Link REIT: Lack of Acquisitions After Rights Issue Continues to Weigh on Unit Price Performance

We lower no-moat-rated Link REIT’s 00823 fair value estimate to HKD 59.00 from HKD 62.30 after the pre-blackout meeting. We trimmed our rental growth assumption on the Hong Kong and China retail and office portfolio, given the slower-than-expected retail recovery in Hong Kong and the weaker economic outlook in China. We also increased our borrowing cost assumption for fiscal 2024-26 (ending March) as interest rates remain elevated. While we continue to see the 11% revenue growth in fiscal 2024 to be supported by the contribution of newly acquired Singapore retail assets and China logistics assets, we cut our distribution per unit, or DPU, forecasts for fiscal 2024-26 by 5%-7%, as we expect the finance cost to weigh on the bottom line. Our fiscal 2024 DPU forecast of HKD 2.45 implies a distribution yield of 6.7%, as of the Oct. 5 close price.

Although we think the units are undervalued with a 38% discount to our fair value estimate, we continue to see the lack of acquisition opportunities after the rights issue as the main overhang to the unit price performance. Management notes the gap between buyers’ and sellers’ expectations remains wide, and it may need to wait longer for distressed acquisition opportunities as the impact of high interest rates fully materializes. If the trust can demonstrate its ability to acquire accretively, this should be positive to unit price