The Motley Fool

3 Reasons Why Fortune Real Estate Investment Trust’s Distribution Per Unit Could Increase in 2019

Fortune Real Estate Investment Trust (SGX: F25U) delivered another outstanding set of results in 2018.

There were improvements in all the major aspects of the real estate investment trust (REIT), with net property income and distribution per unit going up by 1.0% each. The strong showing continues an impressive run of results for the REIT, which has more than doubled its distribution per unit (DPU) in the last eight years.

Source: Fortune REIT FY2018 Earnings Presentation

More importantly for investors, the strong growth looks likely to continue in the future. Here are three reasons why.

Double-digit rental reversions

In 2018, the trust renewed or signed new leases at a staggering 12.7% higher rate than existing contracts. This double-digit rental reversion will be a big boost to DPU in the next year.

With 33.8% of the trusts’ tenant leases expiring in FY2019, there is also room to boost DPU by negotiating higher leases with tenants this year.

The high tenant retention rate of 68% also demonstrates that the REIT is able to increase tenant rent while retaining their existing tenants.

Asset enhancement initiative at Kingswood will drive growth

The REIT’s 2018 year-on-year revenue growth was made all the more impressive as it was achieved despite the disruptions it faced at Kingswood, which is going through a major facelift. Because of the asset enhancement initiative, occupancy at Kingswood, the largest mall in Fortune REIT’s portfolio, dropped to 88.4% from 94.0%.

When the works at Kingswood are completed by the end of 2019, investors can expect to see occupancy return to previous levels, which will be a welcome boost to revenue.

The manager of the REIT has a strong record of prudent asset enhancement initiatives that have returned more than 20% on investment capital.

Source: Fortune REIT FY2018 Earnings Presentation

Based on its past, it is reasonable to expect higher revenue contribution from Kingswood after the asset enhancement initiative is completed this year.

Financial flexibility for growth

Finally, and perhaps the most compelling reason for continued growth, is that Fortune REIT has the lowest gearing ratio among REITs in Singapore. The gearing ratio is a measure of the trust’s debt level. A lower gearing suggests that the REIT has less debt and greater financial flexibility to make acquisitions.

As of 31 December 2018, Fortune REIT has a gearing ratio of just 20.9%, well below the 45% regulatory cap and giving the REIT about HK$18.7 billion in debt headroom.

The trust has the financial capacity to boost DPU through yield-accretive acquisitions. In the past, the manager of the REIT has made prudent use of its capital, and hopefully, they can again make use of their financial muscle to drive growth this year.

The Foolish bottom line

As a unitholder of Fortune REIT, I certainly like what I have seen so far. Besides the outstanding headline numbers in 2018, what excites me more, is the REIT’s long runway for growth. While there are risks with investing in Hong Kong property investments right now, the positives I see in Fortune REIT should still lead to favorable long-term returns.

Meanwhile, there are 28 surprising and important things we think every Singaporean investor should know--and we've laid them all out in The Motley Fool Singapore's new e-book. Packed with information and insights, we believe this book will help you be a better, smarter investor. You can download the full e-book FREE of charge--simply click here now to claim your copy.

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 doesn’t own shares in any companies mentioned.