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Fortune Real Estate Investment Trust’s Latest Earnings: Higher Distributions Seen But Dark Clouds May Be Ahead

Fortune Real Estate Investment Trust (SGX: F25U) released its earnings for the first-half of 2016 yesterday. The trust’s fiscal year coincides with the calendar year.

As a brief background, Fortune REIT’s current portfolio consists of 17 retail malls and properties in Hong Kong that are collectively valued at HK$36.2 billion. These malls provide a total of 3.18 million square feet of retail space and house tenants such as supermarkets, food and beverage retail outlets, entertainment venues, education centres, and more.

With that, let’s have a closer look at the REIT’s latest earnings.

Financial highlights

The following’s a quick summary of some the REIT’s latest financial figures:

  1. Gross revenue for the half-year period grew by 6.1% year-on-year to HK$979.1 million.
  2. Net property income (NPI) followed suit with a 7.9% increase to HK$705.9 million.
  3. The REIT’s higher top-line flowed to the bottom-line. Distribution per unit for the first-half of 2016 stepped up by 6.0% from 23.38 HK cents a year ago to 24.78 HK cents.
  4. The REIT reported a net asset value per unit of HK$12.77, up by 2.2% from the HK$12.49 seen a year ago.

The debt-profile of Fortune REIT could also be something to keep an eye on for investors. Here it is:

Fortune REIT debt profile table
Source: Fortune REIT’s earnings report

You can see that the big changes in Fortune REIT’s debt profile from June 2015 to June 2016 are the higher all-in cost of debt and the rise in the percentage of debt with hedged interest rates.

Investors may want to keep an eye on the cost of debt as pricier debt could eat into the REIT’s bottom-line.

Operational highlights

In the reporting period, Fortune REIT recorded positive rental reversion of 13.3% for renewals.

The REIT also managed to achieve a portfolio occupancy rate of 96.4% in the first-half of 2016. While this is lower than the 97.3% seen in the first-half of 2015, it is worth noting that one of its malls, Provident Square, was undergoing (and still is) asset enhancement initiatives during the reporting period. The AEIs, which are expected to be done in the third-quarter of this year, caused “frictional vacancy” at the property.

The road ahead

Looking ahead, Fortune REIT’s manager plans to embark on major AEIs at Fortune Kingswood, “with an objective to reposition [the property] as a regional shopping and entertainment attraction to a wider spectrum of shoppers from beyond its vicinity.”

While the REIT managed to deliver a higher distribution in the reporting period, it also shared statistics pointing to weakness in Hong Kong’s economy and retail environment:

The Hong Kong economy slowed further in the first quarter of 2016, growing by 0.8% over a year earlier. This compared to the 1.9% growth in the preceding quarter…

…Private consumption expenditure slowed visibly from the preceding quarter, growing only mildly by 1.1% year-on-year in the first quarter of 2016. This, together with the continued slowdown in inbound tourism, posed a severe drag on retail sales.

For the first five months of 2016, the value of total retail sales in Hong Kong registered a decrease of 10.8% year-on-year.”

Fortune REIT closed at a price of HK$9.80 today. This translates to a historical price-to-book ratio of 0.73.

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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.