Final result review: Stable rental income
Dragged by higher cash finance cost, Sunlight REIT’s FY22 distributable income was 1.7% lower at HK$431m, 2.9% above our estimate due to stronger-than-expected rental earnings. Final DPU fell 2.3% to HK$0.128. This brought the full year DPU 2.3% lower at HK$0.25. Payout ratio was maintained at 97.4% (FY21: 97.5%).
Total revenue stood at HK$803m (FY21: HK$799m). Despite negative rental reversions, office rental income rose 1.6% to HK$399m on the back of higher average occupancy. Thanks to new tenants who took up the space surrendered by Chong Hing Bank, occupancy at The Harvest improved to 80.4% in Jun-22 from Dec-21’s 66.4%. Meanwhile, Strand 50 and 135 Bonham Strand Trade Centre property in Sheung Wan saw their occupancies advancing to 99.7% and 99.1% in Jun-22 respectively, from Dec-21’s 94.1% and 94.7%. These brought overall office occupancy higher at 94.8% as of Jun-22 (Dec-21: 93.3%) with the flagship property, Dah Sing Financial Centre, 91.4% let.
Amid subdued leasing demand from MNCs, spot rents at Dah Sing Financial Centre stayed at c.HK$30-40psf. Yet, due to higher expiring rents, rental reversions turned more negative at 7.1% in FY22 from 1HFY22’s 5%. As such, rental decline upon renewal for the office portfolio had further widened to 5.5% in FY22 from 1HFY22’s 4.5%.
High office market vacancy, upcoming office supply and sluggish demand from MNCs and Chinese corporates should cap any rental upside in near term. Hence, reversionary growth for the leases expiring in FY23, which accounted for 36.8% space of the office portfolio, is expected to remain in the negative territory.
Thanks to reduced impact from amortized rental concessions, retail rental income was broadly flat at HK$404m despite negative rental reversions. While Sunlight REIT has granted a new round of rental concessions to tenants in view of the fifth wave of the pandemic, the amount this round was insignificant to the REIT’s overall income. Along the easing of social distancing measures and distribution of electronic consumption vouchers, footfall and tenant sales at Sheung Shui Centre Shopping Arcade and Metro City Phase I exhibited gradual signs of recovery since Apr-22. Hence, despite short term disruptions led by COVID resurgence in early 2022, rental decline upon renewals for the retail portfolio stayed at 5% for FY22 (1HFY22: -4.9%). As of Jun-22, Sheung Shui Centre Shopping Arcade and Metro City Phase I property were 92.9% and 94.6% let respectively with the overall retail occupancy at 94.5% (Dec-21: 97.1%).
Total operating expense was stable at HK$161m. Increased provision for rental receivables was offset by lower rental commissions and repair & maintenance expenses. With cost-to-income ratio similar at 20.1% (FY21: 20%), NPI was broadly stable at HK$642m.
Sunlight REIT is planning asset enhancement works at Metro City Phase I which will be conducted in 2 phases. Scheduled to commence in Sep-22, the first phase includes enhancing key common facilities and layout reconfiguration on the upper floor. With budgeted capex of HK$20m, this phase is expected to be completed by end of 2022.
Cash finance cost rose 7.4% to HK$92.8m, reflecting higher funding costs and increased average borrowings. In Jun-22, Sunlight REIT had total borrowings of HK$4.41bn, of which >60% are sustainability-linked loans. This translated into gearing of 23.3%. The weighted average debt maturity was extended to 2.9 years (Dec-21: 2.3 years). In Jun-22, Sunlight REIT has unwound certain interest rate swaps with an aggregate amount of HK$500m. This brought the hedging ratio down to c.68% in Jun-22 from Dec-21’s 80%.
Sunlight REIT is trading at 6.5% distribution yields for FY23- 24, translating into yield spread of 3.4%. While negative rental reversion continues to work its way through, the portfolio has demonstrated its income resilience attributed to its high occupancy and proactive leasing strategy. The refurbishment at Metro City Ph 1 property should enhance its long-term competitiveness, adding to its investment appeal. Maintain BUY, despite lower DDM-based TP of HK$4.26 due to assumed higher discount rate.
