One of the stocks that I bought early in July was Fortune REIT (I’ve owned Fortune since June 2019).
During the March market meltdown, Fortune’s share price went down to as low as HKD6.20. Since March, the share price has not gone above HKD7.50. I took that as an opportunity to average down on Fortune REIT, buying it at HKD7.15. The share price has since my purchase gone below HKD7.00 … oh, well.
Introduction
Founded in 2003, Fortune REIT is the first REIT to hold assets in Hong Kong. Fortune currently holds a portfolio of 16 private housing estate retail properties in Hong Kong comprising of 3.0 million square feet of retail space and 2,713 car park spaces. The total worth of Fortune’s portfolio, as at 30 June 2020, amounted to HKD40.33 billion (down from HKD42.82 billion as at 31 Dec 2019).
Highlights
As Fortune’s retail malls are all surrounded by residential areas, it predominantly relies on non-discretionary consumer spending for its revenue. About 68% of its retail focus is on necessity trades such as restaurants and eateries, supermarkets and education providers. This kind of tenant mix ensures Fortune’s business remains resilient regardless of economic conditions.
Results and Ratios
In the latest interim report (June 2020), Fortune reported the following:
1. Revenue DROPPED 2.3% year-on-year to HKD951.8 million (from HKD974.3 million). This lower revenue was a result of negative rental reversion and lower carpark income. The Hong Kong economy has entered a technical recession following two successive quarters of contraction. The ongoing Sino-USA trade tensions and unprecedented social unrest had hurt Hong Kong’s trade and retail activities. The Covid-19 virus outbreak just made the entire business sentiment in Hong Kong all the more worse. The retail environment remains very difficult with the uncertain development of COVID‐19.
2. Net asset value per unit CONTRACTED 8.6% to HKD15.37 compared to HKD16.81 a year ago. However, Fortune’s NAV per unit has increased from HKD6.18 in 2010 to HKD16.81 in 2019.
3. Net property income DECREASED 4.1% year-on-year to HKD718.2 million (from HKD748.7 million).
4. Distribution per unit was 51.28 HK cents (FY2019 ending 31 Dec), keeping the same as DPU for FY2018. For the past 10 years, Fortune has paid a growing distribution per unit, from 24.35 HK cents in 2010 to 51.3 HK cents in 2019. For the interim, a payout of HK22.60 cents (44% of total payout in 2019) were paid out over a 90% payout ratio. A cut in DPU is expected for FY2020 (some Singapore REITs such as Capital Mall Trust, Frasers Centrepoint Trust and Mapletree Commercial Trust have already reduced their DPU this year).
5. Fortune’s gearing ratio ROSE slightly to 21.6 % (2019: 19.8%). Fortune’s financial management is still conservative. With gearing ratio at this level, Fortune has a debt headroom amounting to HKD17.3 billion to make further yield accretive acquisitions. Fortune currently possesses sufficient financial resources to satisfy its financial commitment and working capital requirements. As at 31 December 2019, available liquidity stood at HKD530.4 million (down from HKD1,242.9 million in 2018), comprising committed but undrawn facilities of HKD394.0 million and cash and bank deposits of HKD136.4 million.
6, Fortune’s interest coverage ratio is healthy at 4.6x (my criteria: above 3%).
7. Occupancy rate for Fortune’s portfolio shrunk slight to 95% from 97.4% a year ago. Fortune experienced a slightly negative rental reversion but nevertheless strong tenant retention.
8. As of 24 July, Fortune has a NAV per unit of HKD16.84. Fortune’s current PB ratio is 0.39 at the price of HKD6.65, which is in line with the HK REITs industry average. Fortune has consistently traded below its fair value, and its current trading price makes Fortune a very undervalued stock.
9. Fortune’s current yield distribution is 7.18% (10-year average yield distribution:5.76%)
Why did I average down on Fortune REIT?
The 2nd half of 2019 wasn’t a good period for Fortune as a result of the protest movement and the slowing of the Hong Kong economy. And 2020 definitely looks set to be worse, what with the severe disruption caused by the Covid-19 pandemic on retail shopping in Hong Kong.
The social protest movement is very much gone now. Vaccines are currently being developed for Covid-19. Hong Kong’s economy will improve. Things might get worse before they get better but eventually all things will blow over … recessions will end and economic expansion will take over. Remember these words, “These too shall pass”.
