Link Real Estate Investment Trust (823) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to Link REIT's 2026-2027 First Quarter Operational Update. This is Christy Lam, Director of Investor Relations. On this call, we have CFO, Mr. Kok Siong Ng; and CIO, Mr. John Saunders. On the screen, you may find today's agenda. And without further ado, let me hand the floor over to K.S.

Thank you, Christy. Good afternoon, everyone. This was a quarter of steady performance against an operating environment that remains mixed across our markets. Here are 4 highlights we would like to share. Starting with the top line, first Q performance remained steady during the quarter. In Hong Kong retail, spot rent stabilization continued and rental reversion remained in line with our guidance as we continue to wash through leases signed above current market rent. Across our markets, the retail portfolio maintained high occupancy despite mixed operating conditions. In Singapore and Australia, performance remains solid. In Hong Kong and the Chinese Mainland, we have kept up our continued cost discipline while navigating the current retail environment. We'll go over the more detailed figures shortly. On our capital position, strong credit ratings continue to support low financing costs despite divergent interest rate trends. We expect valuations to remain broadly stable in the first half, supported by stabilizing spot rents. Finally, on our focus areas, our back-to-basics strategy remains centered on portfolio optimization, capital recycling and cost discipline. On that front, we continue to advance asset recycling, unit buybacks and third-party capital partnerships to unlock value. In July, we announced the appointment of Mr. Neil Slater as CEO, effective 1st March 2027, supporting leadership continuity and execution of our strategy. With that, let me take you through our latest portfolio breakdown. Before we get into performance, a quick look at what the portfolio now looks like following the Thomson Plaza disposal completed during the quarter. As at the end of June 2026, the total valuation of the Link REIT portfolio, excluding Swing By @ Thomson Plaza stood at HKD 216 billion on a pro forma basis. Core retail and car park assets continue to form the backbone of the portfolio, accounting for 89.5% with the remaining 10.5% comprising other assets, including offices and logistics. Geographically, Hong Kong and the Chinese Mainland retail remain our key markets at about 82% of portfolio value, spanning retail and car park assets, while international retail assets in Australia and Singapore make up around 8%. I'll now hand over to John to take you through our operational performance.

Thank you, K.S. Hong Kong is our biggest market and the one working hardest right now. So let me spend a moment here. Occupancy remained high and stable with unit rent broadly steady, while spot rents have continued to stabilize. On rental reversion, we expect the first half to trend towards negative mid-single-digit range and continue to guide for full year reversion at a similar level to last year. Against this backdrop, our response has 2 parts. The first is how we shape the portfolio itself. We continue to refresh our tenant mix and reconfigure our space to stay relevant to the market with proactive leasing supporting resilience through the quarter. I'll share some examples on a later slide. The second is omnichannel engagement. We remain cognizant of the structural shift in cross-border e-commerce, the growth there appears to be moderating following the sharp increase last year. We have recently expanded Link Collect to 2 additional locations to continue deepening our community engagement, activating quieter zones within our malls and generating data insights. Alongside retail, our car park business kept revenue stable, supported by tariff growth and new revenue streams despite softer demand from declining car ownership and lower ticket volumes. Our convenient locations and the scale of our EV charging network continue to add value for drivers. I'll expand on our car park initiatives later. These 2 charts provide an overview of tenant performance across the portfolio. On tenant sales, overall growth was broadly in line with the modest softness we saw a year ago. Across trade categories, F&B, which is roughly half of our business, remained resilient as dining demand continued to hold up well, while supermarket and foodstuff as well as general retail stayed muted. On the right-hand side, our occupancy cost ratios remain healthy, sitting within a comfortable and sustainable range. We continue to proactively refine our tenant mix to stay ahead of evolving market trends. The next slide shows our asset management strategy in practice. I mentioned we're reshaping the tenant mix. This is what that actually looks like on the ground. We curate our retail offering with a few distinct drivers. And while we bring in different trades during the process, the objective remains the same, keeping our malls relevant to the communities around them. First, we activate common areas to generate incremental revenue, pop-ups, food fairs and putting otherwise idle space to work through a range of events. Secondly, we repurpose space to better serve evolving community needs, introducing services in districts where we see growing demand. Thirdly, we curate in-person offerings that differentiate physical retail, experiential concepts that cannot be replicated online. And then last but not least, we bring in distinctive new concepts to keep the shopper experience fresh. So now let's move on to our car park initiatives. While volume isn't fully within our control, how we price and use our spaces is. We rolled out a series of focus measures this quarter, each aimed at lifting usage and building steadier recurring parking revenue. To start, we reshaped our parking privilege scheme, moving certain complimentary benefits onto a paid basis and converting them into income while keeping customers engaged. We also introduced an hourly discount for taxi drivers, drawing in a wider user base and putting our off-peak capacity to better use. On pricing, we took a sharper approach using data analytics and dynamic pricing to fine-tune tariffs by demand, location and peak usage. And to round all this off, we added more motorcycle bays, capturing rising demand and unlocking income from an underserved segment. Together, these efforts show how we are actively managing our car parks, protecting utilization while opening up fresh recurring income streams. So that covers our Hong Kong portfolio. Let's turn now to Chinese Mainland retail. Moving across the border to our Chinese Mainland retail assets, a subdued operating environment continues to weigh on performance with rental reversion under some pressure, primarily reflecting weaker performance in the North. Against that, the portfolio maintained occupancy at a healthy level and both tenant sales, excluding EVs and shopper traffic, saw year-on-year growth. Unit rent, on the other hand, recorded modest year-on-year growth. We are actively refreshing the trade mix and reconfiguring layouts with leasing focused on lifestyle, IP-driven retail and popular F&B in order to lift footfall and sales and stabilize performance against the challenging backdrop. Outside our home markets, we are seeing a more supportive environment. Across Singapore and Australia, both sustained high occupancy and positive rental reversions, underscoring continued leasing demand for our well-positioned assets. Occupancy stayed high across the 2 markets and tenant sales held up well, remaining resilient at Jurong Point and strong throughout the quarter in Australia. Even so, we remain mindful that energy-driven inflation pressure could weigh on retail sentiment and household spending in both. Beyond our core portfolio of retail and car parks, we hold a small book of office and logistics assets. Occupancy across these assets remain stable with leasing activity steady despite mixed conditions in individual markets. Our Chinese Mainland office and logistics assets held up against new supply and remain reasonably positioned for tenant demand, while our international office portfolio continues to see support from flight to quality demand. I will now hand over to K.S. to walk through capital management and cost optimization. K.S.?

