ng says. In 1HFY2023, Link REIT distributed HK$1.551 per unit.
On the other hand, Ng is quick to acknowledge that the Singapore portfolio’s NPI yield is historic and hence the NPI does not fully account for the rise in utilities during the year. “The 4.9% headline yield is based on the historical preceding 12 months. Utilities has come up quite a fair bit. There's wage inflation as well. So there'll be some pressures on direct costs. But overall, even 4.9%, including all the costs, is pretty competitive,” Ng says.
For the six months to Sept 30, Link REIT’s borrowing costs were 2.5%. However, this is set to rise. In Dec, Link REIT issued HK$3.3 billion of five-year convertible bonds at 4.5%. The strike price of the bonds is HK$61.92 versus Link REIT’s current price of around HK$60. In Nov, when the bonds were first announced, China had not given any indication of lifting its zero-Covid policy, and Link REIT was trading at around HK$53.
The convertible bond issuance is not connected to the Singapore acquisition. “We separated the two decisions. We didn't know, [whether the Mercatus transaction] would happen until the second half of December. When we did the convertible, it's just purely a window of opportunity to tap the liquidity, and pricing being fair, we just raised HK$3.3 billion to pay down existing loans,” Hongchoy says.
Ability to improve yields
“Since our IPO, the leasing team has spent time on developing ways to improve assets, always based on that particular market segment. Initially, with our Hong Kong portfolio, people who live above or next to the properties didn’t shop there. One of the things that we improved on over time is to make sure that more of shoppers’ spending is at the mall that is closest to their home and we’ve done that through introducing better tenants. As we look at the REIT since IPO 17 years ago, the tenant mix hasn't changed, but the tenants have changed,” Hongchoy explains.
In 1HFY2023 for the six months to Sept 30, 2022, Link REIT reported revenue of HK$6.04 billion up 4.5% y-o-y, with NPI at HK$4.59 billion (+6.4% y-o-y) translating into an NPI margin of a tad under 76%. Occupancy costs are a modest 12.6%, but would rise following the Singapore acquisition.
Link REIT is trading at an annualised yield of around 5% based on its 1HFY2023 DPU, and on a pro forma basis, the transaction appears to be around 1.9% accretive.
