Fortune Real Estate Investment Trust (SGX: F25U), which owns a portfolio of 16 suburban malls in Hong Kong, has been riding high on strong economic growth and higher consumption in the region. Rental rates and property prices have increased at pace in the last few years leading to strong distribution per unit growth. At the end of July, the trust reported its half-year report for 2018. Once again, it delivered strong revenue and DPU growth of 2.2% and 3.7% respectively. In addition to these positive headline numbers, there were other notable developments that unitholders should be pleased about. Healthy balance…
Fortune Real Estate Investment Trust (SGX: F25U), which owns a portfolio of 16 suburban malls in Hong Kong, has been riding high on strong economic growth and higher consumption in the region. Rental rates and property prices have increased at pace in the last few years leading to strong distribution per unit growth.
At the end of July, the trust reported its half-year report for 2018. Once again, it delivered strong revenue and DPU growth of 2.2% and 3.7% respectively. In addition to these positive headline numbers, there were other notable developments that unitholders should be pleased about.
Healthy balance sheet
A REIT’s debt levels are an important indicator of its financial capacity for acquisitions. The lower its debt, the more headroom it has to make debt-funded acquisitions that can increase distribution per unit in the future.
Fortune REIT has the lowest gearing ratio in Singapore. The gearing ratio is calculated by dividing the debt of a REIT by its asset value. In Singapore, REITs must have gearing ratios no higher than 45%. As of 30 June 2018, Fortune REIT had a gearing of just 22.3%, giving it an additional debt headroom of HK$17.4 billion.
As such, if Fortune REIT can put its additional debt headroom to fund further acquisitions in the future, unitholders should see substantial growth in their distribution per unit.
Portfolio valuation growth
Fortune REIT’s portfolio is concentrated in Hong Kong. Some may say that a geographically concentrated portfolio is risky. However, on the flip side, it can also benefit when the local economy is doing well.
That is precisely what has been happening for Fortune REIT. Its portfolio has seen revaluation gains for the past few years. In the most recent half-year report, the trust had an 8% increase in its portfolio value. Together with the sale of Provident Square at a whopping 88% premium to book value, net asset value increased by 14.5% to HK$16.09.
Higher portfolio valuations may not directly impact unitholders, but there are two ways that the trust can unlock shareholder value. First is by selling the assets at a profit and distributing the earnings, and second is to make use of the higher asset value to increase its debt load and to make yield-accretive acquisitions. Therefore, as a unitholder, I am always pleased to see portfolio revaluation gains, even though it does not represent any cash flow growth.
Double-digit rental reversions
Finally, the trust continues to increase its rental rates during the reporting period by securing new leases at 13.6% above existing rent. This marks an acceleration from the 12.8% recorded in the second half of 2017.
Moreover, the higher rental rates look to be sustainable for now as there has been strong growth in retail spending. In the first five months of 2018, total retail sales in Hong Kong increased by 13.7%. Restaurant sales grew 10%, and non-discretionary retail sales rose 4.1%. These numbers suggest that strong consumer appetite can help to drive tenant sales and consequently, propagate higher rental rates.
The Foolish bottom line
With all that said, there are still some risks that investors should be aware of. For one, the trade tensions between the United States and the rest of the world can curb optimism and reduce consumer spending. Higher interest rates are also forecast for the next couple of years. Even though Fortune REIT has the lowest gearing ratio amongst Singapore REITs, it still will be affected when rates go up.
Investors should consider if the risk-reward profile of the REIT fits their investment objectives. At the time of writing, units of Fortune REIT exchanged hands at HK9.80 per piece, giving a price-to-book ratio of 0.6 and a distribution yield of 5.4%.
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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.