Fortune REIT - DBS Research 2019-07-29: Safe Haven During Volatile Times

FORTUNE REAL ESTATE INV TRUST (SGX:F25U)

Fortune REIT - Safe Haven During Volatile Times

Fortune REIT's 1H19 distribution income was flat, 3% ahead of our forecast, because of better-than-expected cost control and lower-than-expected cash interest expenses.
Better than expected recovery in portfolio occupancy.
Resilient revenue stream and beneficiary of rate cut cycle.

Fortune REIT (SGX:F25U)’s 1H19 distribution income was flat at HK$505.4m. Interim DPU was 0.8% lower at HK$0.2613.
Total revenue fell 74.8% in 1H19.
With cost-to-income ratio improving further to 20.8% in 1H19 from 1H18’s 21.1%, net property income (NPI) was flat at HK$748.7m (up 1.1% on a like-for-like basis).
Portfolio occupancy recovered to 97.4% in Jun-19, from 93.1% in Dec-18, mainly driven by improved occupancies at Fortune Metropolis, Fortune Kingswood, and Ma On Shan Plaza.
Fortune REIT is carrying out the renovation works at the West Block of Fortune Kingswood. Leasing of cash interest expense was 3% lower at HK$128m due to interest saving resulting from the HK$1.95bn loan repayments over the course of 2018.

Aided by increased property Jun-19, interest cost for 59% of debt was hedged with the aid of interest rate swaps and caps.
Assuming that Fortune REIT raises its gearing to the statutory limit of 45%, this would result in HK$19.3bn for new acquisitions. Yet, given the current low market yield, identifying yield-accretive acquisitions remains challenging. Fortune REIT has been exploring acquisitions in southern China but there are no immediate plans for any yet.

Over 60% of its rental income is derived from tenants selling consumer staples whose businesses are stable across economic cycles. This points to resilient income, and makes it a safe harbour in the current uncertain market.
Potential interest rate cuts should also benefit the valuation of Fortune REIT.
We maintain our BUY recommendation with DDM-based Target Price of HK$11.80.

Jeff YAU CFA DBS Group Research | Ian CHUI CFA DBS Research | Jason LAM DBS Research | https://www.dbsvickers.com/ 2019-07-29

SGX Stock Analyst Report BUY MAINTAIN BUY 11.800 SAME 11.800