Company Update: Retail reversionary growth turning less negative
Office portfolio occupancy, which stood at 93.1% in Sep 21, has retreated due to increased vacancies at The Harvest in Mong Kok. Chong Hing Bank did not renew the lease for the retail portion from the basement to the fourth floor, with GRA of 11,627sf, upon lease expiry in Dec 21. Sunlight REIT is actively in search of replacement tenants. The short-term rent void, however, is inevitable. Although the property is popular among service trade tenants, given its convenient location, lower rent is expected upon re-letting the space on the ground and first floors. Nonetheless, the overall income impacts should not be overly concerned as the vacated space accounts for only 1.4% of the office portfolio.
On the other hand, certain Grade B office buildings in Central, Sheung Wan, and North Point benefit from recovering demand.
Occupancy at Dah Sing Financial Centre stood at 88.5% as of Sep 21, with spot rents showing signs of stabilising. However, with expiring rent high at HK$43.6psf, reversionary growth should stay in the negative territory in FY22 when 14.2% of its area is scheduled for roll over. Rental reversion for the overall office portfolio should remain negative at 5%-8% in FY22.
On the backdrop of an easing pandemic situation in Hong Kong, no further rental concessions were granted to retail tenants in 1HFY22. Footfall at the Metro City Phase I property, which serves the daily needs of residents nearby, has returned to >80% of pre-COVID levels. Sheung Shui Centre Shopping Arcade stages a slower recovery, with the absence of cross border shopping due to border closure. Mainland shoppers used to account for one-third of footfall prior to the COVID-19 outbreak.
Leasing sentiment has improved, particularly with F&B and grocery tenants. Against this backdrop, retail tenants are more willing to commit to long-term leases. Rental decline upon renewal has narrowed to 5.4% in 1QFY22 from FY21’s 8.4%.
Overall, we estimate Sunlight REIT’s total revenue to fall 1% in FY22, reflecting primarily negative reversionary growth. With a slightly higher estimated cost-to-income ratio of 20.7% (FY21:20%), NPI is expected to drop by a larger 2%.
Sunlight REIT is in discussions with banks for the refinancing of its HK$2bn term loan maturing in mid-22. The credit margin is expected to be slightly higher than the existing one.
Unit price of Sunlight REIT fell 5.6% in the past four months. Meanwhile, Sunlight REIT is trading at 5.7%-5.8% distribution yields for FY22-23, translating into yield spreads of 4.0%-4.1%. Office rents show initial signs of bottoming, while retail reversionary growth is turning less negative. Even taking into account short-term disruptions caused by the spread of the Omicron variant, we remain positive on the REIT’s investment value following the unit price correction. Maintain BUY with DDM-based TP of HK$5.01. Any faster-than-expected interest rate hike remains an overhang.