Thank you, John. Here is a brief overview of our capital management as of 31st March 2026. Key credit metrics continue to reflect a strong and healthy position with conservative gearing and low funding costs. Finance costs held largely stable despite divergent interest rate trends across our key markets, supported by fixed rate hedge and continued benefit from flight to quality conditions in refinancing. Since the year-end, we have also made good progress on capital allocation. As of 7th September, we have resumed our unit buyback program with over HKD 1 billion deployed to date. Non-Hong Kong dollar distributable income and non-Hong Kong dollar currency exposure to U.S. were substantially hedged. Turning to the shape of our debt. Funding mix on the left, maturity profile on the right. Our debt profile remains well structured and diversified, supporting a prudent refinancing cadence. By type, our funding is well diversified across bank loans, medium-term notes and convertible bonds, giving us a balanced mixture of funding sources. On maturities, our debt is well staggered across the coming years. This disciplined approach ensures we stay well positioned to refinance smoothly and maintain financial flexibility through the cycle. I'll now pass back to John to elaborate on our focus areas.

Thank you, K.S. Everything we've covered sits under one framework, which we set out at the full year results. And as K.S. said at the start, our back-to-basics strategy rests on 3 priorities, each directed at unitholder value. First, we continue to unlock value from our core Asia Pacific portfolio. As part of this strategy, we have approved HKD 1 billion of CapEx over the next 3 to 5 years to enhance our core portfolio, positioning our assets to capture improving market sentiment. Secondly, we continue to simplify the portfolio through noncore divestments with proceeds redeployed to enhance unitholder returns, including through reinvestments in unit buybacks. We also continue expanding third-party capital partnerships to grow AUM and fee income. I will elaborate on this in greater detail on the next slide. Thirdly, cost discipline stays a key focus we will continue to pursue. A leaner structure, consolidated facilities management and wider digitalization and automation keep delivering savings and supporting margin resilience. And on the next slide, I will take you through the capital recycling completed to date, and I will also touch briefly on the CEO appointment for the benefit of those who missed the announcement call. You've seen the strategy. This is what we've delivered against it so far this year. On capital recycling, we completed the disposal of Swing By @ Thomson Plaza for SGD 250 million, crystallizing value at a premium to book. The proceeds are being redeployed into unit buybacks. Following the end of last financial year, we resumed the buyback program on the 9th of July and have deployed over HKD 1 billion as at September 7. We have also announced the sale of a 50% stake in 100 Market Street in Sydney for just under AUD 226 million, and this is expected to complete in the third quarter. We retained the remaining 50% stake through a joint ownership agreement with Aware Real Estate, keeping an ongoing income stream and management fees while demonstrating our third-party capital partnership capability. On leadership succession, we announced the appointment of Neil Slater as CEO, effective 1st of March 2027. Neil is strongly aligned with the group's strategic direction, supporting continuity through the transition. Meanwhile, the interim leadership team and Chairs Committee continue to drive the Back-to-Basics strategy. This concludes our operational updates for the first quarter. Thank you all for your time today.

Thank you, John. Thank you, K.S. Let's open the floor for Q&A. For those who have questions, please fill them in using the chat box. Thank you. Okay. So let's have the first question from JPM, Karl Chan. Can you clarify what you mean by rent reversion trending towards negative mid-single digits in the first half, but full year forecast remains broadly similar to last year? Did you mean that the full year guidance for rent reversions remains high single digits? Looking forward to next financial year, do you expect the negative rental reversion to further narrow?

