Insights

What You Should Know About Fortune REIT’s Earnings and Dividend

Here’s how one of Hong Kong’s leading REITs did during the coronavirus outbreak in the first half of 2020. – REIT with stack of coins dividends

Shares of Fortune Real Estate Investment Trust (SEHK: 778), or Fortune REIT, fell substantially in the first quarter due to the coronavirus outbreak. They haven’t recovered since.

Given that the coronavirus will eventually be contained, and that Fortune REIT recently reported its interim results, is there an opportunity for investors in the REIT’s shares?

Here’s more on what investors need to know.

Interim results

For the six months ended 30 June, Fortune REIT’s sales fell 2.3% year-on-year to HK$951.8 million (US$122.8 million) while net property income fell 4.1% year-on-year to HK$718.2 million.

Sales fell due to lower car park income and negative rental reversions while net property income fell due to the lower sales, higher marketing spend, and building management expenses due to Covid-19.

As of 30 June 2020, Fortune REIT’s net asset value (NAV) was HK$15.37 per unit, down 8.6% year-on-year due to lower rental projections caused by the softer retail environment.

While Fortune REIT’s NAV fell, it’s still well above its stock price, which was HK$6.80 per unit at the time of writing.

Given the challenges caused by the coronavirus outbreak, Fortune REIT management decided to cut the dividend distribution by more than the decline in income for distribution in order to strengthen the balance sheet.

Although income for distribution declined 3.1% year-on-year to HK$489.7 million, Fortune REIT’s distribution per unit fell 13.5% year-on-year to 22.6 HK cents.

Focused on keeping existing tenants

Due to Covid-19, retail sales value in Hong Kong fell 34.8% year-on-year in the first five months of the year as social distancing measures and travel restrictions reduced demand.

As a result, leasing momentum has been pretty soft for Fortune REIT and newly-committed rents are lower than average.

Rather than spend huge efforts on finding new tenants, Fortune REIT has been focused on retaining existing tenants.

In terms of its existing tenants, Fortune REIT has done a pretty good job with portfolio occupancy at 95% as of 30 June 2020. Given the high occupancy rate, it has financial stability.

Company outlook

In terms of the near-term future, Fortune REIT is cautious – the company notes that Hong Kong is in recession, where GDP fell 8.9% year-on-year in the first quarter and unemployment rose to 6.2% in June.

Although interest rates are low and Hong Kong’s government has initiated relief measures, management thinks that retail rents could continue to remain under pressure for the near term.

In terms of the long term, however, the company is cautiously optimistic and “well poised to embark on opportunities when they arise.”

What could be ahead

The market right now is debating the near-term bearishness versus the long-term potential.

In the near term, Hong Kong’s economy could remain pretty weak given that the city is undergoing another wave of Covid-19 infections.

In the long term, Hong Kong’s economy will recover and retail sales will return closer to normal. If retail sales return closer to normal, lease demand could strengthen and NAV could increase.

In the long run, I think the market will side with the bullish camp. Covid-19 will eventually be contained as many analysts think a successful vaccine will be approved.

For its second quarter, China’s economy also recovered faster than expected. If China can return to normal faster, Hong Kong and other places could also return to normal fairly rapidly too.

Foolish conclusion 

Fortune REIT’s first-half results were worse than last year due to the coronavirus outbreak.

Given that the Covid-19 outbreak is very likely temporary, and Fortune REIT has an attractive dividend yield and a price substantially below NAV, I think the stock will rebound in the long run.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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