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

*Better, But Weak Metrics: Link REIT (823.HK) [Link REIT] reported a positive FY 2H21 bottom-line result of HKD 5.3 bn, increasing HKD 9.4 bn over the HKD 4.1 bn in losses posted in FY 1H21. However, when we exclude Link’s non-cash FV marks of HKD 2.0 bn, operating performance cam in at just HKD 3.3 bn – improving just HKD 143 mn (4.5%) HOH. The positive HOH operating performance was driven by an increase in revenues from mainland China and overseas related property;  *Worries Remain In Hong Kong: Hong Kong retail portfolio's rental reversion rate continued to be challenged YOY in FY 2H21, albeit slightly improving from a negative 2.6% in FY 1H21 to a negative 1.8%. Although not a enormous surprise, this trend would appear to be with us for an extended period in Hong Kong - especially given the continued border closures amid the COVID-19 disruption; and*Poor Capital Management Becoming A Big Problem: Link management also appears hellbent on destroying shareholder value with deals that make little financial sense. Link recently announced the acquisition of Happy Valley Shopping Mall in Guangzhou where the current annualized NPI yield barely covering the project’s cost of funding. In order to improve occupancy, it would appear that Link would likely need to offering significant tenant enticements, and investment massively in asset enhancement. Bizarrely instead of weighing buybacks return versus new investment ROI, management views share buybacks as a mechanism to defend shares against short-selling.

*Better, But Weak Metrics: Link REIT (823.HK) [Link REIT] reported a positive FY 2H21 bottom-line result of HKD 5.3 bn, increasing HKD 9.4 bn over the HKD 4.1 bn in losses posted in FY 1H21. However, when we exclude Link’s non-cash FV marks of HKD 2.0 bn, operating performance cam in at just HKD 3.3 bn – improving just HKD 143 mn (4.5%) HOH. The positive HOH operating performance was driven by an increase in revenues from mainland China and overseas related property;  *Worries Remain In Hong Kong: Hong Kong retail portfolio's rental reversion rate continued to be challenged YOY in FY 2H21, albeit slightly improving from a negative 2.6% in FY 1H21 to a negative 1.8%. Although not a enormous surprise, this trend would appear to be with us for an extended period in Hong Kong - especially given the continued border closures amid the COVID-19 disruption; and*Poor Capital Management Becoming A Big Problem: Link management also appears hellbent on destroying shareholder value with deals that make little financial sense. Link recently announced the acquisition of Happy Valley Shopping Mall in Guangzhou where the current annualized NPI yield barely covering the project’s cost of funding. In order to improve occupancy, it would appear that Link would likely need to offering significant tenant enticements, and investment massively in asset enhancement. Bizarrely instead of weighing buybacks return versus new investment ROI, management views share buybacks as a mechanism to defend shares against short-selling.

Link REIT – Hong Kong “Stabilizing”

*Update Confirms Weak Outlook: Negative rental reversion rates persist in Hong Kong, as do negative tenant sales. We continue to await another round of negative revaluation of property due to lower rents and/or higher cap rates; and  *No Serious Capital Management Strategy Exists: Management of Link appears hellbent on destroying shareholder value.As gearing was 19.2% at September 2020, management continues to believe that it has abundant headroom to add debt for acquisition. Instead of weighing a buyback’s return versus new investment ROI, management views share buybacks as a mechanism to defend its shares against short-selling. Maybe a re-re-review of its acquisition strategy will occur by earnings when Link’s new mainland China acquisition strategy truly flops.

*Update Confirms Weak Outlook: Negative rental reversion rates persist in Hong Kong, as do negative tenant sales. We continue to await another round of negative revaluation of property due to lower rents and/or higher cap rates; and  *No Serious Capital Management Strategy Exists: Management of Link appears hellbent on destroying shareholder value.As gearing was 19.2% at September 2020, management continues to believe that it has abundant headroom to add debt for acquisition. Instead of weighing a buyback’s return versus new investment ROI, management views share buybacks as a mechanism to defend its shares against short-selling. Maybe a re-re-review of its acquisition strategy will occur by earnings when Link’s new mainland China acquisition strategy truly flops.

*No Results Surprise Post-Profit Warning: In January 2021, MTR Corp (66.HK) [MTR] issued a profit warning for FY 2020, suggesting that the company faced significant operational and valuation challenges, which led to its first loss since listing two decades ago. As warned, MTR announced losses of HKD 4.8 bn both related to the impact of the COVID-19 pandemic and a troubled mega project;*2021 Not Looking Much Better: The decision by the Hong Kong government to close all but three border checkpoints since the beginning of 2020 is likely to remain through most of 2021 as business conditions continue to worsen; and* New Projects Remain In Progress: The construction of Shatin-Central Link is in progress, Tuen Ma Line Phase 1 (Tai Wai to Kai Tak) has already opened, and the full Tuen Ma Line is scheduled to be completed in 3Q21. The 1Q22 opening of the Hung Hom to Admiralty section is likely to be delayed.

