• 1Q14 DPU rose 15.3% YoY
• Reversion strong at 26.5%
• No refinancing needs until 2016

1Q14 results beat expectations

Fortune REIT reported a better-thanexpected set of 1Q14 results, with NPI up 32.7% YoY to HK$289.2m, and distributable income up 26.5% to HK$193.9m. The remarkable performance was mainly due to contribution from newly-acquired Fortune Kingswood, higher secured rents across the portfolio and superior returns from its asset enhancement initiatives (AEIs). DPU registered 10.38 HK cents, up 15.3% YoY. This formed 26.7%/26.1% of ours/consensus full-year DPU projections, which we deem to be above expectations.

Solid operational performance

Portfolio occupancy for the quarter saw a sequential uptick of 0.6ppt to reach 99.3% – the highest level in over three years. In addition, rental reversion was strong at 26.5%, led by rental growth at Fortune Kingswood. As a result, average portfolio passing rent improved from HK$33.5 psf in 4Q13 to HK$33.9 psf. Excluding Fortune Kingswood, the growth in passing rent for the original portfolio, we note, was also healthy at 7.0%. Going forward, management expects Fortune Kingswood and the completed AEIs at Ma On Shan Plaza and Fortune City One Market to contribute to further growth. We also understand the HK$80m AEI at Belvedere Square Phase 3 will commence as planned in 2H14, and that ROI of 15% is targeted. For the rest of the year, we believe there may be opportunities for repositioning and rental growth at Fortune Metropolis and Provident Square, as a sizeable 66.1% and 66.1% of total GRA at the respective malls will be expiring. This may possibly provide another boost to Fortune REIT’s rental income, in our view.

Maintain BUY

As at 31 Mar, Fortune REIT’s gearing ratio remained sturdy at 32.9%. However, interest cost improved from 2.59% in prior quarter to 2.22%. In Apr, we note that Fortune REIT has refinanced its existing HK$1.4b loan facilities, ahead of its maturity in Feb 2015. This not only lowers its interest margin to 1.4% (from 2.0% under existing facilities), but also fully eliminates its refinancing needs for 2014-15. After incorporating the better results, our fair value is now raised to HK$6.68 from HK$6.28. Maintain BUY.

Source: OCBC Research - 9 May 2014