• 1Q15 DPU rose 12% YoY
• Robust rental reversion of 18.4%
• Limited upside potential

1Q15 results within expectations

Fortune REIT started FY15 on a positive note, recording a 13.6% YoY increase in revenue to HK$458.8m and a 12.0% growth in its DPU to 11.63 HK cents for its 1Q15 results. This was within our expectations, as revenue and DPU constituted 25.3% and 25.6% of our full-year forecasts, respectively. Growth was driven by solid rental reversions of 18.4% across its portfolio, contribution from Laguna Plaza, which was acquired in Jan 2015, and the re-opening of the first renovated zone of Belvedere Square (50,000 sq ft) which had undergone AEI works.

Operating metrics still healthy

Overall portfolio occupancy stood at a healthy 98.1%, as at 31 Mar 2015 (end FY14: 97.3%); while average passing rent was HK$37 psf per month, which represented an 8.2% YoY increase, if we exclude Laguna Plaza. In terms of financial position, Fortune REIT’s gearing was 33.2%, as at end 1Q15, and 46% of its debt has been hedged through interest rate swaps and caps. Following the opportunistic divestment of Nob Hill Square in Apr this year for HK$648m and the utilisation of the net proceeds to repay its loans, Fortune REIT’s gearing was subsequently reduced to 31.8%. Despite China’s restriction on visits of Shenzhen residents to Hong Kong to once a week, Fortune REIT does not expect to see a significant impact on the performance of Fortune Kingswood, which is located near the Shenzhen border. This is because tenant sales are still largely driven by the local catchment area.

Maintain HOLD

While we like Fortune REIT for its strong management team, as illustrated by the awards it recently won in five categories of “Asia’s Best Companies Poll 2015” conducted by FinanceAsia, we see limited upside potential ahead. We trim our fair value estimate slightly from HK$8.05 to HK$8.04 due to a marginally higher unit base assumption, and reiterate our HOLD rating. Fortune REIT is currently trading at FY15F distribution yield of 5.7%, which is close to one standard deviation below its 5-year average blended forward yield of 6.3%.

Source: OCBC Research - 12 May 2015