Citigroup Maintains Buy Rating on Link REIT Amid 25% Stock Gain

Citigroup has maintained its "buy" rating on Link REIT, a prominent real estate investment trust, with a target price of HK$47.25. This decision is based on the trust's 3.0 strategy, which aims to create a dual-engine model by leveraging both fund management and listed real estate investment trust (REIT) portfolios. The bank believes that while Link REIT may focus on developing its asset management business and expanding its market presence, a short-term asset split is unlikely.

Link REIT's stock price has risen by 25% since April, offering a 6.4% yield that is 190 basis points higher than the 10-year U.S. Treasury yield, aligning with the 10-year average but below the 3-year and 5-year averages of 250 basis points. Despite an anticipated 2.5% reduction in distribution per unit (DPU) due to negative rent adjustments, the overall return remains reasonable. With no immediate negative catalysts, Citigroup expects the stock price to stabilize at current levels, reinforcing their "buy" rating and target price of HK$47.25.

The bank's analysis underscores the stability and potential of Link REIT, highlighting its strategic initiatives and market positioning. The dual-engine approach, combining fund management and REIT portfolios, is seen as a robust strategy to drive growth and maintain competitive advantages. The current yield and the absence of negative catalysts further support the bank's positive outlook on the trust's performance.

Citigroup anticipates that Link REIT will navigate macroeconomic headwinds through rental and cost optimization, outperforming the overall market. For the fiscal years 2026 and 2027, the bank projects a 2.5% and 1.5% year-over-year decline in DPU, respectively. This is attributed to a 3% to 5% negative rent adjustment in the Hong Kong retail business, while the parking business is expected to grow by 1% to 2% due to fee adjustments and smart parking systems. The financial costs, with 177 billion Hong Kong dollars in floating-rate debt (33% of the total), will benefit from a decrease in the one-month Hong Kong Interbank Offered Rate (HIBOR), with a 100 basis point annualized reduction equating to a 2.5% DPU increase.

Additionally, the updated executive compensation plan incorporates key performance indicators (KPIs) such as unit returns, financial and operational metrics, ESG factors, and the real estate platform. This plan aims to achieve better alignment of interests and drive long-term value creation for Link REIT.