Fortune – BT

Fortune Reit raising funds to buy HK malls

Debt and rights issue to raise HK$5b; unit price dives on fears of yield dilution

Fortune Reit is raising funds totalling close to HK$5 billion (S$930 million) through debt facilities and a rights issue, joining the spate of S-Reits that have rolled out their re-financing plans.

The bulk of the HK$1.9 billion gross proceeds from rights issue and a term loan of HK$480 million will be used to fund Fortune’s latest acquisitions.

Yesterday, the Reit announced that it was acquiring three suburban retail properties from Hong Kong tycoon Li Ka-shing for HK$2.04 billion.

The three properties are Metro Town and Caribbean Bazaar in New Territories and Hampton Loft in Kowloon, with a combined gross rentable area (GRA) of 318,574 sq ft and an average yield of 5.5 per cent, comparable to the average of above 5 per cent yield for Fortune’s existing assets.

ARA Asset Management (Singapore), the Reit’s manager, said these acquisitions will help expand and diversify Fortune’s portfolio in Hong Kong, enlarge its exposure to the resilient suburban retail space, and provide opportunities for asset enhancement.

‘We think that the worst is over. We do hope we could take advantage of this timing to do acquisitions for Fortune Reit,’ said Justin Chiu, chairman of ARA, in a video conference.

This move will raise its total assets under management from 11 retail malls worth HK$8.9 billion to HK$11 billion.

Gains from this divestment are not significant for Cheung Kong, Mr Chiu added. ARA is an affiliate of Mr Li’s Cheung Kong group.

Some of the other Reits that have turned to rights issues in the recent past include Starhill Global Reit, CapitaMall Trust, CapitaCommercial Trust and Ascendas Reit.

Hong Kong-based ARA chief operating officer Justina Chiu noted that given the scarcity of suburban retail assets up for grabs in Hong Kong, this is a good chance to grow Fortune Reit’s portfolio. Only 5 per cent of suburban shopping centres there are not owned by a Reit or a developer.

Analysts noted that the fall in prices of retail space and rental rates in Hong Kong has presented Fortune Reit with the opportunity to acquire retail properties at lower prices and at better yields.

But positive effects from these transactions will not be immediately visible, said SIAS Research vice-president Roger Tan.

‘Investors will only gain higher dividend yields from this acquisition when rentals start to recover and that would not happen until the global economy recovers – hopefully in 2010.’

The combined impact of the acquisition and the rights issue is yield-dilutive. According to the circular issued to shareholders, the proforma distribution yield will fall from 9 per cent to 7.2 per cent for the fiscal year ended Dec 31, 2008.

Investors dumped units of Fortune Reit yesterday on fears of the dilution, driving its price 10.5 per cent down to HK$3.67 at the closing after it resumed trading in the afternoon.

The properties being acquired are valued at HK$2.073 billion and HK$2.07 billion by independent valuers Knight Frank Petty and Savills Valuation and Professional Services Ltd respectively.

The three properties have an average 95.6 per cent occupancy rate as at June 30, with total FY2008 proforma net property income at HK$103.1 million.

For the rights issue, Cheung Kong has offered an irrevocable undertaking to subscribe for up to 50 per cent of the total size, including its pro-rata entitlement under the rights issue based on its stake of about 31.9 per cent.

The rights issue price of HK$2.29 represents a discount of 44.1 per cent to the last traded price of HK$4.10 per unit on Aug 21. Cazenove & Co (Singapore) and DBS Bank are the joint lead managers and underwriters for the rights issue.

With the recovery of Fortune Reit’s unit price this year from HK$1.99 as at end-2008, ARA chief executive John Lim felt that ‘it is the right time to do rights issue’ at the right price.

The debt facilities that Fortune Reit entered with DBS Bank and Standard Chartered Bank (Hong Kong) comprise three tranches. The term loan of HK$480 million is the first tranche and is due on June 28, 2010.

The second tranche is a HK$2.83 billion term loan facility that will be drawn down starting from June 28, 2010, to refinance an existing term loan of HK$2.35 billion and the HK$480 million term loan.

The third tranche of the loan is a HK$270 million revolving loan facility for corporate funding purposes. The loans bear an interest margin of 2 per cent per annum over the Hong Kong Interbank Offer Rate.

With a term of four years, these loan arrangements effectively defer any refinancing risks till 2013 and the Reit’s aggregate leverage is expected to decrease from 25.7 per cent to 24.9 per cent.

Unitholders will vote on the proposed acquisitions and resolutions relating to the rights issue at an extraordinary general meeting on Sept 11.