Link Reit sinks as surprise US$2.4 billion cash call triggers a sell-off in Hong Kong property stocks amid debt concerns

A Hang Seng gauge tracking 13 Hong Kong and mainland China developers slips by the most in two months, erasing US$5 billion of capitalisation
Link Reit’s first-ever rights issue, priced at a steep discount to market price, will be fully underwritten by HSBC and other banks

Hong Kong stock market

Jiaxing Li

Published: 3:40pm, 13 Feb 2023

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Link Reit, Asia’s largest real estate investment trust, spooked Hong Kong property stocks on Monday after it unexpectedly asked US$2.4 billion from unit holders to help pare debt. Investors dumped the stock for its worst sell-off since October 2008.

The stock sank as much as 16.4 per cent to HK$52.50 in Hong Kong trading, erasing HK$19 billion (US$2.4 billion) from its market capitalisation. It closed 12.8 per cent lower on Monday at HK$54.75, the worst one-day setback since a 15.4 per cent plunge on October 10, 2008.

Link Reit proposed a rights issue on a one-for-five basis at HK$44.20 each, according to a stock exchange filing on Friday. The subscription price represents a steep 30 per cent discount to its market price, stoking concerns about earnings dilution and dividend cuts.

George Hongchoy, CEO of Link Reit, during an interview in Wan Chai in November 2019. Photo: Tory Ho

The HK$18.8 billion cash call, the company’s first since its listing in early 2005, will be fully underwritten, it said. HSBC, one of the lead underwriters with DBS Group of Singapore and JPMorgan Chase, slipped 0.4 per cent to HK$57.75. Citigroup and Goldman Sachs cut their stock recommendations.

“The raise came as a surprise to us,” Sam Wong, an analyst at Jefferies said in a report. “Deleveraging does not appear to be a priority with the cost of debts actually showing signs of peaking out.” The plan could hurt other highly leveraged Hong Kong developers with equity raise risk, he added.

Link Reit recently bid and won a parcel of land near Anderson Road in Kwun Tong for HK$766 million. Photo: SCMP

The plan infected the city’s broader stock market. The Hang Seng Property Index, which tracks 13 developers in Hong Kong and mainland China, slumped 3 per cent, the most in two months. The index’s capitalisation shrank by HK$39.2 billion (US$5 billion), according to Bloomberg data.

Among key losers, New World Development tumbled 6.7 per cent while Wharf REIC lost 3 per cent and Henderson Land 4.8 per cent.

Hong Kong developers face HK$109 billion debt mountain as interest rates soar

Analysts at Citigroup lowered their recommendation to neutral from buy and slashed their 12-month target price to HK$59.80 from HK$66.50. While Goldman Sachs also downgraded the stocks to neutral and cut the target price to HK$68.90 from HK$69.60.

The rights issue will dilute consensus estimates of book value and earnings per share by about 8 to 10 per cent, Wong at Jefferies estimated. He kept his buy call and maintained the stock’s price target at HK$69, saying the cash could be deployed to capture new opportunities in the post-pandemic asset repricing cycle.

Link Reit will use the 40 to 50 per cent of the proceeds to repay existing debt, it said in the filing. The rest will be spent on future investments, with a focus on retail, car park, office and logistics sectors across the Asia-Pacific region, the company said.

“The market is worried that dividend will be diluted and some retail investors might not be willing to participant the new offering,” said Kenny Ng Lai-yin, a strategist at Everbright Securities International. The rights issue “could still be a good thing for the company because they can lower their interest expense.”