Hong Kong’s economy will improve, unemployment rate will go down, people will have enough for discretionary spending and spend they will. Fortune’s fortune will improve over time, I believe.
I decided to average down on Fortune for these reasons:
1. Management track record: Fortune’s management has done well in the past. Over a 10-year period, the management has consistently grown the property valuation, gross revenue, NPI, DPU, etc, year after year after year. There is no reason to think that they will not continue to execute well both now and in the future. By the way, I do believe good assets can be mismanaged. So a capable management is paramount in any form of asset management.
2. Impeccable track record in AEIs: All Fortune’s properties that have undergone AEIs have reported impressive ROI. Like most good REITs, Fortune regularly engages in AEI to sustain the long-term growth of its shopping malls and present a sustainable business environment for its tenants. The latest AEI (HKD150 million renovation) at +WOO (new branding image) in the Tin Shui Wai residential area, which now provides enriched offerings of retail, food and beverages, education services, has yielded positive return. Phase 1 has been completed and Phase 2 is currently being planned. Within the immediate vicinity of +WOO, a large-scale residential development of over 1,500 flats at Tin Wing Station is to be completed in 2021. This new and growing catchment will continue to support the business at +WOO. Fortune’s AEIs have unlocked value from and generated growth in its properties, and could definitely help spur further growth in the future.
3. Good sign of crowd returning during Covid-19 lull period: During the lull period of the on-going pandemic in May and June, footfall in Fortune’s malls actually increased.
In May and June social distancing rules were relaxed and the crowd returned: public gathering rule relaxed from 8 people to 50 people; F&B limit rule of 8 per table in May completely removed in June. Hong Kong people, just like Singaporeans, need their malls … love their malls. Fortune’s management has been doing its best by launching the Fortune Mall App and introducing a Fortune+ membership in an attempt to “take the edge off” the retail devastation caused by the COVID‐19 outbreak.
Unfortunately, the flickering embers of the pandemic has been rekindled and now social distancing rules are back … sigh. As of 28 July, public gatherings are now limited to two instead of four. In-restaurant dining, previously permitted until 6pm, is now banned altogether. The pandemic situation is worsening by the day with rates of new infection repeatedly shattering single day record. Blame it on complacency in society; blame it on lack of decisiveness and firmness in the government in securing compliance and cooperation from the whole community. Anyway, let’s hope this third wave will abate soon and life will return to as close to normalcy as possible in Hong Kong.
4. Robust neighbourhood shopping mall portfolio: Suburban malls are more resilient than city malls as they are often frequented by local shoppers who go there for their daily non-discretionary needs.
5. Strong balance sheet and prudent financial management: A strong balance sheet puts Fortune in a great position to grow should an investment opportunity appears in the horizon. Fortune’s financial management has been conservative. It is interesting to note that Fortune holds no perpetual securities (debt instruments commonly treated as equities), so the gearing ratio of 21.6% is pretty much “what you see is what you get”. With the gearing ratio well below the 45% regulatory ceiling, Fortune has ample debt headroom to meet any yield-accretive acquisitions.
Conclusion
I am slowly expanding my investments in China/HK market.
In the short term, the China/HK market will be pretty volatile, and a lot of it will come from the escalating US-China tension, maybe even more so than from the Covid-19 pandemic.
The USA has been doing a lot these days to antagonise China and destabilise it, for example, the passing of the Hong Kong Autonomy Act, the massive sale of weapons to Taiwan, and the military presence in the South China Sea.
There is no coming back to a benign relationship between the two countries, I think (let’s hope I’m wrong … world peace, fellas!). This will really be the new normal. The USA will do its best to prevent the ascent of China just so to secure its own #1 position in the world. It’s quite a scary and unstable world out there, and hence we are seeing the price of gold hitting record high these days.
The HK market itself is still volatile also in part due to the new Security Law and the upcoming Legislative Council Election. Things will become clearer after the first case involving transgression of the new Security Law goes to court. There many be some social unrests in the weeks leading to the September Legislative Council Election, unless the Hong Kong government decides to cancel it and put it off till next year in view of the spread of the virus.
Anyway, I’m investing for the long term, so I should be able to stomach any short-term volatility.
And I almost forgot to answer my own question. Is Fortune REIT still a safe haven? Yes, I think it is … at least for now, it is.
Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.
Paul Samuelson
Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice. I write here to detail my investments, strategies, and analyses. Feel free to read at your own risk. Should you need financial advice, consult a licensed financial advisor.
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