The Motley Fool

Fortune REIT: Set For a Strong Second Half

Fortune Real Estate Investment Trust (SGX: F25U) disappointed investors when it reported a 0.8% drop in distribution per unit (DPU) compared to the same period last year.

The Hong Kong mall REIT was set back due to asset enhancement works at its biggest property, Fortune Kingswood. That said, there appear to be solid indicators that the REIT will be able to rebound sharply from the disappointing fall in DPU. Here’s why.

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West block of Fortune Kingswood already more than 90% pre-leased

Asset enhancement works at Kingswood commenced in June 2018, with the HK$150 million upgrade of the West Block in its final phase and slated for completion in the second half of 2019.

While asset enhancement works can lead to near term pain due to tenants having to move out and high renovation costs, if executed well, the investment will pay off in the long-term. Fortune REIT has a stellar record of successful asset enhancement initiatives (AEIs), with many delivering more than 20% returns on investment.

Source: Fortune Real Estate Investment Trust 2019 Interim Results Presentation

Currently, more than 90% of the Kingswood West block has already been pre-leased which will likely lift rental income in the coming months.

Occupancy rates increased 

Besides pre-committed leases at Kingswood, the rest of Fortune REIT’s portfolio also did well, with positive leasing results at three of its major malls. Its overall portfolio occupancy increased to 97.4% from 93.1% at the end of 2018.

The REIT manager highlighted, “Although most of these new tenants came in the later part of the Reporting Period, these rental uplift will be fully reflected in the second half of 2019.”

Positive rental reversions

Finally, despite the uncertainty surrounding the Hong Kong protests and retail sales from Chinese tourists declining, Fortune REIT still managed to secure higher rental rates for leases renewed or signed during the first six months of 2019.

The REIT reported a positive rental reversion of 7.8% for leases signed in the first half of the year. Together, with the higher occupancy, positive rental reversions will likely lift DPU for the second half of this year.

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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 of Fortune Real Estate Investment Trust.