HSI : 23,070
Price Target : 12-Month HK$8.02
Enhancement works bear fruit
In line results; solid rental reversions propelled growth
Asset enhancement initiatives bear fruit
BUY with HK$8.02 TP
Solid rental reversions propelled growth. Fortune REIT’s 3Q13 distribution income grew 11% to HK$153m, primarily driven by higher rental revenue.
DPU, however, grew by marginal 1% to HK$0.0828, due to an increase in number of outstanding units following the share placement in Aug 13. Total revenue was 11% higher at HK$316m, thanks to solid rental reversion of 20% on renewals YTD Sep 13 and strong returns from the completed asset enhancement initiatives (AEI). Portfolio occupancy improved to 98.3% in Sep 13 from Jun 13’s 97.8%, as occupancy at Fortune City One recovered after the completion of AEI at the wet market. Due to substantially higher leasing commission incurred, property operating expenses rose 18% to HK$93m in 3Q13, leading to higher cost-to-income of 29.6% (3Q12: 27.8%). As a result, NPI rose by smaller 8%.
Asset enhancement initiatives bear fruit. The recently completed AEIs at Fortune City One Market and Ma On Shan Plaza achieved impressive ROIs of > 25% and 60% respectively. Following the property upgrade, occupancy at Fortune City One Market improved significantly to c.96% from 75% previously. At Ma On Shan Plaza, the reconfigured area from downsizing and subdividing a supermarket has been fully pre-committed with higherpaying retailers and F&B outlets. Elsewhere, tenant repositioning initiatives at Smartland was completed with c.30% higher rentals achieved for new tenants. Occupancy at Fortune Kingswood, acquired in Oct 13, improved to c.97% from Jun 13’s 95.5%. In this mall, the Hong Kong Jockey Club will be relocated from the G/F to1/F to free up prime space for higher-paying tenants.
BUY with HK$8.02 TP. Fortune REIT offers distribution yields of 5.6-6.2% for FY13-14. In view of its solid income growth, we remain positive on its long-term value, and re-iterate our BUY rating with HK$8.02 TP. Interest rate hike remains the key investment risk.
Publish date: 13/11/13