The Motley Fool

Better Buy: Link REIT vs. Sunlight REIT

Real Estate Investment Trusts (or “REITs” for short) are popular investment vehicles for income investors.  The recent market turmoil has resulted in REITs being sold off.

The latest earnings from REITs have been lacklustre due to many of them retaining income to tide them through the tough economic situation. This will likely reverse once the worldwide lockdowns start to be rolled back.

What this means for investors is that REITs purchased at current prices might potentially yield much higher distributions once things go back to normal.

With that in mind, I’m going to analyse two REITs listed in Hong Kong – Link REIT (SEHK: 823) and Sunlight REIT (SEHK: 435) to see which might be the better buy for investors.

Net asset value growth

Over the past five years, Link REIT has grown its net asset value (NAV) at a torrid pace, increasing from HK$51.53 in FY14/15 to HK$89.48 in FY18/19. This implies an annualised growth rate of 14.81%.

Sunlight REIT on the other hand has seen its NAV grow from HK$7.99 in FY14/15 to HK$9.68 in FY18/19, indicating an annualised growth rate of 4.9%.

This means that Link REIT has outperformed Sunlight REIT when we compare NAV growth for the two REITs.

Winner: Link REIT

Distribution per unit growth

Link REITs distribution per unit (DPU) grew at a compounded rate of 10.31% over the last five years moving from HK$1.83 in 2015/16 to HK$2.712 in 2018/19. At current prices, Link REIT sports a distribution yield of 4.06%, based on its FY18/19 payout.

Meanwhile, Sunlight REIT’s distribution also saw an increase over the same period. It moved from HK$0.22 per unit in 2014/15 to HK$0.273 in 2018/19, indicating an annualised growth rate of 5.54%.  At its current price of HK$3.77, the REIT has a distribution yield of 7.2%.

Link REIT comes out on top when looking at DPU growth, while Sunlight REIT is currently sporting a higher yield. I would give this one to Link REIT, as I prefer the companies I invest in to grow at a healthy clip. But for now, I shall settle on a tie.

Winner: Tie

Gearing ratio

Lastly, I’ll look at the gearing ratio for the two REITs based on their latest interim results. Link REIT’s gearing ratio stood at 11.9% as of September 2019, while Sunlight REIT’s gearing stood at 20.5% in December 2019.

Link REIT once again comes out on top here with a lower gearing ratio, indicating that the REIT is less leveraged compared to Sunlight REIT.

Winner: Link REIT

Foolish conclusion

After looking at three key metrics for the REITs – NAV, DPU, and gearing ratio – Link REIT seems to be the better REIT to purchase. It has managed to grow its NAV and DPU at a healthier clip and has a lower gearing ratio compared to Sunlight REIT.

In a recent post, I looked at how Link REIT is preparing itself for the future. It’s a forward-looking article analysing Link REIT’s plans to continue on its growth path.

Interested investors should use the above information merely as a starting point to evaluate whether Link REIT is a good investment.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Saket Jhajharia doesn't own shares in any companies mentioned.