Is Sunlight REIT a Bargain Now For Dividend Investors?

Sunlight REIT (SEHK: 435) is a Hong Kong-listed REIT with exposure to both the office and retail sectors and was listed in December 2006. The REIT now owns a diverse portfolio of 11 office and five retail properties with a total gross rentable area (GRA) of over 1.2 million square feet.

Sunlight REIT’s share price reached a peak of HK$6.35 in mid-2019 but has since retreated and currently stands at HK$5.01 (as of the time of writing), representing a 20.9% decline.

Let’s look at two financial metrics; the price-to-book (PB) ratio and distribution yield to determine if Sunlight REIT is a bargain at current prices.

Price-to-book ratio

The real estate investment trust reported a Net Asset Value (NAV) of HK$9.68 at the end of the fiscal year in June 2019. This implies a PB ratio of 0.52 at current prices.

What this means is that investors are paying only HK$0.52 for HK$1 worth of assets. Effectively, the assets are selling for a 48% discount to the price it will fetch should it be sold in the market today.

Additionally, the REIT’s NAV has increased from HK$7.99 in FY14/15 to HK$9.68 in FY18/19, indicating a compound annual growth rate (CAGR) of 4.9%. The consistent growth thus makes Sunlight REIT more attractive as its future PB ratio will be even lower if investors were to buy shares now.

Distribution yield

Sunlight REIT’s distribution has also increased over the last four years moving from HK$0.22 per unit in 2014/15 to HK$0.273 in 2018/19. At its current price of HK$5.01, the REIT has a distribution yield of 5.5% which is meatier than its yield at its peak price which would have come in at 4.3%.

The drop in Sunlight REIT’s share price has thus allowed investors to buy shares on the cheap, especially in the current lower interest rate environment we are living in.

Sunlight REIT’s yield, when compared to the interest rate (0.001%) paid in a bank deposit account, should thus warrant the extra risk investors are taking.

Foolish summary

Looking at the two metrics, investors can see that based on the current PB ratio, the REIT is attractively valued as investors are getting shares at a 48% discount to its NAV. Similarly, the sharp decline in Sunlight REIT’s share price has resulted in the REIT yielding over 5.4%.

This together with the strong growth seen in both the REIT’s NAV and DPU, makes Sunlight REIT seem like a bargain at current prices.