Fortune REIT is a dual-listed REIT that trades on the Stock Exchange of Hong Kong and Singapore Exchange (although it will eventually delist from the SGX in October 2019). The REIT currently owns a portfolio of 16 retail properties located in Hong Kong worth HK$42.0 billion.
I recently received a copy of Fortune REIT’s latest annual report and I’ll be giving an update on Fortune REIT’s latest financial results, long-term performance, and valuation. Here are 12 things to know about Fortune REIT before you invest:
1. Fortune REIT’s portfolio value has grown at a compounded annual growth rate (CAGR) of 15.5% over the past 10 years. It has grown from a portfolio of 14 properties worth HK$11.5 billion in 2009 to 16 properties valued at HK$42.0 billion as at 31 December 2018. This is due to capital appreciation of its existing properties and the acquisition of new properties such as Belvedere Square, Fortune Kingswood, and Laguna Plaza during the period.
The five biggest properties contributed 69.6% of Fortune REIT’s net property income (NPI) in 2018:
|Property||NPI (HK$ millions)||Percentage of Total NPI|
|Fortune City One||271.8||18.6%|
|Ma On Shan Plaza||231.5||15.8%|
|Fortune REIT’s 11 Other Properties||445.7||30.4%|
Source: Fortune REIT annual reports
2. Fortune City One is one of three flagship malls owned by Fortune REIT. As at 31 December 2018, it is valued at HK$8.8 billion and has a 99.3% occupancy rate. The mall’s NPI has grown at a CAGR of 4.9% over the last 10 years, from HK$177.0 million in 2009 to HK$271.8 million in 2018.
3. Fortune Kingswood is another flagship mall owned by Fortune REIT. As at 31 December 2018, it is worth HK$8.3 billion and has an 88.4% occupancy rate, a fall from 95.8% in 2017. This was mainly due to asset enhancement initiatives (AEI) which commenced in June 2018. The mall’s NPI of HK$271.3 million 2018 was its first dip in five years.
4. Ma On Shan Plaza is valued at HK$6.1 billion and has a 92.2% occupancy rate as at 31 December 2018. The mall’s NPI has grown at a CAGR of 7.9% over the last 10 years, from HK$117.1 million in 2009 to HK$231.5 million in 2018.
5. Metro Town is worth HK$3.9 billion and has a 99.2% occupancy rate as at 31 December 2018. The mall’s NPI has grown at a CAGR of 7.8% over the last 10 years, from HK$73.4 million in 2010 to HK$134.3 million in 2018.
6. Belvedere Square is valued at HK$2.7 billion and has an occupancy rate of 99.8% as at 31 December 2018. Its NPI has grown at a CAGR of 13.7% over the last six years, from HK$50.8 million in 2012 to HK$109.7 million in 2018.
7. Overall, Fortune REIT’s revenue and distributable income have grown at a CAGR of 12.0% and 12.6% respectively over the last 10 years. This was achieved by positive rental reversions and the acquisition of new properties during the period. As at 31 December 2018, Fortune REIT has an overall portfolio occupancy rate of 93.1%. The REIT has close to 1,300 leases and its top 10 tenants account for 27.7% of gross rental income.
8. Net asset value (NAV) per unit has increased from HK$5.32 in 2009 to HK$16.61 in 2018 – a CAGR of 13.5%. Gearing ratio lowered from 27.4% in 2017 to 20.9% in 2018 and Fortune REIT has no refinancing needs until 2020. Fifty-seven percent of its debt has been hedged at fixed interest rates and average cost of debt is 2.89% per annum. Fortune REIT has a debt headroom of HK$18.7 billion which it can use to invest in new properties or AEIs to raise the value of a property.
9. In June 2018, Fortune REIT commenced AEI at the West Block of Fortune Kingswood. Costing a total of HK$150 million, the mall aims to introduce more F&B and retail offerings upon its completion at end-2019. A revitalisation plan to add new lifestyle & entertainment elements at the East Block is also being planned and will come next.
10. Fortune REIT’s entire property portfolio is centred in Hong Kong where land tenures are set to expire on 30 June 2047. The exceptions are Metro Town and Hampton Loft where their land tenures will expire on 10 February 2053 and 12 December 2049 respectively instead. It remains to be seen whether the Chinese government will extend the land leases in Hong Kong.
11. P/B ratio: As at 31 December 2018, Fortune REIT has a NAV per unit of HK$16.61. Based on its unit price of HK$10.78 (as at 16 July 2019), its current P/B ratio is 0.65, which is marginally above its 10-year average of 0.62.
12. Distribution yield: Fortune REIT has paid a growing distribution per unit over the last 10 years, from 30.2 Hong Kong cents in 2009 to 51.3 Hong Kong cents in 2018.
If the REIT maintains its distribution, its current yield is 4.75%, the lowest in 10 years.
The fifth perspective
Fortune REIT has delivered steady growth in revenue, NPI, and distributions over the last 10 years. Looking at its current P/B, it may seem that the REIT is undervalued as it is trading at only 0.66 times its book value. However, looking at Fortune REIT’s historical P/B will tell you that it persistently trades below book value and a P/B below 1.0 should not be construed as a discount.
It may be more useful to compare Fortune’s current yield with its historical averages. At a 4.75% yield currently — a 10-year low — the REIT looks expensive right now.