In a statement, which was issued ahead of the launch of the Hong Kong retail portion of the offering today, the Reit manager confirms that the upper end of the indicative dividend yield range will exceed 9% - a return that it will achieve through a combination of financial engineering and guarantees and waivers from the sponsors. According to sources, the average real yield on the 20 properties included in the portfolio is much lower, with some estimates putting it at no more than 3%.
Even at the low end of the 8.49% to 9.01% indicative 2007 dividend yield range, the newcomer will rank well above the other four Hong Kong-listed Reits, which yield between 4.0% and 6.5%.
The yield range is based on an annualised dividend distribution of HK$0.2208 per unit for the next 2.5 years until the end of the 2009 fiscal year in June that year, which will be guaranteed by Henderson Land Development and its chairman, Lee Shau Kee. The Reit is committed to paying out 100% of its distributable income every year.
Henderson and Lee, which are the sellers of the properties that will go into the Reit, have also agreed to waive 100% of their dividend entitlements for the next three fiscal years and a certain portion of it for the following two years until June 2011. This arrangement will ensure that there will be more cash left to distribute among the other unit holders. Henderson and Lee, who will also count as the sponsors of Sunlight, will hold a combined 30% of the Reit at the time of listing.
The management company will also help to preserve the cash by receiving its fees in the form of units in the Reit for the next five years.
Henderson and Lee are also guaranteeing that the rental income from the 12 office and eight retail properties will not fall below HK$405.4 million in the current fiscal year to June 2007 and that it will amount to at least HK$429.4 million and HK$454.9 million in the coming two years, representing a top-line growth rate of 5.9% in each of those years.
The properties included in the Reit have an appraised value of HK$9.09 billion ($1.17 billion) but will be sold to the listing vehicle at a price between HK$7.06 billion and HK$7.27 billion, depending on the final IPO price. The acquisition cost represents a 20% to 22.4% discount to the appraised value.
According to the statement, the properties are located across Hong Kong and have a gross rentable area of 1.3 million square feet.
ôOur portfolio has exhibited high occupancy rates across the properties, providing stable cash flows to Sunlight Reit,ö said Keith Wu, the CEO of Henderson Sunlight Asset Management, which will be the manager of the Reit. ôWith over 900 tenancies, our diverse tenant mix also provides a natural hedge against the business cycle of any one property sub-sector (and ) our portfolio is well positioned to benefit from upward rental reversion opportunities to drive top line rental growth,ö he added.
Sunlight Reit, which is being brought to market by Deutsche Bank, HSBC and Macquarie, is offering 1.045 billion units, or 70% of the trust, at a price between HK$2.45 and HK$2.60 apiece. About 84% of the total will be sold to international investors and 6% will be offered to existing Henderson Land shareholders in the form of a preferential offering. The remaining 10% will be set aside for Hong Kong retail investors.
There will also be a 10% greenshoe that could help boost total proceeds to $384 million in case of strong demand in the secondary market.
The deal will be an important test of the demand for Reits in Hong Kong after two planned real estate investment trusts were pulled in June before they started the official marketing in response to the difficult market environment. One of those was Sunlight Reit. The other a Reit backed by local property giant Sun Hung Kai Properties.
Aside from the highly popular Link Reit, interest for Hong KongÆs other four Reits have been lukewarm at best with Champion Reit and Prosperity Reit both languishing well below their respective IPO prices.
Many market watchers are skeptical towards Sunlight because of its high degree of financial engineering, which is a feature that Hong Kong investors have previously shown they are not happy with. The fact that the Henderson-backed trust will come to market at roughly the same time as Regal Reit, which and has a ôcleanö albeit lower yield, could make it even harder to overcome that sentiment.
ôBut Sunlight will probably have a number of cornerstone investors to back up the issue, and having postponed the deal once already, it is unlikely that the bookrunners would have brought it to the market at this time if they didnÆt feel confident that it will get done,ö one observer says.
Regal Reit, which will be Hong KongÆs first and AsiaÆs second Reit to be backed by hotels, is expected to raise between $600 million and $700 million. It is being brought to market by Deutsche Bank, Goldman Sachs and Merrill Lynch.
Among the key selling arguments for Sunlight will be its diversified portfolio, the high quality of the sponsors and the fact that they are still sitting on HK$40 billion worth of rental income assets that could be injected into the Reit. In fact, Henderson and Lee have already made a commitment to offer at least two office or retail properties worth no less than 30% of the appraised value of the Reit to Sunlight within six months after the first anniversary of the listing.
Both the institutional and the retail order books will remain open until December 13 with the final price due to be announced shortly thereafter. The trading debut is scheduled for December 21.
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