Yes. Thanks for that. So yes, I think what we're guiding is that for the first half will be sort of mid-single digits. And I think we've been clear with our guidance previously about where we sort of expect the end -- or the end of the year to look. I mean even now, we don't have total visibility on that. We've done roughly 2/3 of our leases so far. So we still have work to do on the rest to get with the eventual result. But I would stick by the guidance that we gave previously in the year as far as the full year is concerned. The one thing I would say, though, is that spot rents do continue to stabilize, which is an encouraging sign. So we'll continue to monitor that and finish off the remainder of the leases.

And then we got quite some questions regarding tenant sales as well. Can management update us on tenant sales trends in July and August? Has the improvement trajectory continued? What trade categories are outperforming and underperforming?

Yes. So I think in the first quarter, there's always a little bit of seasonality because you have Chinese New Year and you've also got quite a few holidays there. And I think overall, the trends are continuing. Nearly half of what we do is food and beverage. I would say F&B is still performing reasonably well. And probably the weakest of the sectors at the moment is still household. But that's why we spend such a lot of time with the mix in the portfolio. As you've seen with Chinese restaurants, for example, where we've reduced the footprint of some of our Chinese restaurants, replaced them with F&B brands from the Mainland. Sometimes that results in a larger number of smaller shops, but it definitely adds to the mix and changes the vibrancy of the center. And you've also seen the footprint of some of the general retail categories, particularly household, shrink as well as we look at a number of initiatives, including gyms and more recently, we've been doing some aged care as well with quite some degree of success.

Next question is regarding the recent currency fluctuations. So with the recent currency fluctuations and potential U.S. rate hike, what is your guidance on the full year average borrowing costs?

I think as of now, I mean, our best action that we have taken so far is to keep the hedge to 60% and the foreign assets are all foreign currency hedged. I think we have shared at that point about 3.4%. I think clearly, if rate hikes continue down the path that the market is expecting, we will expect a higher borrowing costs. But looking at what we have shared before, the mathematics remains the same: every 25 bps is HKD 0.02 on an annualized basis. But as of now, I mean, there's been so much talk of rate hikes for so long that our sense is we are just going to manage on the business and keep that ratio fixed about 60% plus/minus for now.

And how is the cost saving initiatives tracking versus plan?

In June, we shared that we were aiming for HKD 200 million annualized. So far, we are on track to save that amount, and we don't see any major deviations from what we have been budgeting and planning for.

Having spent HKD 1 billion for share buyback, how much quota is left out of the USD 250 million (sic) [ SGD 250 million ] -- or is a portion of the divestment of 100 Market Street could also be included?

We have, I guess, announced to the market that we are putting the full Thomson Plaza proceeds to buyback, of which we have done 2/3 of it. And I think the buyback program continues. As far as for the 100 Market Street divestment, we did share that we are looking at various options of how to deploy the capital that we have recycled. At this stage, we will continue to finish the first HKD 1.5 billion buyback. And then at some point, we will likely go on to -- in the spirit of recovering the divested NPI to announce the next bucket of buyback and the interim results.

Cindy from Citi. Want to ask for the update on noncore asset disposals. Are any transactions at an advanced stage? If so, could potential NPI restrict Link's ability to continue unit buyback?

I'll take the first part of that and then pass to K.S. As you know, we have several sales programs ongoing. I think it's been public that we have a program ongoing for the London office asset. That process is still alive and progressing. So we hope to be able to bring you more news of that going forward. I think we've also made it fairly clear that we're probably not long-term holders of the China logistics assets. So that's also something that we're working on as well. And again, as we get more information and more clarity on that, we'll bring that to you. K.S.?

I mean we don't see any significant or material transactions in the pipeline that would restrict our buyback short of the normal 1 month pre results announcement blackout and 2 months for full year results.

And there's a question on car park. Noticed on the various initiatives. Can you share some latest revenue trend and perhaps guidance going forward?

Yes, sure. I mean overall car parking market is still a little weak because of falling car ownership. But really, what we're trying to do, as I think we mentioned in the presentation earlier, is try and maximize the utility of our car parking areas as much as we possibly can. So you'll remember, we put in place what we call privileged parking. We used to have parking -- basically free parking against receipts versus an average ticket of about HKD 25. And we've now put in place privileged parking, which is a HKD 5 charge. That's actually been really quite successful. And so we'll continue pushing with that. We've got a number of other initiatives as well, including both short-term changeover parking for taxi fleets, looking at -- and potentially some longer-term parking for those fleets as well. So we're working with a number of the taxi associations and authorities in respect of that. And then, of course, we have our dynamic parking system. So we're looking where we can to fine-tune and maximize the revenue for the car parking through there. So it's still -- there are still declining registrations, but I think we're doing well against that backdrop with both the initiatives and the technology that we've invested in.

Next question is on AEI. Can you share a bit of details on the HKD 1 billion AEI CapEx in the next 3 to 5 years? What will be the pace of deployment? And what's the selection criteria?