Fortune Real Estate Investment Trust

OCBC on 11 May 2012

1Q12 results were above our and the street’s forecasts. Net property income of HK$185m was up 15.1% YoY; 9.9ppt came from organic growth, while 5.2ppt was due to the one-and-a-half months contribution from Belvedere Square and Provident Square, which were acquired in mid Feb. DPU climbed 14% QoQ to 7.78 HK cents. With the next three quarters seeing full contribution from the two properties, we raise our FY12 DPU forecast from 29.4 HK cents to 31.7 HK cents, up 20.5% YoY from FY11 DPU. We maintain our BUY rating and raise our fair value from HK$4.88 to HK$5.22.

Surpassing forecasts
1Q12 results were above our and the street’s forecasts. Net property income of HK$185m was up 15.1% YoY; 9.9ppt came from organic growth, while the other 5.2ppt was from two properties acquired in mid Feb. Retail continues to remain a bright spot in the HK economy. Average passing rent for the original portfolio rose 11% YoY due to good rental reversions in 2011. Net property income margin declined from 73.6% to 71.5% mainly due to one-off costs associated with the acquisition. DPU climbed 14% QoQ to 7.78 HK cents. With the next three quarters seeing full contributions from the two properties, we raise our FY12 DPU forecast from 29.4 HK cents to 31.7 HK cents, up 20.5% YoY from FY11 DPU.

Strong financial position
As of 31 Mar, Fortune’s effective interest cost is at 2.87%, down by 78bps from 31 Dec 2011. Management believes that it can keep interest cost below 3%. It has an interest cover of 5.3x and a comfortable gearing ratio of 26% and debt headroom of HK$2.6b before reaching the 35% gearing limit. The REIT has no refinancing needs till 2015.

AEIs still on track
By the end of 2012, Fortune City One would have completed its HK$100m asset enhancement initiative (AEI) and looks likely to exceed its ROI target of 15%. Fortune defines ROI conservatively, looking at returns quantifiable within only the first year. Fortune will also undertake a HK$12m AEI at Jubilee in 3Q. We view AEI as a good way to generate returns for unitholders.

Maintain BUY; raise fair value
Fortune is trading at a P/B of 0.5x (NAV per unit of HK$7.81) and an estimated FY12 dividend yield of 7.6%. We maintain our BUY rating and raise our fair value estimate from HK$4.88 to HK$5.22.