Fortune REIT is raising funds amounting to approximately $930 million or HK$5 billion through rights issue and debt facilities, conjoining the spate of S-REITs, which rolled out their re-funding plans.
A term loan of HK$480 million and the majority of the gross proceeds, amounting to HK$1.9 billion from rights issue will be used to fund the latest acquisitions of Fortune REIT. The REIT proclaimed yesterday that it plans to acquire from Hong Kong tycoon Li Ka-shing the three suburban retail properties for an amount of HK$2.04 billion.
These three properties are Hampton Loft in Kowloon, Caribbean Bazaar and Metro Town in New Territories, with an average yield of 5.5 percent, as good as the average 5 percent yield of Fortune REIT’s existing assets, and a combined gross rentable area of 318,574 sq ft.
The REIT’s manager of ARA Asset Management in Singapore said that these acquisitions will aid diversify and expand Fortune’s portfolio in Hong Kong, provide opportunities for asset improvement, and expound its resilient suburban retail space exposure.
Chairman Justin Chiu of ARA said in a video conference: “We think that the worst is over. We do hope we could take advantage of this timing to do acquisitions for Fortune Reit”.
They believe that the total assets under the management from 11 retail malls, which costs HK$8.9 billion to HK$11 billion, will greatly increase due to this move.
Mr. Chi added that gains from this divestment are not substantial for Cheung Kong. Mr Li’s Cheung Kong group also affiliated ARA.
Other REITs which have turned to rights issues in the past include Ascendas REIT, CapitaCommercial Trust, CapitaMall Trust and Starhill Global REIT.
Justina Chiu, the chief operating officer of the Hong Kong-based ARA, notes that this is a good opportunity to increase Fortune REIT’s portfolio, given the lack of suburban retail assets that are available for everyone to obtain in Hong Kong. Almost all the shopping centres there are owned by a developer or a REIT. In fact, only 5 percent of shopping centers there are not owned by them.
Financial analysts observed that the low prices of rental rates and retail space in Hong Kong has delivered Fortune REIT with the chance to purchase retail properties at better yields and at lower prices.
However, SIAS Research Vice President Roger Tan said that the positive results from these transactions will not instantly be visible.
“Investors will only gain higher dividend yields from this acquisition when rentals start to recover and that would not happen until the global economy recovers – hopefully in 2010”.
The rights issue and the acquisition’s combined impact is yield-dilutive. For the fiscal year ended 31 December 2008, the proforma distribution yield will decrease from 9 percent to 7.2 percent, according to the circular issued to shareholders.
Yesterday, investors dumped units of Fortune REIT fearing the dilution, which caused its value 10.5 percent down to HK$3.67 at the closedown after it re-started trading during the afternoon.
The properties being purchased are priced at HK$2.07 billion and HK$2.073 billion by independent valuers Professional Services Ltd and Frank Petty and Savills Valuation, respectively.
As of 30 June, the three properties have a total of HK$103.1 million proforma net income for FY2008 and an average of 95.6 percent occupancy rate.