On 13 December, Fitch confirmed Link Real Estate Investment Trust ("Link Real Estate Investment Trust") 00823HK) has a long-term issuer default rating (IDR) of "A" with a "stable" outlook. Fitch also affirmed its senior unsecured rating at 'A'.
The rating is based on the prudent financial management of Link Properties** and the continued resilience of its retail properties in the Hong Kong SAR. Link Land**'s placement in March 2023 and a higher proportion of fixed-rate debt helped it manage its interest rate risk while supporting its rating. Fitch believes that Link Properties**'s real estate portfolio is more geographically diversified following recent acquisitions, but its debt-financed acquisition strategy has limited its rating.
Key rating drivers.
Interest rate risk is reduced: Fitch believes that Link Properties**'s fixed-rate debt accounted for 70% of total debt at end-September 2023 (end-March 2023: 60%), helping to reduce its interest rate risk. Fitch**, in the fiscal year ending March 2024 (FY24) (1HFY24:4.).3x), the interest coverage ratio will stabilize at around 4x and return to 4 in FY 2025-20265 times - 5 times. Fitch has rated its Investment Property (IP) EBITDA Total Interest Coverage Ratio from a negative rating sensitivity of 35 times revised to 30x, reflecting REIT's prudence in managing interest rate risk and resiliencing its real estate portfolio.
Good leverage with a cushion:The company's leverage ratio (net debt IP value) was 196%, compared to 197% with a negative rating threshold of 30%. Fitch expects Link Properties**'s total debt to remain at around HK$60 billion (1HFY24: HK$59 billion) in FY2024 as the company may choose to retain its cash balance of around HK$10 billion after the dividend payment in December 2023. Good leverage provides the company with some flexibility to expand its portfolio of investment properties.
Growth through acquisitions:Fitch believes Link Properties** is likely to continue to look for acquisition opportunities to expand its portfolio. Fitch does not expect any material acquisitions in FY2024 given the high financing cost environment and management's belief that current assets** and rental yields will not increase dividends.
Fitch has assumed a total acquisition of HK$9 billion to HK$10 billion in FY2025-2027, in line with the planned use of the proceeds from the recent rights issue. Fitch expects any acquisitions above this amount to be financed through additional debt or assets, which may limit the financial position of Link Properties, although the acquisition may improve its geographical diversification.
Resilience of the HKSAR market:Fitch expects Link Properties** retail properties (mass-market-focused, non-discretionary retailers) in Hong Kong SAR to remain resilient, with rents returning to the mid-single digits by FY2024. The Company's retail properties are located in urban residential areas of the Hong Kong Special Administrative Region. Its gross occupancy rate remains at a high level of 98%, while the rental rollback rate has increased from 71% rose to 8. in the first quarter of fiscal 20247%。Revenue from parking and related businesses increased by 52%。Fitch expects the car park business to continue to experience low single-digit growth amid the imbalance between supply and demand in car parks.
Manageable office exposure:Link Properties**'s office assets account for approximately 10% of its asset value. Its international office portfolio maintained a high occupancy rate of 95% with a weighted average lease term of 53 years. Fitch expects office rental income to remain stable in the near term, although there may be a negative rent reversal after lease expiration, which could have an impact on its investment property, EBITDA.
Summary of Rating Derivation.
Resilient rental income from investment properties and a proven track record in operating and asset appreciation underpinned Link's rating. Link Lands**'s investment portfolio consists mainly of shopping malls located in large urban residential areas in the Hong Kong Special Administrative Region. Link Properties** also owns shopping malls and office buildings in first-tier cities in Chinese mainland, Singapore, Australia and the United Kingdom.
Link Properties**'s investment property assets are valued at approximately US$30 billion, with an EBITDA size of US$1 billion, and it is in close agreement with Swire Properties*** Swire Properties Limited ("Swire Properties"), 01972HK,A stable) but lower than Sun Hung Kai Properties Limited ("Sun Hung Kai Properties") (00016).HK,a stable). Due to its higher investment intensity and lower development risk, Link Properties** is in a stronger position than Swire Properties, and its loan-to-value ratio of approximately 20% is higher than that of Swire Properties.
The asset quality of Link Properties** is similar to that of Sun Hung Kai Properties, as it is smaller in scale than Sun Hung Kai Properties, but its investment is larger than that of Sun Hung Kai Properties. Link Land**'s investment properties in the first half of FY2024 have an EBITDA total interest coverage ratio of 4.3 times, which is higher than Sun Hung Kai Properties' 33 times, but SHKP's other recurring income from diversified businesses also helped to cover interest expenses.
Link Properties** and Scenter Group Limited Australia (A Stable) have similar business profiles in that both are focused on retail properties, have a smaller significant exposure to development properties, and have similar asset sizes. Both companies have a high occupancy rate of close to 100%. Link Properties**'s portfolio is stronger than that of Scenter Group Limited. However, Link Properties**'s portfolio is highly concentrated in the Hong Kong SAR and has some exposure to international office buildings, while Scenter Group Limited's portfolio is purely retail and spans cities across Australia and New Zealand.
Key Rating Assumptions.
Fitch's key rating assumptions in this issuer rating study include:
The rental rebate rate of the HKSAR portfolio is 5% in FY2024 and 3% in FY2025-2026
The average occupancy rate of retail and office space in the HKSAR in FY2024-2026 is 98%;
The EBITDA margin for the 2024-2026 fiscal year is approximately 70%;
FY 2024-2026 capital expenditures as a percentage of 7%-10% of revenues;
There were no acquisitions in the second half of FY2024 and acquisition expenses of HK$9 billion to HK$10 billion in FY2025-2027.
Rating sensitivity.
Factors that could individually or collectively lead to positive rating action by Fitch include:
Fitch does not expect to take any positive rating action on Link Properties** in the near term, as the company's debt-financed acquisition strategy will constrain its financial position.
Factors that could individually or collectively lead to negative rating action on Fitch Factors that could downgrade include:
Net debt The ratio of investment property assets is consistently above 30%;
The ratio of cash interest expense to EBITDA for investment properties is consistently below 3x;
The faster-than-expected pace of business expansion led to higher execution and financial risks.
Liquidity and debt structure.
Sufficient liquidity:Link Land** had HK$13.1 billion in cash at end-September 2023 and an unused committed facility of HK$9.7 billion. Assets held in investment-grade corporate bonds are approximately HK$1 billion – 70% of which Fitch treats as cash. Its liquidity is sufficient to cover short-term debt of HK$6.9 billion. As at the end of September 2023, the company's investment properties were valued at HK$210 billion, giving the company greater financial flexibility.
Issuer Profile.
Link Properties** is the largest real estate investment trust** in Asia and one of the world's largest retail-focused REITs** by market capitalisation. The Company owns 129 properties in the Hong Kong Special Administrative Region (HKSAR) with an internal floor area of 9 million square feet of retail properties and approximately 57,000 parking spaces. As at the end of September 2023, all of its properties were valued at HK$239 billion.