Link REIT scores Lions Rise Mall from Kerry for HK$1,380mn

Purchase is in synergy with existing portfolio.

The Link REIT announced on 18 August that it has agreed to buy the Lions Rise Mall from Kerry Properties for HK$1,380mn, and this has been viewed as a win-win transaction for both Link and Kerry Properties.

According to a research note from Barclays, details on the transaction price include: Against the HK$126,319sf GFA of the Lions Rise Mall, the transaction price works out to a per square foot value of HK$10,925psf.

The property is currently 84% let and generates a passing rent of HK$2.7mn per month. This implies a passing rental yield of 2.4%.

According to the announcement, the valuer believes the property if 100% occupied at market rent should generate a monthly income of HK$4.7mn, implying a yield of 4.0%. 53.4% of the current leases (based on monthly passing rent) will expire by the end of 2015.

Here’s more from Barclays:

The consideration of HK$1,380mn is at a 4.5% premium to the Independent Property Valuer’s appraised value of HK$1,320mn.

The Link will fund the acquisition with debt. It expects to draw down HK$1,508mn from its debt facilities and it anticipates this will increase its debt to total asset ratio from 11.0% to 12.2%.

Although the passing yield of 2.4% is not high, we believe the acquisition of the Lions Rise Mall is a positive for Link REIT for two reasons:

1) Synergy with existing portfolio – The Lions Rise Mall is located very close to two of the Links’ existing assets, namely Lung Cheung Plaza and Wong Tai Sin Plaza.

2) Part of asset redeployment strategy – We believe it is also important to view this acquisition in the context of Link’s recent disposal of four assets for HK$1.24bn.

Considering that those four older assets were disposed of at a 38% premium to their book value and a net passing yield of 3.3%, we believe the Link has essentially swapped four smaller assets for a newer one with greater critical mass.

Having raised HK1.24bn from the earlier disposal, the net cost of this acquisition for Link is essentially just HK$268mn (HK$1,508mn debt drawdown less HK$1.24bn).

Assuming the valuer’s assessment that the Lions Rise can be fully let at market rent to generate monthly rent of HK$4.7mn per month, with proper tenancy management, Link should be able to raise the yield of this acquisition to 4.0%, 70bp higher than the 3.3% exit yield from the 21 May 2014 disposal.