Steady operational performance, waiting for liquidity discount to narrow

• 1H09 results largely in line with expectations: Fortune REIT announced a 1H09 DPU of HK$0.196, up 5.9% Y/Y, and just 1.1% below our estimate. Gearing was a healthy 25.7%. Despite the tough environment, rental income remained fairly stable in Fortune REIT’s portfolio. Investment properties were revalued up by 3.5%, mainly on cap-rate compression of around 50bp (cap rates at 5.25-6%).

• We turn slightly optimistic about the retail rental market outlook: With early signs of stabilization in the retail market, and a slightly better economic outlook for 2010, we now only assume a 6% decline in FY09 spot rents and a 3% recovery in FY10 (compared to -10% in FY09 and 0% in FY10). As a result, we tweak our DPU forecast by -1% for FY09 to account for higher maintenance costs alongside some renovation projects, while we raise our FY10 DPU forecast by 6%. Our NPV also increases by 22.5% as a result of the higher DPU estimates, higher longterm growth rate (from 0.1% to 0.2%) assumption, and lower discount rate (from 7.72% to 6.95%) assumption.

• Valuation still looks appealing: The stock is still trading at a clean yield of 8.3% for FY09E-FY11E, which is still high relative to other Hong Kong REITs which are trading at an average clean yield of 5.6%. We believe there is room for further re-rating of the stock in the current low-interest-rate environment. The yield spread between Fortune REIT and 10-year HK Exchange Fund notes is wide at 680bp versus its longterm average of 384bp since its listing in 2003. We believe the liquidity discount on Fortune REIT should gradually narrow.

• Maintain OW, raise our Dec-09 PT to HK$4.9: We increase our Dec- 09 PT by 22.5% to HK$4.9, on par with our DDM-based NPV estimate. We used a discount rate of 6.95% and a long-term growth rate of 0.2%. Risks to our PT include sharper-than-expected rental declines, higherthan- expected vacancy rates, and a prolonged economic recession.

Fortune Reit Q1 DPU up 14.4%

HIGHER occupancies and rental rates, as well as the completion of asset enhancement works, drove first-quarter revenue for Fortune Reit up 10.4 per cent year on year.

Total revenue for the quarter ended March 31 grew from HK$152.4 million (S$29 million) to HK$168.2 million.

This lifted the distribution per unit (DPU) 14.4 per cent to 10.06 HK cents, up from 8.79 HK cents in Q1 last year.

Although the Reit expects 2009 to be challenging given the global financial and economic crisis, non-discretionary retail sales in Hong Kong still registered a growth for the first quarter and was less affected.

‘These results underscore the defensive nature of the Hong Kong suburban retail sector in general and Fortune Reit in particular,’ said chief operating officer Justina Chiu of ARA Asset Management (Singapore), which manages Fortune Reit.

‘The manager will continue to negotiate leases with tenants well in advance and will, at the same time, intensify marketing and promotion activities in order to assist tenants in keeping up their sales momentum,’ Ms Chiu added.

Fortune Reit, which has a portfolio of 11 retail malls in Hong Kong, saw higher occupancies and rental rates at City One Shatin Property, Ma On Shan Plaza and The Metropolis Mall.

Despite the financial crisis, occupancy remained solid at 95.5 per cent with passing rent up 3.6 per cent to HK$27.09 per square foot.

Completion of asset enhancement works at Waldorf Garden Property also contributed to revenue growth.

The Reit’s rental reversion remained healthy at 4.9 per cent being registered for renewals in the first quarter.

The quarter ended March 31 also saw a rise in net property income of 8 per cent from HK$114 million to HK$123.1 million.

Income available for distribution jumped 15.8 per cent to HK$82.8 million from HK$71.5 million.

Fortune Reit said it remains well positioned to weather the tightening of credit markets as one of the lowest geared Reits in the region at 26.6 per cent.

Its term loan of about HK$2.35 billion expires in June 2010 and borrowing costs for the period dropped 12.8 per cent year on year to HK$23.5 million.

Fortune Reit units closed trading six cents up at HK$3.11.

