Does Fortune Favour Fortune REIT?

fortune reit reits stocks Nov 22, 2018

by: Dean Goh


All examples and stocks quoted here in this article and on the ProButterflyTM and REITScreenerTM site are for learning purposes; it does NOT constitute financial advice or a Buy/Sell recommendation. Contents are reflective of personal views and readers are responsible for their own investments and are advised to perform their own independent due diligence and take into account their own financial situation. If in any doubt about the investment action you should take, you should consult a professional certified financial advisor.


Since plunging to a low of HKD 1.65 a few months after its IPO listing in 2007, Fortune REIT (“Fortune”) has risen steadily to a high of HKD 10.04 at the end of 2016 (a more than 500% increase). However, just last month, Fortune hit a new low of HKD 8.56 since more than a year ago. Fortune has consistently traded below its fair value, and its current trading price (at point of writing) HKD 8.86, makes Fortune an even more undervalued stock.

At first glance, Fortune is an attractive stock to snap up. It boasts steady growth over the past 5 years in the key areas of DPU, NAVPU and NPI. Further, it has a very low gearing ratio at 27% and a healthy interest cover at 5.60 for FY 2017. Thus, it would be apt to look at the risks Fortune REIT may be exposed to going forward.

Macro Factors

  • US Fed Hike: The booming economy under President Trump has led the Fed to raise interest rates for the 3rd time this year. As Hong Kong interest rates are primarily influenced by US interest rates, recent Fed Hikes are likely to see increases in Hong Kong’s interest rates too. As of H1-FY2018, 54% of Fortune outstanding debts had been hedged against possible increases in interest costs. However, this is a 6 percentage point decrease in hedged debts as of 4Q-FY2017 for Fortune. Looking ahead, forecasts from Fed policymakers' in September pointed to three possible hikes in 2019.
  • FOREX Risk: Though Fortune is listed on the SGX, all of its properties are located in Hong Kong. Fortune collects its rental income and distributes its dividends in HKD. If an investor uses the SGD as his base currency to be converted into HKD, he is at FOREX risk due to this currency conversion. The figure below shows a weakening SGD against the HKD since the start of 2018 (Fig. 1). This may result in an investor receiving more than expected gains from the capital appreciation and dividend distributions in SGD by Fortune.


Fig. 1: SGD to HKD chart
Source: XE.com

  • Consumer sentiments amidst US-Sino trade tensions: The Chinese contribute to more than one fifth of Hong Kong’s export revenue. Further, given how Hong Kong is very reliant on exports to boost GDP figures, trade war prospects between the US and China can hurt the Chinese economy. This in turn will hurt Hong Kong’s export revenue. As seen from the escalating US-China trade war, the Q3 period of Hong Kong’s economy faced its slowest quarterly growth since more than 2 years ago, and well below its projected figures for the quarter.

Micro Factors

  • Fortune’s Asset Enhancements: Fortune has been involved in the enhancement of the West Block of Fortune Kingswood since earlier this year. Last renovated 22 years ago and the largest shopping mall within the Tin Shui Wai area, Fortune Kingswood looks set to be repositioned as a regional shopping and entertainment hub. Though this would cost HKD 150 million in CAPEX for Fortune, Fortune has a proven track record of successful AEIs, consistently achieving a Return on Investment of over 20% for all of its AEIs. Fortune Kingswood also happens to be the largest contributor of Fortune’s Net Property Income at 19.0%.
  • The Location of Fortune’s Shopping Malls: As most of Fortune’s retail malls are located in the suburban areas of Hong Kong, Fortune predominantly relies on non-discretionary consumer spending for its revenue. This is seen through its makeup of tenants in its portfolio (of which more than 60% of its gross rental income is made up by bread and butter services). As such, Fortune’s suburban retail malls are likely to be able to weather economic downturns in the Hong Kong economy.


Fig. 2: Tenant Makeup of Fortune’s retail malls
Source: http://fortunereit.todayir.com/attachment/20180727172633545352212_en.pdf 

Conclusion

The achievements of Fortune REIT are well-known - high occupancy rates, positive rental reversions et cetera. So this article skips that. This article merely presents the future traps Fortune might fall into for prospective and current investors of Fortune to take note of, amidst the glitzy figures for Fortune. Such risks are influenced largely by uncontrollable global conditions and are often more unpredictable than President Trump’s personality. Thus, it’s good to get a better grasp of such uncertainties by being periodically updated by global news channels.

 

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