Fortune Reit

Fortune Reit: 2Q11 results largely in line.
Revenue +11.4% yoy to HK$228m and NPI +8.2% to HK$158m.
DPU improved 3.1% yoy to HK ct 6.07/unit, for a total of HK ct 12.80/unit for 1H11. This represents an annualized distribution yield of 6.7%.

Net gearing improved to 18.4% from 21% the last quarter as cash balances increased by ~HK$230m. The trust booked a HK$ 2.4b revaluation gain this quarter, compared to a HK$ 900m gain previous year. Effective borrowing rate was 4.44% for this quarter.
Occupancy and rental rates improved across the portfolio, underpinned by growth in the HK retail sector. Occupancy rates stand at 98.1% (97.8% last quarter) while rental reversions for renewals were at 13.8%.

Portfolio passing rent increased 10.2% to HK$30.3 psf. AEIs at City One Plaza will commence in 3Q and should be completed by 4Q12. The project is targeting a 15% ROI on the HK$100m cost. The Ma On Shan Plaza will be reconfigured with works to start in Aug ‘11 and be completed by the end of the year. This will provide more diversified offerings and >50% of the space has already been pre-committed.

Mgmt expects organic growth to be strong as 22.1% of gross rental income is due to expire in 2H11, representing opportunities for further rental reversions. More AEIs will also be in the pipeline to drive revenue growth. Although co has significant debt headroom up to 35% (~HK$4.3b), earnings accretive acquisitions might be rare due to the tight market yields.

StanChart notes possibility of opportunities in other areas, potentially through M&A.
Stock currently trades at 0.6X P/B. Recent recommendations are positive with TP HK$4.37 – 5.15.