The Motley Fool

Is Prosperity REIT Suitable for Income Investors?

Prosperity REIT (SEHK: 808) is a REIT that owns a diverse portfolio of seven high-quality offices, commercial and industrial properties in the business districts of Hong Kong.

The portfolio has a gross rentable area of around 1.28 million square feet and the REIT is managed by ARA Asset Management (Prosperity) Limited, a wholly-owned subsidiary of ARA Asset Management Limited.

I find it useful to observe how a REIT has grown over the years, as this gives an indication as to how proactive the manager is in acquiring properties to boost the REIT’s asset base.

By tracking financial and operating metrics, investors can gain a better idea of the growth characteristics of the REIT, its prospects and what to expect in terms of both distributions per unit (DPU) growth and asset growth.

For Prosperity REIT, I took a look at three aspects – its property portfolio, revenue, and distribution per unit (DPU), to assess how much the REIT has grown over the years and whether it’s suitable for income investors.

Property portfolio

Prosperity REIT made its first major acquisition back in 2014 by acquiring 9 Chong Yip Street. Prior to that, the REIT had seven properties, and the acquisition boosted the REIT’s portfolio size by 11.2% to around 1.35 million square feet. The REIT ended the year with eight properties in total.

Moving on to 2017, the REIT announced the disposal of Harbourfront Landmark Property for HK$885.7 million (US$113.1 million), which was a 49.1% premium to the appraised value of HK$594 million.

The rationale for the disposal was that the property is a non-core asset for the REIT, and the disposal was accretive to the net asset value for the REIT. Prosperity REIT, therefore, ended 2017 and 2018 with seven properties, down from eight in the years 2014-2016.

Revenue

Prosperity REIT’s revenue has not increased significantly over the years, with a total increase of 10.8% from FY 2014 to FY 2018. The compound annual growth rate (CAGR) of revenue was just 2.6% during this period.

There was a spike in revenue from 2014-2015 as 9 Chong Yip Street made a full year’s contribution, but revenue stagnated thereafter. The REIT has undertaken asset enhancement initiatives (AEIs) on three of its properties, but it remains to be seen if revenues can receive a further lift.

Distribution per unit

DPU has also climbed in line with revenue, up 11% over a four-year period with a CAGR of 2.7% per year. The acquisition of a property in 2014 was a great catalyst for a DPU boost, from 16.3 HK cents to 17.68 HK cents, but DPU has since stagnated as the REIT has not undertaken any acquisitions to add on to its revenue base.

At Prosperity REIT’s closing share price of HK$2.82 (as of the time of writing), this translates to a historical dividend yield of around 6.4%.

Foolish conclusion

It can be seen that Prosperity REIT has not grown much over the years, and investors should view it more as a steady yield play rather than a growth one. While some REITs actively pursue acquisitions, this REIT has not managed to acquire any new properties in the last five years.

Prosperity REIT’s high dividend yield does somewhat compensate investors for the lack of growth, so income investors may be interested to own this REIT for the longer term.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Royston Yang doesn’t own shares in any companies mentioned.