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Sunlight REIT Summary

Core Content

Sunlight REIT is a Hong Kong-based Real Estate Investment Trust (REIT) that focuses on the leasing of office and retail properties. The report discusses a proposed acquisition of the AIA Financial Centre in San Po Kong, which is expected to be yield accretive and enhance the REIT's portfolio diversification. The analysts from DBS Vickers maintain a BUY rating with a 12-month price target of HK$3.56.

Key Information

• Acquisition Details:

  • Sunlight REIT proposes to acquire AIA Financial Centre from Henderson Land for HK$1.96bn or HK$7,883psf, which is a 2% discount to the appraised value.
  • The property is a 26-storey Grade A office building with a gross rentable area (GRA) of 248,641sf and 77 parking spaces.
  • The deal is expected to increase the REIT's property valuation by 13.5% to HK$16.9bn and portfolio size by 19.3% to 1.54m sf.
  • The acquisition will be funded by issuing 201m new units at HK$3.90 per unit and bank loans.
  • The unit issuance represents a 20.7% premium over the closing price on 20 Jun 2014.

• Rental Support:

  • The vendor, Henderson Land, has agreed to provide rental support for FY15–18 due to the property's passing rents being 25% below new letting rates.
  • The guaranteed net property income (NPI) is HK$73.5m p.a., leading to an initial NPI yield of 3.75%, which is above the market yield in Kowloon East.

• Portfolio Diversification:

  • The acquisition is expected to reduce the dominance of the largest three properties, which previously contributed 68.5% of NPI for 1HFY14, to 60%.
  • It also allows Sunlight REIT to establish a presence in the Kowloon East office sector, improving geographical and sector diversification.

• Financial Impact:

  • The acquisition will increase Sunlight REIT's gross gearing from 25.2% to 29.2%, remaining below the statutory limit of 45%.
  • The pro forma DPU for FY13 is expected to increase by 2.4% if the acquisition and unit issuance were completed in July 2012.
  • The deal is expected to have a mild yield accretive effect on the REIT.

• Dividend Yield:

  • Sunlight REIT offers distribution yields of 5.9–6.2% for FY14–15, which are attractive compared to the market.
  • The distribution income is expected to grow by 16% in FY15, indicating a positive outlook for future dividends.

• Market Capitalization:

  • The issuance of new units is expected to increase the market capitalization, potentially attracting more institutional investors.

Main Viewpoints

• The acquisition is seen as a strategic move to diversify the REIT's asset base and improve earnings quality.
• The rental support agreement is a key factor in ensuring the yield accretive nature of the deal.
• The REIT's financial risk remains manageable despite the increase in gearing.
• The analysts maintain their BUY rating due to the REIT's defensive earnings profile, healthy reversionary growth, and the potential for higher valuations in the long term.

Key Assumptions

• Decentralised office rental growth is expected to be 0% in 2014 and 5% in 2015.
• Retail rental growth is projected to be 0–5% in both 2014 and 2015.

Summary Table

Analysts

• Jeff YAU CFA: +852 2820 4912, jeff_yau@hk.dbsvickers.com
• Allen CHAN: +852 2971 1932, allen chan@hk.dbsvickers.com

Disclosure

• The report is prepared for clients of DBS Vickers Group and not for general public distribution.
• The research is based on information from reliable sources, but no guarantees are made regarding its accuracy.
• DBS Vickers accepts no liability for any losses arising from reliance on this report.
• The report is not intended for distribution in Australia, and is subject to legal restrictions in various jurisdictions.