Bank of Communications International has issued a research report on LINK REIT (00823), maintaining its "Buy" rating and HK$45.70 target price. The report notes that the company's FY2026 operational pressures were in line with expectations, and its distribution per unit (DPU) met forecasts. LINK REIT's Hong Kong retail portfolio, which is heavily weighted towards essential consumption, has demonstrated resilience despite the trend of northbound spending. The bank believes the FY2026/27 performance can remain broadly stable, with share buybacks and the potential inclusion of REITs in the Stock Connect program serving as medium to long-term catalysts for the share price.
Key Points from the Report
FY2026 DPU Met Expectations
LINK REIT announced its full-year results for the financial year ending March 31, 2026. Revenue and net property income declined by 2.0% and 3.7% year-on-year to HK$13.938 billion and HK$10.230 billion, respectively, primarily due to a -8.2% rental reversion for its Hong Kong retail segment. Affected by one-off factors and rental reversions, distributable income fell 6.9% to HK$6.577 billion, which was approximately 0.8% higher than the bank's forecast. The second-half DPU was HK$1.2673 (first half: HK$1.2688), bringing the full-year DPU to HK$2.5361, about 0.3% above the bank's expectation of around HK$2.529. Net asset value per unit decreased 8.8% year-on-year to HK$57.75, while the net debt ratio rose to 23.9% from 21.5%, mainly due to a decline in portfolio valuation.
Hong Kong Retail Portfolio Shows Resilience, High Occupancy
Management indicated that retail conditions have improved in recent quarters, with rental reversions stabilizing and showing signs of recovery. However, given the high rental base in 2023-24, the rental reversion rate for FY2027 is expected to be similar to that of FY2026. Occupancy remained high at 97.8% during the period. The decline in tenant sales narrowed to -1.0% year-on-year, with the food and beverage category recording positive growth. Hong Kong car park revenue was stable, at HK$2.505 billion. Excluding the impact of competition from new projects on the Beijing Zhongguancun property, the retail portfolios in Mainland China, Singapore, and Australia recorded rental reversions of -3.3%, 12.3%, and 16.5% respectively last year, with occupancy rates of 96.6%, 98.2%, and 99.5%. The bank believes growth from non-Hong Kong projects can partially offset rental pressure in Hong Kong.
Focus on Cost Management and Asset Disposals for Unit Buybacks
As of the end of FY2026, LINK REIT's average borrowing cost was 3.4%, down from 3.6%. Approximately 60% of the company's financing is at fixed rates or hedged. The recent decline in HIBOR is expected to help reduce future interest expenses. Looking ahead, the company will conduct a comprehensive review for further cost control and proactively seek investment and capital recycling opportunities in core markets to safeguard DPU growth. This includes expected annualized savings exceeding HK$200 million through organizational streamlining. Simultaneously, the company will intensify efforts to divest non-core assets (representing about 5-10% of total assets, or approximately HK$10-20 billion) to recycle capital for unit buybacks, thereby enhancing shareholder returns and unit distributions. The bank forecasts that the overall distributable amount for FY2027 can be largely maintained at the FY2026 level.
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