Fortune REIT - DBS Research 2016-07-26: Steady Climb

Fortune REIT - DBS Research 2016-07-26: Steady Climb FORTUNE REAL ESTATE INV TRUST F25U.SI 

Fortune REIT - Steady Climb

  • 1H16 distribution income was 3% above our forecast due to better-than-expected cost control and lower-than-expected growth in cash interest expense.
  • Higher rents achieved on renewals despite the retail market slump.
  • BUY with HK$10.42 TP.


  • Fortune REIT's 1H16 distribution income grew modestly by 7% to HK$470m, mainly driven by higher rental income, despite increased cash interest expense.
  • Total revenue rose by 6.1% to HK$979m due to positive rental reversion as well as benefits of asset enhancement initiatives (AEI) at Belvedere Square, completed in 2015. Despite the lackluster retail market, Fortune REIT achieved rental increment of 13.3% upon renewals. Portfolio occupancy, however, retreated to 96.4% in Jun-16 from Dec-15's 98.8%, due to AEI-led vacancy at Provident Square in North Point. Cost-to-income ratio improved slightly to 25.7% (1H15: 26.8%). NPI grew by larger 7.9%. Cash interest expense was 13% higher at HK$129m due to increased effective borrowing cost led by increased interest rate hedging and higher interest margin upon debt refinancing, but this is lower than expected.
  • Gearing stood at 30% in Jun-16. Should Fortune REIT raise its gearing to 45%, it would have debt headroom of HK$10.2bn for acquisitions. Interest cost for c.66% of its debt was fixed.
  • Fortune REIT is carrying out an asset enhancement initiatives at Provident Square in North Point. This involves reconfiguration of 78,280sf of space (43% of GRA) on the basement (which was mainly occupied by a supermarket previously) into smaller units. After the completion of enhancement works, the supermarket will be downsized with other reconfigured space to accommodate higher- paying tenants including food and beverage outlets, household product retailers and education operators. Overall, some 60% of the enhanced area has been pre- committed. Elsewhere, Fortune REIT is finalising the plan for a major AEI at Fortune Kingswood.
  • Fortune REIT’s unit price has risen 23.3% YTD, outperforming the Hang Seng Index by 22.9%, as investors are going for yield plays especially after the "Brexit" in Jun- 16. Meanwhile, Fortune REIT offers distribution yields of 5.0%-5.2% for FY16-17. With 60% of monthly rentals derived from non-discretionary trades such as F&B and supermarket whose businesses are relatively stable, Fortune REIT's income should be very resilient. Ongoing asset enhancement initiatives should add further spice to its distribution income growth. Maintain BUY with DDM-based TP of HK$10.42.

Jeff YAU CFA DBS Vickers | Andrew Robert LAM DBS Vickers | http://www.dbsvickers.com/ 2016-07-26
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 10.42 Up 10.22