Fortune REIT -
PRICE as of 11 Nov 2013 HKD 6.32
PRICE TARGET HKD 8.08
Strong rental growth in 3Q13
■ Fortune REIT’s (FRT) 3Q13 distributable income rose 10.6% YoY to HKD 153.3mn, but DPU rose just 1.5% on dilution.
■ Reversion was strong at over 20%, contributing to a 9M13 reversion of 20%, which is above management’s target of mid teens for the full year.
■ Asset enhancement initiatives (AEIs) beat management’s 15% ROI target, with Ma On Shan Plaza (MOSP) and Fortune City One (FCO) Market achieving 60% and 25% ROIs.
■ We reiterate our OP rating with a DDM-based price target of HKD 8.08. FRT trades at a 6.2% yield versus 1.9% yield on the 10-year Hong Kong exchange fund note (EFN).
Strongest reversions YTD
FRT reported a 3Q13 DPU of 8.28 HK cents, up only 1.5% YoY due to the units issued for the Kingswood acquisition. Distributable income increased 10.6% YoY to HKD 153.3mn, driven by strong rental reversion of over 20%, high occupancy of 98.3%, and contributions from both AEIs and tenant remix. Higher commission (non-cash) and maintenance expenses lowered the net property income (NPI) growth to just 8.2% YoY.
FRT seeks to achieve sustainable growth through AEIs and tenant repositioning, including a HKD 80mn AEI at Belvedere Square phase 3 and repositioning opportunities at Waldorf Avenue and Provident Square. It is also considering potential AEI/repositioning at Kingswood in 2015. We expect the healthy occupancy costs of 10-15% to continue to support reversions. In our view, occupancy could improve further in 4Q13 with close to full occupancy at MOSP and FCO. We lift our 2013E/14E DPU by 1%/3% to factor in higher reversions.
Balance sheet remains healthy
FRT‟s gearing as of end-3Q13 was 20.1% and post Kingswood acquisition gearing would be below 35% in 4Q13, with no refinancing requirement until 2015. The company has debt headroom (until 45% gearing) for potential investment opportunities but would require credit rating. Stable and high yield. We reiterate OP with a DDM-based PT of HKD 8.08 (lower versus HKD 8.20 earlier, on higher discount rate). FRT offers the highest dividend yield within our Hong Kong property coverage.
The stock trades at c.6.2% 2014E yield versus Link REIT‟s 4.1% and 10-year Hong Kong EFN yield of 1.9%.