Fortune REIT - DBS Research 2018-07-30: Healthy Reversionary Growth 

Fortune REIT - DBS Group Research Research 2018-07-30: Healthy Reversionary Growth  FORTUNE REAL ESTATE INV TRUST SGX:F25U

Fortune REIT - Healthy Reversionary Growth 

  • Distribution income in line with our estimate at HK$505m. 
  • Retail rental reversion continued to stay healthy at 14%. 
  • Maintain BUY with HK$10.50 Target Price. 


  • Fortune REIT's 1H18 distribution income grew a modest 4% to HK$505m, mainly driven by higher rental income. Interim DPU rose 3% to HK$0.2634. Total revenue rose by 2% to HK$978m mainly due to positive rental reversion. In 1H18, Fortune REIT achieved rental reversion of 13.6% upon renewals (FY17: 12.8%). Healthy rental reversions of 10-15% for FY18 should be achievable.

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  • Portfolio occupancy was slightly lower at 96.0% in Jun-17 (Dec-17: 98.1%). This was mainly driven by reduced occupancies at Fortune Kingswood and Fortune Metropolis resulting from the commencement of enhancement works and a non-renewal of an anchor tenant respectively.
  • Tenant retention rate moderated to 61% due to tenant reshuffling at Fortune Kingswood, the largest asset by area in Fortune REIT’s portfolio, as it is undergoing a major asset enhancement initiative (AEI). With cost-to-income ratio improving slightly to 21.1% in 1H18 from 1H17’s 21.7% led by lower utility costs, net property income (NPI) grew by larger 3.0%.
  • Gearing improved to 22.3% in Jun-18 from Dec-17’s 27.4%, aided by revaluation gains on investment properties and early repayment of a bank loan due 2019 with HK$1.1bn of its divestment proceeds from the sale of Provident Square. A higher gearing to its statutory limit of 45% implies debt headroom of HK$17.4bn for acquisitions.
  • Currently, the REIT has no refinancing needs till 2020. Further, c.80% of total debt is unsecured, giving the REIT more financial flexibility in future acquisitions. Interest cost for c.54% of its debt has been hedged through interest rate swaps and caps.
  • Fortune REIT commenced a major AEI project at the West Block of Fortune Kingswood in Jun-18. The AEI aims at enhancing efficiency and circulation through the reconfiguration of supermarket space on second floor. More complimentary trades will be added to provide a one-stop shopping for household product. 
  • Fortune REIT plans to divide asset enhancement works into three phases. They are expected to be completed by end-2019 with an estimated capex of HK$150m. The AEI for East Block is under planning with positioning to focus on lifestyle and entertainment.
  • Fortune REIT offers distribution yields of 5.3-5.4% for FY18-19. With > 60% of monthly rentals by area derived from non-discretionary trades such as F&B and supermarkets, Fortune REIT's income should stay resilient. Coupled with healthy reversionary growth and rental uplift by AEI at Fortune Kingswood, we maintain our BUY rating with DDM-based Target Price of HK$10.50.

Jeff YAU CFA DBS Group Research Research | Ian CHUI DBS Research | Jason LAM DBS Research | https://www.dbsvickers.com/ 2018-07-30
SGX Stock Analyst Report BUY Maintain BUY 10.500 Same 10.500