Asset write-downs dim a solid result

Event

Fortune Reit’s Q4 net property income up 6.8%

FORTUNE Reit has reported a net property income of HK$121.34 million (S$23.54 million) for the fourth quarter ended Dec 31, 2008, up 6.8 per cent from HK$113.57 million a year ago. Revenue for the period was HK$166.18 million, 5.1 per cent higher than HK$158.14 million a year ago.

Income available for distribution for the quarter was HK$80.78 million, up 4.1 per cent year-on-year (yoy). Distribution per unit was HK$0.099, up 3.1 per cent yoy.

Stephen Chu, CEO of ARA Asset Management (Singapore) Ltd, the manager of Fortune Reit, said: ‘These results underscore the defensive nature of the Hong Kong suburban retail sector in general and Fortune Reit in particular.’

He added that, under the current volatile market conditions, the management will focus on sustaining organic growth through proactively managing its portfolio of assets, cost management and execution of its ongoing asset enhancement initiatives.

As at end-December 2008, Fortune Reit’s aggregate amount of secured borrowings repayable after one year was HK$2.34 billion.

Its cash and cash equivalent position at the end of the same period was HK$243.36 million. It also has a gearing of 26.4 per cent.

Fortune Reit has a portfolio of 11 suburban retail properties.

The performance of the Reit was attributed to organic growth at City Shatin Property and Ma On Shan Plaza as well as results from the completed asset enhancement works at Waldorf Garden Property.

As at end-December 2008, the portfolio occupancy was 96 per cent, up from 92.1 per cent a year earlier. Rental reversion of 18.8 per cent was achieved for renewals in 2008.

Overall tenant retention was 83.6 per cent in 2008.

The portfolio passing rent was HK$27.03 psf as at Dec 31, 2008, an increase of 7.1 per cent yoy.

At the end of trading yesterday, Fortune Reit closed at HK$2.40 per unit, up 7 cents.

Fortune Reit Q2 distributable income up 13.5%

FORTUNE Real Estate Investment Trust, which owns 11 Hong Kong malls, has posted distributable income of HK$79.4 million (S$13.8 million) for the second quarter ended June 30, 2008, up 13.5 per cent from the corresponding year-ago period.

The latest Q2 bottomline included HK$21.9 million non tax-exempt income, which referred mainly to interest income from fixed deposits and structured swaps entered on June 28, 2006. ‘Included therein for the period 1 April 2008 to 30 June 2008 is a positive fair value of HK$16.6 million (1 April 2007 to 30 June 2007: Nil) as well as the value of HK$5.02 million for the unwinding of one of the structured swaps,’ the trust said in its results statement.

Total revenue rose 2.8 per cent year-on-year to HK$156.6 million in Q2, while net property income increased 2 per cent over the same period to almost HK$115 million.

For the six months ended June 30, 2008, Fortune Reit’s net property income was flat at around HK$229 million, while total revenue inched up 0.2 per cent to HK$308.9 million. Distributable income rose 5.3 per cent to HK$150.9 million.

Unitholders will receive a tax-exempt distribution per unit of 18.51 HK cents for the half-year ended June 30, 2008. That works out to an annualised distribution yield of 8.2 per cent based on Fortune Reit’s HK$4.54 closing price on June 30.

Fortune Reit was last traded on Monday (July 28), when it closed at HK$4.31, down five cents from the Friday closing.

Its net asset value per unit (excluding hedging reserves) slipped 2 HK cents to HK$9.02 as at June 30, 2008, from HK$9.04 as at Dec 31, 2007.

Fortune Reit currently has 11 malls – many of which are in the New Territories – worth about HK$9.7 billion, against five malls worth HK$3.3 billion when the trust was listed in 2003.

The trust’s manager, ARA Asset Management (Singapore) Ltd, said: ‘Asset enhancement initiatives to improve revenue and shopping experience are in progress with the major initiatives at City One Shatin Property, Household Center and Smartland, to refine the physical enhancements and tenant mix.’

It also noted that the trust’s low gearing of 23.4 per cent ‘provides management with debt flexibility of about HK$1.8 billion for opportunistic acquisitions, before a credit rating and before the statutory borrowing limit of 35 per cent is reached’.