Link REIT’s Pre-Emptive Equity Raising a Bold Move; Lowering FVE to HKD 77

We lower our fair value estimate for Link REIT to HKD 77 from HKD 83 to factor in the impact of its 1-for-5 rights issue. The subscription price of HKD 44.20 per rights unit represents a 29.6% discount to the Feb. 9 closing price of HKD 62.80. This represents a theoretical dilution of 5% to the unit price. Our fiscal 2024 distribution per unit, or DPU, forecast is lowered to HKD 2.95 from HKD 3.27 as a result of the enlarged share base, implying fiscal 2024 dividend yield of 5%, based on the theoretical ex-rights price of HKD 59.70. The rights issue is expected to raise HKD 18.5 billion after expenses. Of this, HKD 8 billion-HKD 10 billion will be used to repay upcoming debt maturities in 2023 and 2024, and the balance is expected to fund future acquisitions to capture future opportunities. Overall, we believe that Link REIT’s decision to pre-emptively raise equity (for the first time since its initial public offering in 2015) and dilute its unitholders is a bold move that can only be justified if the right investment opportunities arise in the next 12 months. Hence, we think the unit price performance may be under pressure in the near term. That said, we continue to see its units as undervalued, as the theoretical ex-rights price represents a 22% discount to our fair value estimate, and we expect Link REIT to benefit from an increase in footfall and tenant sales in the Hong Kong and mainland China retail portfolio as border restrictions are lifted and China recovers from the COVID-19 situation.