Company Update: Enhancement works bearing fruit
- Portfolio occupancy to pick up slightly to c.95%, thanks to improvement in Fortune Metropolis
- Reversionary growth expected to stay broadly neutral in FY24
- Commitment rate for stage 3 AEI at +WOO Ph 2 has reached >50%
- Attractively valued amid peaking interest rate, Maintain BUY with TP of HK$6.50.
Fortune REIT’s portfolio continued to record positive tenant sales growth in 2H23 supported by post-pandemic economic recovery. This was primarily led by the upward momentum from restaurants sales. Selected eateries have seen their sales exceeding pre-COVID levels. On the other hand, supermarket sales fell mildly due to weaker groceries demand from locals.
+WOO in Tin Shui Wai saw the strongest pickup in footfall with the gradual completion of asset enhancement work. Overall footfall recovered to c.95% of pre-COVID level.
Portfolio occupancy should improve slightly to c.95% from Jun-23’s 94.1% mainly led by higher occupancy from Fortune Metropolis in Hung Hom. In Dec-23, Fortune REIT welcomed their first new energy vehicle tenant, MG, into its portfolio by opening an open-concept showroom at Fortune Metropolis. Coupled with new interior design and F&B tenants, occupancy at Fortune Metropolis should rise to c.88% from Jun-23’s 82.9%. Meanwhile, with the recruitment of a new elderly home, the occupancy of Smartland in Tsuen Wan improved to c.95% from Jun-23’s 90.5%. Occupancy at +WOO should remain stable at c.90%.
Occupancy cost ratio of the portfolio has edged down to a healthier level than that prior to the COVID outbreak. Restaurant operators, household product retailers and gym tenants recorded positive rental growth on renewals. However, this should be more than offset by negative rental reversions from real estate agencies, supermarket and kindergarten tenants. Hence, overall reversionary growth for the overall portfolio should remain mildly negative for FY23. We expect reversionary growth to be broadly flattish in FY24 as dragged by property agency tenants given the prevailing sluggish residential market.
Commitment rate for stage 1 & 2 renovation works at +WOO Ph2 has exceeded 85%, mainly featuring F&B and fashion tenants. Stage 3 of the AEI has commenced in 3Q23 and is expected to complete by 2Q24. Fortune REIT has secured tenants for >50% of the space under renovation, including general retail trade, F&B and cinema. ROI for the entire AEI is targeted c.10%. Elsewhere, Fortune REIT is scheduling an asset enhancement work at Fortune Metropolis in 2H24. With a total capex of c.HK$200m, this should enhance the layout and improve the retail offerings of the mall.
Gearing should remain stable at c.24%. Refinancing for the HK$1.5bn loan that expired in Oct-23 has been completed with credit margin slightly higher than the previous one. Fortune REIT should see a decline in hedging ratio (Jun-23: c.63%) along the natural expiry of IRS in 2024. Higher cash financing costs would be a near-term earnings drag to the REIT.
Fortune REIT is trading at distribution yields of 8.0-8.6% for FY24-25. This translates into yield spread of 4.0-4.6%, above its 10-year average of 3.7%. Current valuation is attractive, especially taking into account that interest rate is gradually peaking out. Gradual completion of enhancement works should enhance rental value of +WOO Ph 2, which in turn underpins Fortune REIT’s revenue growth in the years ahead. Moreover, interest rate upcycle is near an end. This should bode well for sentiment towards the counter. Maintain BUY with a DDM-based TP of HK$6.50.