Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Profit Warning: MTR Corp (66.HK) [MTR] warned that it has faced significant operational and valuation challenges, which have led to its first loss since listing two decades ago. Losses of negative HKD 4.8 bn are likely from COVID-19 and a troubled mega project; and*2021 To Remain Very Challenging: The decision by the Hong Kong government to close all but three border checkpoints since the beginning of 2020 is likely to remain in place through much of 2021 as business conditions continue to worsen with the SAR now battling its now fourth wave of COVID-19. At it stands, ridership is down 31.5% YOY in 2020.

*Profit Warning: MTR Corp (66.HK) [MTR] warned that it has faced significant operational and valuation challenges, which have led to its first loss since listing two decades ago. Losses of negative HKD 4.8 bn are likely from COVID-19 and a troubled mega project; and*2021 To Remain Very Challenging: The decision by the Hong Kong government to close all but three border checkpoints since the beginning of 2020 is likely to remain in place through much of 2021 as business conditions continue to worsen with the SAR now battling its now fourth wave of COVID-19. At it stands, ridership is down 31.5% YOY in 2020.

*Another Weak Set Of Metrics: Link REIT (823.HK) [Link REIT] reported negative FY 1H21 bottom-line results of HKD 4.1 bn. While still a loss, this figure represents about 17.2% of losses (HKD 23.9 bn) posted in FY 2H20. Losses in both periods were attributed to negative fair value marks of HKD 7.3 bn and HKD 27.6 bn, respectively. While results on an operating basis were positive, the trend unfortunately remains negative for Link REIT – declining HKD 564 mn (15.1%). The poor operating results were driven by weaker Hong Kong rental income which declined HKD 186 mn (5.4%) HOH; and a HKD 55 mn (9.8%) decline in mainland Chinese property-related revenues;*Worries Abound: Weaker than expected Hong Kong retail operations leading to lower level of rental reversions; and continued negative revaluation of property due to lower rents and/or higher cap rates remain long-term risks; and*Poor Capital Management: On July 26, 2020, Link announced its proposed acquisition of a Grade A office building, The Cabot at 25 Cabot Square at Canary Wharf in London. This transaction makes little sense for Link REIT on a number of levels. Management also reiterated its 2025 target, suggesting that intends to add to the existing "core" portfolio while adding "core-plus" and "value-add" assets, which would include mainland Chinese Tier-1 cities, the United Kingdom, Australia, Singapore and Japan. Link REIT has also completed the 60 mn share buyback. Instead of weighing a buybacks return versus new investment ROI, management views share buybacks as a mechanism to defend its shares against short-selling.

*Another Weak Set Of Metrics: Link REIT (823.HK) [Link REIT] reported negative FY 1H21 bottom-line results of HKD 4.1 bn. While still a loss, this figure represents about 17.2% of losses (HKD 23.9 bn) posted in FY 2H20. Losses in both periods were attributed to negative fair value marks of HKD 7.3 bn and HKD 27.6 bn, respectively. While results on an operating basis were positive, the trend unfortunately remains negative for Link REIT – declining HKD 564 mn (15.1%). The poor operating results were driven by weaker Hong Kong rental income which declined HKD 186 mn (5.4%) HOH; and a HKD 55 mn (9.8%) decline in mainland Chinese property-related revenues;*Worries Abound: Weaker than expected Hong Kong retail operations leading to lower level of rental reversions; and continued negative revaluation of property due to lower rents and/or higher cap rates remain long-term risks; and*Poor Capital Management: On July 26, 2020, Link announced its proposed acquisition of a Grade A office building, The Cabot at 25 Cabot Square at Canary Wharf in London. This transaction makes little sense for Link REIT on a number of levels. Management also reiterated its 2025 target, suggesting that intends to add to the existing "core" portfolio while adding "core-plus" and "value-add" assets, which would include mainland Chinese Tier-1 cities, the United Kingdom, Australia, Singapore and Japan. Link REIT has also completed the 60 mn share buyback. Instead of weighing a buybacks return versus new investment ROI, management views share buybacks as a mechanism to defend its shares against short-selling.

*Weak Set Of Metrics:Link REIT (823.HK) [Link] announced a poor set of FY 1Q21 operating metrics, which in fairness were well flagged as weak operational results and negative reversion appear to have been the culprits; and *Negative Market Readacross: Implications for retail landlords are such that there are risks of further rent concessions, negative reversions, and higher vacancies. Discretionary retail landlords could see greater impact than mass market.

