Fortune REIT’s Buying A New Property

Ser Jing - Fortune REIT's Buying A New Property (pic) Singapore and Hong Kong-listed real estate investment trust Fortune REIT (SGX: F25U) announced this morning that it intends to purchase, subject to unitholders’ approval, the Kingswood Ginza property in Hong Kong for HK$5.849b.

The property’s a shopping mall located in Tin Shui Wai, Yuen Long, New Territories and has been valued at HK$5.858b and HK$5.850b respectively in two independent appraisals.

Some further details of the property (as of 30 June 2013) are given below:

Government Lease Expiry 30 June 2047
Gross Rentable Area 655,244 square feet
Occupancy Rate 95.5%
Net Property Income for the six months ended June 2013 HK$ 110.4m
Monthly rental per leased square feet HK$27.4

Source: Fortune REIT’s Circular to Unitholders

Fortune REIT’s consultants believe that shoppers from China will continue to increase their spending in Hong Kong with an undiminished appetite for shopping in the coming years. With the acquisition, the REIT sees itself gaining “further exposure to the robust retail market in Hong Kong.”

The trust has estimated its total cost to acquire the property – after factoring in all related fees, charges, and expenses – will amount to HK$5.965b. HK$4.902b of the total cost will be paid for using bank loans. The remaining HK$947m will come from a private placement of 143m new units to institutional as well as professional investors that were issued on 6 August 2013.

If we assume that the acquisition was completed on 30 June 2013, some of the pro-forma (meaning the numbers are displayed as if the transaction had been completed with the afore-mentioned financing methods already taken place) financials of the REIT for the first six months of 2013 are in the table below:

Actual Pro-Forma
Net Property Income HK$ 437.6m HK$544.8m
Distributable Income HK$307m HK$350m
Issued Units 1.704b 1.858b
Distribution Per Unit HK$0.18 HK$0.1884
Net-Asset Value HK$17.06b HK$17.82b
Net-Asset Value Per Unit HK$10.01 HK$9.60
Total Debt HK$4.77b HK$9.84b

Source: Fortune REIT’s Circular to Unitholders

So, for investors who are concerned over their distribution yields, they’ll be happy to know that the presence of Kingswood Ginza in Fortune REIT’s portfolio would likely prop up future distribution yields compared to its absence, all else being equal.

But, in the process, Fortune REIT has also almost doubled its total debt-load and increased its leverage, which amps up risks for investors. Its Gearing Ratio/Aggregate Leverage will increase from 20.9% to 34% once the acquisition is completed.

At 34%, the figure is still within legal limits of 35% for Aggregate Leverage and 45% for the Gearing Ratio. But, as things stand now, the REIT can’t borrow more money if the additional borrowing causes its Aggregate Leverage to hit the legal limit unless it obtains credit ratings from firms like Fitch Inc., Moody’s or Standard & Poor’s, in which case, the ceiling will be raised to 60%.

In addition, if Fortune REIT’s assets fall in value, they’ll likely go above the legal thresholds for Aggregate Leverage but it won’t be considered a breach of the rules. However, it’ll be unable to obtain additional financing for any purpose, which might affect the REIT’s operations. Investors must be aware of such risks.

That said, the REIT does have plans to obtain credit ratings should its Aggregate Leverage fall below 35% so as to widen its scope for borrowing.

While this development is largely of concern only to Fortune REIT’s unitholders or any future investors, Singapore-listed real estate fund management company ARA Asset Management (SGX: D1R) also stands to benefit.

ARA’s the manager of Fortune REIT and would stand to earn HK$58.5m in fees after the acquisition is complete. ARA has decided to obtain units of the REIT that are traded in the Hong Kong Stock Exchange as its fees.

In addition, ARA earns recurring management fees from the REITs it manages based on performance metrics like their Gross Property Value and Net Property Income. With acquisitions like what Fortune REIT has announced, it would add to both the trust’s Gross Property Value and Net Property Income, which literally translates to a positive double whammy for ARA!

Foolish Bottom Line

There can be significant ties between locally-listed companies at times and developments in one company can even be a clue for how others might be doing. It pays to watch for links like the one that exists between Fortune REIT and ARA.

Click here now  for your  FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by  David Kuo ,   Take Stock Singapore  tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool’s purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.