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Fortune Real Estate Investment Trust Delivers a Stellar Set of Results for the First Half of 2018

With a portfolio of 16 sub-urban malls in Hong Kong, Fortune Real Estate Investment Trust (SGX: F25U) is the only listed real estate investment trust (REIT) in Singapore that invests primarily in retail real estate in the country. The REIT has been in my list of REITs to watch for some time now. Besides its recent stellar record of growth, Fortune REIT has one of the lowest gearing ratio (measure of debt levels) among all the REITs in Singapore.

As such, I was keeping a close watch when it released its interim earnings update on Saturday (28 July). And the trust once again did not disappoint, announcing another strong set of results that increased my conviction in the REIT. Here are the key highlights.

Strong headline numbers

Despite the recent divestment of Provident Square, its 9th largest asset, Fortune REIT still managed to deliver revenue growth of 2.2% year-on-year to HK$978.1 million. The growth was largely due to strong positive rental reversions in 2017.

In addition, property operating expenses fell 0.5% to HK$206.2 million, increasing the net property income margin. As a result, net property income increased at a faster tick of 3.0% to HK$748.6 million. Distributable income rose 3.7%, on the back of lower finance cost, and distribution per unit (DPU) increased by 3.2% to HK26.34 cents.

The chart below shows its DPU growth over the last 9 years.

Source: Fortune REIT’s 2018 Interim Earnings Presentation

Robust financial position

As mentioned earlier, Fortune REIT divested Provident Square for HK$2 billion (S$345 million) in February. The fund obtained from the divestment was used to pay off HK$1.1 billion of its debt which was due in 2019. Through that, its gearing ratio dropped to 22.3% from 27.4% a year ago. The trust, now, has no refinancing needs until 2020. Its low gearing ratio also affords it HK$17.4 billion in debt headroom for any further acquisitions in the future.

Also, the trust reported a 8% valuation gain (excluding Provident Square) to HK$40.8 billion in the six-month period. That’s an impressive portfolio gain over such a short time frame. Together with the sale of Provident Square for an 88% premium to its book value, the trust recorded a 14.5% increase in net asset value to HK$16.09.

Portfolio performance

Occupancy rate for Fortune REIT’s malls was 96% as of 30 June 2018. Rental reversions during the period was an impressive 13.6%, which will have a positive impact on rental income in the next period. The trust also has a well-staggered leasing profile with just 20.2% of leases due for renewal in the second half of 2018. Another 32.5% of leases expire in 2019 and 22.6% in 2020, with the remaining 13.7% extending beyond 2021.

Source: Fortune REIT’s 2018 Interim Earnings Presentation

Asset enhancement projects

In June, the REIT started work on its largest ever asset enhancement project at Fortune Kingswood, the largest shopping mall at Tin Shui Wai town in Hong Kong. The asset enhancement initiative (AEI) is designed to improve mall efficiency and to position the mall to focus on lifestyle and entertainment.

During the upgrading process, there could potentially be lower rental income from this particular mall. That said, Fortune REIT has a good track record of successful AEIs in the past, and I am expecting strong returns on investment from this major facelift.

Outlook

Total retail sales in Hong Kong for the first five months of 2018 grew a staggering 13.7% year-on-year. This is a continuation of a longer running trend that began in 2017. There is also low unemployment in Hong Kong of just 2.8% and growing private consumption rates recorded in the first quarter of 2018. Fortune REIT, with its line-up of shopping malls, is well-positioned to take advantage of the trends.

The Foolish bottom line

As expected, Fortune REIT delivered another strong set of results. A growing Hong Kong economy and strong private consumption helped fuel tenant sales. I am expecting more of the same in the next half of the year, as long as the economy holds up. At the time of writing, units of Fortune REIT exchanged hands at HK$9.60 per piece, giving it a price-to-book ratio of 0.59 and an annualised 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 Jeremy Chia owns units in Fortune Real Estate Investment Trust.