Fortune REIT: 1Q11 results largely in line.
Net Property Income up 3.3% YoY to HK$161m on strong positive rental reversions. DPU improved 5.5% YoY to HK 6.73 cts/unit due to the better NPI margins at 74%. However occupancy rates dipped 0.9% to 97.8% from 3 months ago, mainly due to a 5.8% decline at The Metropolis Mall as a church occupying the entire top floor did not renew its lease...
Gearing remains healthy at 0.21x and mgmt also secured new credit facilities at HIBOR + 0.91% (from HIBOR + 2%) in Apr, which will lower the avg borrowing rate to ~3.5% for FY11 (from 3.74% in 1Q11). Mgmt is actively looking for earnings accretive or neutral acquisitions to make use of the debt capacity up to the 0.35x ceiling. However this may be a challenge in view of the tight market yields for retail assets...
The Street expects mainly organic growth moving forward, with strong rental reversions of 17.4% in 1Q11, and average passing rent up 7.3% to HK$29.4psf. Another 30.3% of leases are due for renewal over FY11, leaving room for further positive rent reversion...
Asset Enhancement Initiatives in the pipeline incl One Shatin (Phase II completion expected in FY12) and Ma On Shan Plaza (completion in 4Q11), to cost HK$100m and HK$30m rptvly. The AEI should make the properties more attractive; already One Shatin is seeing increasing occupancy (97.2% now from 96% 3 months ago) after Phase I of the AEI.
StanChart and Macquarie maintain Outperform, with TP at HK$4.15 and HK$4.7 rptvly. Reit currently trades at P/B of 0.6x, with FY11E yield of 6.7%.
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