Fortune REIT - DBS Research 2017-07-31: Steady Growth

Fortune REIT - DBS Vickers 2017-07-31: Steady Growth FORTUNE REAL ESTATE INV TRUST F25U.SI

Fortune REIT - Steady Growth

  • Fortune REIT's 1H17 distribution income was 1% ahead of our forecast due to lower-than-expected cash interest costs.
  • Rental reversion was healthy at >10% in 1H17.
  • BUY with HK$10.38 TP.

What's New

  • Fortune REIT's 1H17 distribution income grew a modest 3.7% to HK$487m, mainly driven by higher rental income. Interim DPU rose 3% to HK$0.2553.
  • Total revenue rose by 2.5% to HK$1,003m mainly due to positive rental reversion. 
  • In 1H17, Fortune REIT achieved rental reversion of 10.7% upon renewals (FY16: 14%).
  • Portfolio occupancy stayed steady at 96.6% in Jun-17 (Dec- 16: 96.7%). Occupancy at Provident Square improved to 94% in Jun-17 from Dec-16's 84.6% following the completion of asset enhancement initiatives while that of Laguna Plaza was lower at 82.7% in Jun-17 due to non-renewal of a Chinese restaurant. Tenant retention rate was high at 78% reflecting the REIT’s focus on retaining quality tenants.
  • With cost-to-income ratio improving slightly to 25.3% in 1H17 from 1H16’s 25.7% led by lower utility costs, net property income (NPI) grew by larger 3.0%. Cash interest expense remained largely stable at HK$128m.
  • Gearing improved to 28.4% in Jun-17 from Dec-16’s 29.5%, aided by revaluation gains on investment properties. Should Fortune REIT raise its gearing to statutory limit of 45%, it would have a debt headroom of HK$11.5bn for acquisitions.
  • In Apr-17, Fortune REIT has arranged for HK$1.2bn unsecured banking facilities to refinance all debt due in 2018. Currently, the REIT has no refinancing need till 2019. Further, c.70% of total debt was unsecured, giving the REIT more financial flexibility. Interest cost for c.60% of its debt has been hedged through interest rate swaps and caps.
  • Fortune REIT has plans for a major AEI at Fortune Kingswood. The company is finalising the layout reconfiguration and expects to begin substantial renovations in late 2017/early 2018. Fortune REIT plans to transform Fortune Kingswood into a retail and entertainment hub for the Yuen Long and Tin Shui Wai areas.
  • Fortune REIT offers distribution yields of 5.2-5.3% for FY16- 17. With c.61% of monthly rentals derived from non-discretionary trades such as F&B and supermarkets, Fortune REIT's income should stay resilient and hence we maintain BUY rating with DDM-based TP raised slightly to HK$10.38.

Jeff YAU CFA DBS Vickers | Ian CHUI DBS Vickers | 2017-07-31
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 10.38 Down 10.420