Is Link REIT (0823.HK) a Good Buy Right Now?

I know retail malls are set to make a comeback one day.

But forget about the Singapore retail malls. Today, the one I’m talking about is Asia’s largest REIT…

Link Real Estate Investment Trust (0823.HK) is a HK$146 billion retail landlord publicly traded on the Hong Kong Stock Exchange.

Link REIT owns and operates over 130 retail malls in Hong Kong and some in China. 

Specifically, I’m not referring to Hong Kong’s legions of massive shopping malls in Central or Tsim Sha Shui.

But rather, pointing to Hong Kong’s local “neighbourhood” retail malls — mostly located in the older, urban districts, away from the SAR’s tourist hotspots.

You see, Link REIT’s sole purpose of listing in 2006 was to safekeep all these good neighbourhood retail malls owned by the Hong Kong Housing authority. 

These buildings were originally built 10 to 30 years ago to serve the nearby local residences. 

Now, this is what’s little known to many people. 

Unlock Link REIT’s Hidden Profits

Many of Link REIT’s retail malls are actually located in heavily-populated areas with a large residential catchment.

Because these areas have limited land spaces and land costs are high, it deters many new retail developments to come in. 

In my opinion, this makes Link REIT’s malls the dominant retail landlord in their respective domains. 

These malls are also among the most stable retail outlets that exist. Similar to Singapore’s heartland malls, there’s always a natural demand for nearby Hong Kong residents to shop at their local malls for their daily essentials. 

In fact during the Covid-19 pandemic, Link REIT’s tenants’ sales in supermarket and foodstuff during Apr to Sep 2020 grew 13.9% year on year. 

Sure, there are tenants in the food & beverage, even general retail like clothing and household retailers suffering briefly right now. 

But these tenants know this. Link REIT’s malls provide a strong foot traffic for tenants to stick around for the long-term. 

That’s why, throughout the pandemic, Link REIT maintained their retail malls’ occupancy rate at a stable 96%. And it continued to collect more than 95% of its rents through 2020. 

You can say a landlord’s business is simple, yet stable. As long as it owns properties in good locations.

Collect Steady Dividends… Even if Link REIT’s Stock Goes Nowhere

For the most part of its years, Link REIT’s properties have shown steady revenue and distribution per unit (DPU) growth. 

Since its financial year (FY) ending March 2007, Link REIT grew its revenues from HK$4 billion to HK$10.7 billion in FY2020. During the same period, its DPU grew from HK$0.67 per unit to HK$2.87 per unit. 

DPU is the amount of dividends a shareholder gets for every unit owned. 

In fact, Link REIT maintained its DPU of HK$1.42 per unit during the first half of financial year 2021.

As a real estate investment trust, Link REIT has to pay a heavy dividend. You see, even in Hong Kong, REITs pay out at least 90% of their taxable income as dividends. 

And because management is confident the REIT will continue to grow dividends for their investors, It aims to maintain a 100% payout ratio.

These dividends are a critical piece of Link REIT’s investment story. 

Many income investors look into REITs for their hefty dividend payouts. So the ability to consistently grow Link REIT’s dividends will continue to attract yield-seeking investors.

Now, what’s even more impressive is Link REIT’s fortress-like balance sheet. 

While Singapore REITs have an average gearing ratio of around 35% to 40%, Link REIT only manages a low, clean 17.7% gearing ratio. Don’t believe me? Check their latest financial presentation.

Gearing ratio is simply total debt divided by Link REIT’s total assets.

That means, Link REIT has plenty of room to grow their property portfolio without putting too much pressure on their financial position.

And because of Link REIT’s high-quality properties, banks are more than willing to lend money to Link REIT at a very cheap cost. 

Today, Link REIT’s borrowing cost is around 2.8% and, so far, they have bank credit of HK$13 billion ready to use for new acquisitions. 

When Link REIT buys a new property, it’s very strict with its investment criteria. It recently bought two overseas premium Grade A offices in a move to diversify into the global commercial property market. 

Both acquisitions are well-located in the heart of Sydney, Australia and London, UK.

But what matters is these new properties are fully occupied with very long leases of 8 to 10 years. And rent reviews are typically set for an annual 4% increase.