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Fortune Real Estate Investment Trust’s Latest Earnings: There Are Headwinds To Note Despite Strong Growth Seen

Fortune Real Estate Investment Trust (SGX: F25U), which is managed by ARA Asset Management Limited (SGX: D1R), had released its fiscal second-quarter earnings report yesterday evening.

As at 30 June 2015, Fortune REIT’s portfolio consists of 17 retail properties with a gross rentable area of 3.18 million square feet and a collective value of HK$35.2 billion (around S$6.3 billion). As is common with retail malls, Fortune REIT’s portfolio has a diverse tenant mix that are involved with supermarkets, food & beverage, entertainment, education, and more.

With that, let’s dig into the REIT’s latest figures.

Financial highlights

The following’s a quick read of the numbers from Fortune REIT’s latest earnings release for the first half of its current fiscal year (the six month period stretching 1 January 2015 to 30 June 2015):

  1. Total revenue grew 13.4% year over year from HK$813.5 million to HK$922.6 million mainly on the back of a positive rental reversion of 22.1% across the REIT’s portfolio as well as new contributions from the Laguna Plaza which was acquired just this January.
  2. Net property income (NPI) for the quarter advanced in line with the top-line growth, up 12.6% from a year ago to HK$654.4 million.
  3. Fortune REIT’s bottom-line benefitted from the increase in revenue as well with its income available for distribution for the six month period rising by 12.8% year over year to HK$440.3 million.
  4. This then translated into a solid 12% growth in the REIT’s distribution per unit (DPU) from HK$0.2088 a year ago to HK$0.2338 for the reporting period.

Summing it up, Fortune REIT has managed to deliver commendable growth in both revenue and distributions.

Moving on to the balance sheet, here are some important figures to note:

Fortune REIT balance sheet details (28 July 2015)

Source: Fortune REIT’s earnings release

From the table above, we can see that Fortune REIT has managed to lower its costs of borrowings and increased its interest cover when compared to end-2014; these are good things.

The slight increase in aggregate leverage from 29.4% to 30.6% is also not troubling especially when we consider that it is still way below the soon-to-be-implemented new single-tier gearing ratio limit of 45% that the Monetary Authority of Singapore had recently stipulated.

But, the REIT’s relatively short weighted average term to maturity of just 2.2 years for its borrowings may be an area to watch. With the possibility of rising interest rates, the REIT may find its bottom-line under pressure if it has to refinance its borrowings in the near future at higher rates.

During the reporting period, Fortune REIT had completed the disposal of Nob Hill Square (in April 2015) and used the proceeds of HK$638.0 million to repay existing loan facilities. But, the REIT also took on additional loan facilities comprising of a HK$1.2 billion five-year term loan and a HK$400 million two-year revolving credit facility to finance the acquisition of Laguna Plaza in January 2015.

Fortune REIT ended the first half of its fiscal year with a net asset value of HK$12.49 per unit, up a strong 13% from the figure of HK$11.01 seen a year ago.

Operational and growth highlights

Fortune REIT’s portfolio of retail malls managed to put on a resilient display with an average portfolio occupancy of 97.3% despite a slowdown in the overall retail sales environment in Hong Kong which probably came about due to the protest issues against China that happened earlier in the year. The resiliency is also highlighted by the REIT’s strong rental reversion of 22.1% that was mentioned earlier.

Meanwhile, investors might also be happy to know that the average passing rent for the REIT’s portfolio (excluding Laguna Plaza and Nob Hill Square) had risen by 9.5% year over year to HK$38.40 per square feet.

It’s not all good news though, as  Fortune REIT actually had a portfolio-wide occupancy rate of 99.1% in 30 June 2014. It’d be worth keeping an eye on trends in the occupancy rate in the future.

Looking ahead, Fortune REIT’s Manager warned of changing tourist spending patterns, an “uncertain external environment,” slower domestic demand, and the potential for interest rate hikes. But, the REIT’s Manager thinks that its portfolio of retail properties, which are seated in private housing estates and which cater mainly to day-to-day shopping needs, “tends to maintain a more resilient performance when compared to the overall market and economic conditions.”

Fortune REIT also highlighted the possibility of rising wages and electricity costs, with management stating that cost containment measures, “such as energy-saving in operations and facilities will continue to be adopted” to help cushion any negative impacts.

To drive growth, Fortune REIT’s Manager is looking toward “implementing effective leasing and tenant repositioning strategy as well as asset enhancement initiatives [AEIs].” To the latter point, AEIs are currently ongoing at Belvedere Square while Fortune Kingswood is next in line for improvement works to be done.

Foolish summary                                         

Fortune REIT last traded at HK$8.05 on Monday. This translates to a historical price-to-book ratio of 0.64 and a trailing-12-months distribution yield of 5.5%.

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