The Motley Fool

Can Link REIT Keep Growing its DPU?

Link REIT (HKSE: 823) is the largest REIT in Asia by market capitalisation, worth around HK$194 billion. It’s a constituent stock of the benchmark Hang Seng Index (^HSI) and also a firm favourite among local Hong Kong investors looking for regular passive income.

Link REIT has posted impressive results over the last five years and also grown distribution per unit (DPU) from HK$1.8284 in FY2014/2015 to HK$2.7117 in FY2018/2019 (a 48% increase over five years). The question now, though, is can the REIT keep growing and providing larger payouts to shareholders?

Portfolio and earnings

The REIT’s portfolio (as at 31 March 2019) consists of 126 properties in Hong Kong with around 8 million square feet of retail space, and almost 56,000 car park spaces. In China, the REIT owns 5 properties with around 5 million square feet of retail and office space. The total portfolio value as of 31 March 2019 was HK$218 billion.

Link reported a stellar set of results for its fiscal 2018/2019 earnings (the REIT has a 31 March year-end). Revenue rose by 7.2% year-on-year to HK$10 billion, while net property income (NPI) was up 7.1% year-on-year to HK$7.7 billion.

Distribution per unit (DPU) was up 8.6% year-on-year to HK$2.7117. At Link’s last traded price of HK$92.10, the REIT’s trailing dividend yield stood at 2.9%.

The REIT is undertaking several initiatives to grow its portfolio and DPU, and the good news is that it has a long-term plan for a high single-digit growth target by 2025. Let’s take a look at some of these initiatives.

Asset enhancement initiatives (AEIs)

Link REIT has always made use of AEIs to improve the condition of the properties they own and to push for positive rental reversions. It was no different for the last fiscal year, with AEIs for projects in H2 2018/2019 yielding a return on investment (ROI) of between 15.4% and 35.6%. Link REIT spent a total of HK$1 billion on capital expenditure for AEI in FY 2018/2019.

The REIT has lined up another four projects as AEIs, budgeting a total of HK$580 million. These projects will be completed by early 2020. Yet another 24 AEI projects are in the pipeline and have their completion dates extended till 2023. Six of the projects will commence soon (with completion expected by 2020), while the other 18 projects should complete by 2023.

Capital recycling

The REIT’s management should also be lauded for its proactive capital recycling efforts. The REIT made two acquisitions during the previous fiscal year – Roosevelt Plaza in Beijing and CentralWalk in Shenzhen. This adds a total of 1.6 million square feet of retail space and RMB 9 billion in portfolio value.

The REIT had also made 12 divestments during the same year, removing 0.6 million square feet of retail space with a portfolio value worth HK$9 billion. There was a net addition of 1 million square feet of retail space and the acquisitions were carried out in mainland China.

This has enhanced the future growth prospects for the REIT as growth in Hong Kong itself is saturated. Furthermore, initial reversion rates are expected on these new acquisitions, which is great news for shareholders and should further boost DPU.

Source: Link REIT’s FY 2018/2019 Presentation Slides

The table above shows the composite rental reversion rates for each category of real estate for Link REIT’s portfolio. The previous fiscal year saw an overall reversion rate of 22.5%, which is impressive by any standards.

But it’s even more impressive considering most of Link REIT’s portfolio is in Hong Kong, where rental rates are already among the highest in the world. Moving forward, the REIT should continue to see increases in rental rates, though this may come down to single-digit levels in line with management’s long-term growth target.

Foolish takeaway on the DPU

The above three aspects show that DPU can continue to head upwards, albeit at a slower pace than before. With management undertaking proactive capital recycling and undertaking extensive AEIs, investors can look forward to higher levels of rental income and NPI.

However, I believe some caution from investors is warranted – the REIT is trading at a relatively low yield of just 2.9% and rental reversions in Hong Kong could slow beyond what the market is currently expecting.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Royston Yang does not own shares in any of the companies mentioned.