【Broker Report】DBS: Fortune REIT offers an attractive dividend yield and improving fundamentals; maintains 'Buy' rating

DBS published $FORTUNE REIT (00778.HK)$ an updated research report, maintaining'Buy'rating with a target price ofHK$5.26. Below is a summary of the report:

📌 FY2026 interim results slightly beat expectations

$FORTUNE REIT (00778.HK)$ FY2026 interim distributable incomeHK$362 million, which is 2% higher than the bank’s forecast, primarily due to lower-than-expected property operating expenses and financing costs. Interim distribution per fund unit17.5 HK cents。

📌Improved tenant sales support rental stabilization

The recovery in local consumer sentiment in Hong Kong has driven $FORTUNE REIT (00778.HK)$ Sales performance of tenants in its malls has rebounded. Specifically, supermarket tenants maintained solid sales with modest growth, broadly in line with trends in Hong Kong’s retail market. Performance in the food and beverage sector was mixed, while electronics retailers remained generally stable. Demand for home furnishings and personal care products was relatively weak. The negative rental reversion narrowed, driven by a lower proportion of renewing supermarket tenants whose leases were up for renewal and an increase in rental uplift cases. DBS expects that, given tenant rent-to-sales ratios remain in the low double-digit range, rental reversions in fiscal year 2026 will still show a mild decline, gradually stabilizing in fiscal year 2027, supporting a recovery in rental income.

📌 Occupancy rate further improved

As of end-June 2026, $FORTUNE REIT (00778.HK)$ the overall portfolio occupancy rate increased to 96.4% from 95.8% as of 31 December 2025. Specifically,Belvedere Squaresaw its occupancy rate rise by 4 percentage points to 95.7%;+WOO Tuen Munalso saw its occupancy rate climb to 99.4%, following the addition of new F&B tenants.Metro TownandTsing Yi Squareoccupancy rates increased by 0.9 and 1.3 percentage points, respectively, to 99.6% and 97.7%. As forFortune City One、Ma On Shan PlazaandFortune Metropolisthe occupancy rates of key properties remained stable at 96.4%, 98.7%, and 84.6%, respectively. Tenant renewal rates stayed high during the period, reaching82%. There are no significant asset enhancement initiatives planned in the near term.

📌 No refinancing pressure in the near term

Benefiting from the decline in the average Hong Kong Interbank Offered Rate (HIBOR), current financing costs decreased by 6.5% year-on-year to HK$146 million. In the first half of the year, $FORTUNE REIT (00778.HK)$ successfully refinanced a HK$3.8 billion loan at a lower interest margin. With certain interest rate swap contracts expiring in Q2 2026, the interest rate hedging ratio declined from 50% as of end-December 2025 to approximately 46% as of end-June 2026. Additionally, $FORTUNE REIT (00778.HK)$ additional interest rate swap contracts are set to expire in Q4 2026, which is expected to further reduce the hedging ratio. $FORTUNE REIT (00778.HK)$ The hedge ratio will be adjusted according to market conditions, with a target range of 50% to 60%. DBS notes that since approximately 54% of the debt is still priced at floating rates, $FORTUNE REIT (00778.HK)$ distributable income remains relatively sensitive to HIBOR movements.

On the other hand, as of 30 June 2026, the valuation of investment properties increased by 0.4% on a half-year basis toHK$36.7 billion, with net asset value (NAV) per unit remaining atHK$12.21; the loan-to-value ratio remains at26.9%。

📌 Fundamental improvement and attractive yield

DBS points out that $FORTUNE REIT (00778.HK)$ the projected distribution yield for fiscal years 2026 to 2027 ranges from 6.7% to 7.0%, equivalent to a yield spread of 2.1% to 2.3%. As the decline in rental reversion continues to narrow, rental income outlook is gradually stabilizing, which is expected to further support its valuation. The bank believes that $FORTUNE REIT (00778.HK)$ operating prospects will continue to improve, and thus maintains'Buy'Rating andHK$5.26Target price. The target price is calculated based on a Dividend Discount Model (DDM) with a discount rate of 7.1%.

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