*Weak Set Of Metrics:Link REIT (823.HK) [Link] announced a poor set of FY 1Q21 operating metrics, which in fairness were well flagged as weak operational results and negative reversion appear to have been the culprits; and *Negative Market Readacross: Implications for retail landlords are such that there are risks of further rent concessions, negative reversions, and higher vacancies. Discretionary retail landlords could see greater impact than mass market.

Link REIT – Tough Operating Environment To Persist

*Extension Of Tenant Support Program: On August 9, 2020, Link REIT (823.HK) [Link REIT] again extended tenant support program from HKD 300 mn to HKD 600 mn. Link REIT continues to offer additional relief measures, including rent reduction, deferred payments, etc. The additional concession includes: a) a waiver of management and air conditioning fees for all tenants between August and September  - and amounts to HKD 150 mn; and b) case by case rental concessions;*Hong Kong Pressures Are Very Apparent: This London transaction so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the price and location of this deal; and  *Negative Market Readacross: Implications for retail landlords are such that there are risks of further rent concessions, negative reversions, and higher vacancies. Discretionary retail landlords could see greater impact than mass market.

*Extension Of Tenant Support Program: On August 9, 2020, Link REIT (823.HK) [Link REIT] again extended tenant support program from HKD 300 mn to HKD 600 mn. Link REIT continues to offer additional relief measures, including rent reduction, deferred payments, etc. The additional concession includes: a) a waiver of management and air conditioning fees for all tenants between August and September  - and amounts to HKD 150 mn; and b) case by case rental concessions;*Hong Kong Pressures Are Very Apparent: This London transaction so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the price and location of this deal; and  *Negative Market Readacross: Implications for retail landlords are such that there are risks of further rent concessions, negative reversions, and higher vacancies. Discretionary retail landlords could see greater impact than mass market.

* New Transaction In London: On July 26, 2020, Link REIT (823.HK) announced its proposed acquisition of a Grade A office building, The Cabot at 25 Cabot Square at Canary Wharf in London for  GBP 371mn or HKD 3.68 bn -  5% lower than market expectations. The Cabot is Grade A freehold multi-let Canary Wharf office with over 44,000 sq. meters and is widely recognized landmark; * Deal Makes Close To No Sense: While the acquisition of The Cabot is mildly dividend accretive on its face at approximately 1.4%, this transaction makes little sense for Link REIT on a number of levels; and *Hong Kong Pressures Are Very Apparent: This transaction so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the thre price and location of this deal.

 * New Transaction In London: On July 26, 2020, Link REIT (823.HK) announced its proposed acquisition of a Grade A office building, The Cabot at 25 Cabot Square at Canary Wharf in London for  GBP 371mn or HKD 3.68 bn -  5% lower than market expectations. The Cabot is Grade A freehold multi-let Canary Wharf office with over 44,000 sq. meters and is widely recognized landmark; * Deal Makes Close To No Sense: While the acquisition of The Cabot is mildly dividend accretive on its face at approximately 1.4%, this transaction makes little sense for Link REIT on a number of levels; and *Hong Kong Pressures Are Very Apparent: This transaction so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the thre price and location of this deal. 

Link REIT – Moving Further Away From Its Core

Hong Kong

Sun Hung Kai Properties Limited develops and invests in properties. The Company operates and manages hotels, properties, car parking, and transportation infrastructures. Sun Hung Kai Properties serves customers in Hong Kong.

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Sun Hung Kai Properties (16 HK)

MTR Corp – Trainwreck

MTR CORP: MTR warned that it has faced significant operational and valuation challenges, which have led to a major loss. The border closure is...

Thomas J. Monaco

Link REIT – Bread and Butter Melting

LINK REIT: Almost Nothing Is Going Right For Link REIT. Rental Reversion Rates Weakening In Hong Kong; FV Marks Remain Negative; and Capital...

Thomas J. Monaco

Link REIT – Tough Operating Environment To Persist

*Weak Set Of Metrics: Link REIT (823.HK) [Link] announced a poor set of FY 1Q21 operating metrics, which in fairness were well flagged as weak...

Thomas J. Monaco

Link REIT – Concession Time Again

*Extension Of Tenant Support Program: On August 9, 2020, Link REIT (823.HK) [Link REIT] again extended tenant support program from HKD 300 mn to...

Thomas J. Monaco

Link REIT – Moving Further Away From Its Core

* New Transaction In London: On July 26, 2020, Link REIT (823.HK) announced its proposed acquisition of a Grade A office building, The Cabot at 25...

Thomas J. Monaco

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