Understandable Hesitation

Proceeding with acquisition and rights issue – ALERT

• FRT will proceed with acquisition and rights issue: All resolutions for the proposed acquisition of the three properties and one-for-one rights issue were duly passed at the EGM held on 11 September.

• One-for-one rights issue at HK$2.29: Book closure date for rights entitlement is set at 17 September 5pm. The commencement of “nilpaid rights” trading period is yet to be determined but is expected to be no later than 23 Sept.

• Under-gearing still better than over-paying: The three new assets would be acquired at an average net yield of 5.1%, which looks fair. We believe this acquisition is much better than previous acquisitions done by other REITs where the sponsor sells assets at a high price into the REIT and uses a combination of financial engineering and aggressive gearing to initially maintain a high yield –it only delays the pain of overpaying for assets. Fortune REIT’s proposed acquisition is simple and straightforward, though the gearing level might even be considered a bit too conservative, in our view. The blended yield post acquisition would be still be high at 7.5% for FY10E and 7.3% for FY11E. Theoretically, investors could gear up externally (and buy more of the REITs) to engineer a higher yield on equity, though it may not be a viable option in reality.

• Maintain OW, Jun-10 PT HK$3.4: In our previous note dated 24 Aug 2009, we had already incorporated the contributions from new assets and also the dilution from the rights issue. Our Jun-10 NPV post acquisition and rights issue is HK$3.4/share. We maintain our ex-rights PT at HK$3.4/share, which is on par with the new NPV. Our price target is based on a discount rate of 6.57% and LT growth rate of 0.4%. Risks to our PT include higher than expected vacancy rates and prolonged economic recession.

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.

Fortune REIT launching S$352.6 million rights issue

Mainboard-listed Fortune REIT is launching a HK$1.9 billion or about S$352.6 million rights issue to expand its operations.

The REIT will issue about 825 million units in the one-for-one rights offer.

The price of HK$2.29 per unit represents a 44 per cent discount to the last traded price of HK$4.10 per unit.

Fortune REIT said about HK$1.6 billion of the total amount raised will be used to buy three suburban retail properties – Metro Town, Caribbean Bazaar and Hampton Loft. The rest of the money will go towards enhancing its 11 existing malls.

The REIT has also secured debt facilities of up to HK$3.1 billion to refinance an existing facility due in June 2010.

It is bullish about the prospects for its proposed acquisitions.

Justin Chiu, chairman of ARA Asset Management, the Manager of Fortune REIT, said: “They are all part of a major residential development which fits right into the investment criteria for the Fortune REIT portfolio and we find that the existing yield is good at slightly more than five per cent.

“So we think it would bring in very solid income in the long-term interest of our investors. The income is very stable and steady and the quality of tenants is very good. So we are not concerned about the so called asset bubble in Hong Kong or Singapore.” – CNA/vm

Fortune Reit Q2 distribution income dips

FORTUNE Real Estate Investment Trust (Reit) yesterday posted a net property income of HK$115.3 million (S$21.4 million) for the second quarter ended June 30. This is 0.3 per cent more than a year ago.

However, income available for distribution dipped 0.7 per cent to HK$78.9 million. Distribution per unit was 9.54 HK cents, slightly below the 9.72 HK cents for the same period last year.

The occupancy rate across Fortune Reit’s portfolio of 11 retail malls in Hong Kong slipped from 95.5 per cent as at March 31 to 92.1 per cent as at June 30. Offsetting weaker occupancies was an increase in the average passing rent, which was HK$27.60 psf as at June 30.

Fortune Reit said that its suburban malls have stood ‘reasonably well’ in the downturn because they ‘serve a captive population’ and cater to non-discretionary spending on necessities and services.

The Reit also benefited from higher valuations of its malls and reaped a revaluation gain of HK$281.3 million. Its portfolio was valued at HK$8.9 billion as at June 30 – 3.5 per cent higher than at Dec 31, 2008.

Fortune Reit’s gearing at the end of Q2 was 25.7 per cent, and it has more than HK$2.37 billion worth of borrowings coming due in a year or less. It said that its manager ARA Asset Management (Singapore) is in discussion with various banks to refinance a term loan due in June 2010.

For the first half ended June 30, Fortune Reit saw a 4.1 per cent year-on-year rise in net property income to HK$238.4 million. Income available for distribution gained 7.1 per cent to HK$161.7 million. H1 DPU was 19.60 HK cents, exceeding the 18.51 HK cents a year ago.

Unitholders will receive a distribution of 19.60 HK cents per unit on August 28, for the period Jan 1 to June 30.

On future plans, ARA Asset Management (Singapore) chief operating officer Justina Chiu said that the manager will focus on ‘retaining quality tenants’ and step up on marketing activities ‘to assist tenants in keeping up their sales momentum’.

Fortune Reit lost five HK cents yesterday to close at HK$4.07.