Result First Take: preserve cash amidst uncertainty in rental collection
- Distributable income grew 1% to HK$981m, slightly higher than our estimate
- Distribution payout ratio lowered to 90%
- Rental reversion has turned less negative in 2H21
Aided by lower cash finance cost, FY21 distributable income grew by a marginal 1% to HK$981m, 3% higher than our forecast because of smaller-than-expected rental earnings decline. However, Fortune REIT lowered the payout was lowered to 90% from FY20’s 95%, with distribution income down 4% to HK$883m. We see it a prudent move for conserving cash given uncertainty in rent collection led by the temporary rental enforcement moratorium.
To preserve cash amid the challenging retail outlook led by COVID outbreak, the REIT has prudently lowered its payout ratio to 90% for 1H20 from its usual 100%. But Fortune REIT fully paid out distributable income in 2H20 once the situation stabilised.
DPU also fell 4.9% to HK$0.4483 in FY21.
Total revenue was 2% lower at HK$1.81bn dragged by lower average portfolio occupancy and negative rental reversion. Portfolio occupancy fell to 94.3% in Dec-21 from Jun-21’s 95.8% due to increased vacancy at +Woo and Fortune Metropolis led by asset enhancement initiatives. Despite these two asset enhancement initiatives, retention remained healthy at 74% as the REIT adopts flexible leasing strategy to maintain occupancy.
In 2H21, rental decline on renewal narrowed to 4-5% from 1H21’s 9-10% with the absence of rental concessions given improved retail scene led by the relaxation of social distancing measures.
Property operating expenses were stable as the increase in utility expenses, leasing commission and advertising and promotion expenses were offset by saving from lower credit losses and legal fees. With the cost to income ratio increased slightly to 23.5% from FY20’s 23.1%, NPI dropped by 2.6%.
Total debt stood at HK$8.9bn in Dec-21. This puts its gearing at 22.4%. Interest cost for c.70% of total debt was hedged in Dec-21. (Jun-21: 51%). This helps mitigate the interest rate risk in a rising interest rate cycle. In Jan-22, Fortune REIT secured a 5-year sustainability-linked loan facilities of HK$1.2bn for refinancing. Therefore, Fortune REIT has no refinancing need until Oct-23.
About 40.7% of leases are scheduled for renewal. The recent COVID resurgence has disrupted the retail market with low leasing activity expected in the short term.
The HK$16m renovation of food court (15,000sf) at Fortune Metropolis is near completion. Stage 1 of +Woo Ph 2 renovation is underway with business re-opening targeted for Jun-22. Around 50% of enhanced area has been pre-committed.