*No Results Surprise Post-Profit Warning: In January 2021, MTR Corp (66.HK) [MTR] issued a profit warning for FY 2020, suggesting that the company faced significant operational and valuation challenges, which led to its first loss since listing two decades ago. As warned, MTR announced losses of HKD 4.8 bn both related to the impact of the COVID-19 pandemic and a troubled mega project;*2021 Not Looking Much Better: The decision by the Hong Kong government to close all but three border checkpoints since the beginning of 2020 is likely to remain through most of 2021 as business conditions continue to worsen; and* New Projects Remain In Progress: The construction of Shatin-Central Link is in progress, Tuen Ma Line Phase 1 (Tai Wai to Kai Tak) has already opened, and the full Tuen Ma Line is scheduled to be completed in 3Q21. The 1Q22 opening of the Hung Hom to Admiralty section is likely to be delayed.  

*Weak Conference Highlighted By What Wasn’t Discussed: Link REIT (823.HK) [Link] discussed its continued operational and strategic challenges through the COVID-19 pandemic. Hong Kong shopping mall occupancy remains between 95%-96%, with rental reversion rates still tracking at negative 2.6%. Additional deals from mainland China expected to be yield accretive; and*New Acquisition Strategy: While it sounds ridiculous, Link has apparently had an epiphany with respect to evaluating portfolio acquisitions based on growth and risk/reward. If this is now the case, what was management actually thinking with The Cabot in London on July 26, 2020.

*Weak Conference Highlighted By What Wasn’t Discussed: Link REIT (823.HK) [Link] discussed its continued operational and strategic challenges through the COVID-19 pandemic. Hong Kong shopping mall occupancy remains between 95%-96%, with rental reversion rates still tracking at negative 2.6%. Additional deals from mainland China expected to be yield accretive; and*New Acquisition Strategy: While it sounds ridiculous, Link has apparently had an epiphany with respect to evaluating portfolio acquisitions based on growth and risk/reward. If this is now the case, what was management actually thinking with The Cabot in London on July 26, 2020.   

*Weak Numbers Expected: Link REIT (823.HK) [Link] hosted a pre-blackout investor presentation on Oct 8, 2020.The outcome was generally a negative earnings pre-announcement whereby DPU is set to decline 7.6% - the first dividend decline since Link was listed in 2005. The culprit for the poor pre-announcement was a negative rental reversion rate and increased rental concessions (which we believe are not one off) in Hong Kong, factors which are anticipated to continue to place intense pressure on results for the foreseeable future; and  *Hong Kong Pressures Are Very Apparent: This recent London transaction is 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. We are hopeful that management doesn’t let the large cash position burn another hole its pocket.

*Weak Numbers Expected: Link REIT (823.HK) [Link] hosted a pre-blackout investor presentation on Oct 8, 2020.The outcome was generally a negative earnings pre-announcement whereby DPU is set to decline 7.6% - the first dividend decline since Link was listed in 2005. The culprit for the poor pre-announcement was a negative rental reversion rate and increased rental concessions (which we believe are not one off) in Hong Kong, factors which are anticipated to continue to place intense pressure on results for the foreseeable future; and  *Hong Kong Pressures Are Very Apparent: This recent London transaction is 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. We are hopeful that management doesn’t let the large cash position burn another hole its pocket.   

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 (SUHJY US)

Link REIT – Hong Kong “Stabilizing”

LINK REIT: Link operating results only improved 4.5% HOH, driven by mainland China and overseas. Hong Kong retail portfolio remains a challenge, as...

Thomas J. Monaco

Link REIT – Cash Burning Holes

LINK REIT: Negative rental reversion rates and tenant sales persist in Hong Kong, negative revaluation of property continues. Link is hellbent on...

Thomas J. Monaco

MTR Corp – Struggles Set To Continue

MTR CORP: As warned, MTR announced losses of HKD 4.8 bn both due to the impact of COVID-19 and a troubled mega project. With border closures to...

Thomas J. Monaco

Link REIT – Novel Acquisition Approach

LINK REIT: Link recently discussed its continued operational and strategic challenges through the COVID-19 pandemic. Link has apparently had an...

Thomas J. Monaco

Link REIT – Weak Results Preview

*Weak Numbers Expected: Link REIT (823.HK) [Link] hosted a pre-blackout investor presentation on Oct 8, 2020.The outcome was generally a negative...

Thomas J. Monaco

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