Link REIT: Transferring Coverage With HKD 62.30 Fair Value Estimate, No-Moat Rating

We are transferring coverage of Link REIT 00823 with a lower fair value estimate of HKD 62.30 (from HKD 77.00), after switching to an exit cap rate method and baking in yield expansion ranging from 50 basis points to 100 basis points to compute the terminal value of its investment properties at the end of the forecast period. This is to reflect our view that yields will expand in the current high interest-rate environment, and leading to a lower expected real estate value that can be crystallized by the trust through an asset sale. We also assign Link REIT a no-moat rating, down from narrow previously, as we are uncertain as to its ability to achieve the high return on invested capital as it did historically, due to the current high interest-rate environment. We are also concerned that future acquisitions outside Hong Kong could be dilutive to the efficient scale moat source, as opportunities to reinvest capital at returns above its WACC are limited. We think units are undervalued, with 27% discount to our new fair value estimate as of the May 31 closing price. We expect unit price to remain under pressure, with potential upward rerating when the trust demonstrates its ability to acquire accretively to justify the rights issue.

We think the market’s key concern is Link REIT’s ability to make accretive acquisitions with the proceeds from its rights issue in the near term. Management noted difficulty in acquiring attractive assets, as it observes a widening gap between buyers’ and sellers’ expectations, but it expects more opportunities to emerge in the second half of 2023. We assume the trust would use 15% of the proceeds to repay existing debt and deploy another 10% in fiscal 2024 for acquisitions, with the remaining evenly deployed across fiscal 2025 to fiscal 2028.