FortuneREIT – OCBC

Robust performance continues

• 4Q14 DPU rose 8.0% YoY
  
• Solid FY14 rental reversion of 23.8%
  
• Stock appears fairly priced
  

4Q14 results met our expectations

Fortune REIT reported another good set of results, with 4Q14 revenue and DPU increasing by 8.4% and 8.0% YoY to HK$425.7m and 10.5 HK cents, respectively. For FY14, revenue jumped 25.7% to HK$1,655.8m, due to robust rental reversion of 23.8% and a full year of contribution from Fortune Kingswood (rental reversion in excess of 30%). Its portfolio passing rent increased by 8.7% to HK$36.4 psf pm. FY14 DPU of 41.68 HK cents translated into a growth of 15.8%, and formed 99.8% of our full year forecast. Results were within our expectations. All of Fortune REIT’s assets recorded an increase in their valuations ranging from 2.7% (Rhine Avenue) to 13.9% (Fortune City One).

Contribution from Laguna Plaza to further boost growth

Fortune REIT recently completed the acquisition of Laguna Plaza on 9 Jan 2015 for HK$1,918.5m (4.7% passing initial yield). This was fully funded by debt and the asset is expected to form synergies with Fortune REIT’s Centre de Laguna which is located at close proximity. We expect Fortune REIT’s gearing ratio to reach 33% at end FY15, versus 29.4% as at 31 Dec 2014. This is still a healthy level, in our view. Following this acquisition, Fortune REIT’s total debt hedged will ease from 55% to 46%.

Maintain HOLD

We raise our FY15 DPU forecast by 5.4% to take into account the acquisition of Laguna Plaza and also introduce our FY16 projections. Rolling forward our valuations, we bump up our fair value estimate from HK$7.29 to HK$8.05. While we like Fortune REIT for its resilient portfolio as 57% of its gross rental income is derived from the nondiscretionary retail sector, we believe the stock appears fairly priced, having appreciated 7.4% YTD. Our forecasted FY15F distribution yield of 5.4% is more than one standard deviation below its 5-year average forward yield of 6.4%. Maintain HOLD.