Company Background
BHG Retail REIT was listed on the SGX on 11 December 2015. It has six retail properties strategically located in Beijing, Chengdu, Hefei, Xining and Dalian. Its six malls span 178,538 sqm of net lettable area. BHG distributed 100% of its distribution income in FY15, followed by at least 90% p.a. from FY16 onwards.
Highlights
About BHG Retail REIT
BHG Retail REIT was listed on SGX on 11 December 2015 at S$0.80 per unit. It has six retail properties spread out in five cities in China: Beijing, Chengdu, Dalian, Hefei and Xining, four of which are multi-tenanted and two are master-leased.
Sponsor Beijing Hualian Department Store Co. Ltd
Beijing Hualian Department Store Co. Ltd (000882.SZ, Not Rated) is part of the Beijing Hualian Group (Not Listed), which has interests in two publicly listed companies and several holding companies. An established Chinese home-grown retail-property operator, Beijing Hualian Department Store was one of the first companies to manage retail properties in China, with a focus on the ownership and management of community retail properties.
Assets
BHG REIT has six malls valued at RMB3,706mn or S$761mn:
Highlights
Committed occupancy remained healthy at 96.7% in FY19. The latest reported figure is 91.5% on 30 September 2020, still healthy. Lower occupancy rate of 78.4% was recorded at Hefei Mengchenglu due to ongoing tenancy rejuvenation.
NPI grew at a CAGR of 5.8% from FY16 to FY19 (Figure 9). 1HFY20 NPI fell 34.5% YoY mainly due to Covid-19 measures at the start of the year. Its two malls in Hefei were temporarily closed from 7 February 2020 to 10 March 2020 while other malls remained open daily. Revenue from Hefei Changjiangxilu mall started in 1HFY19.
More than 65% of GRI and 80% of NLA are derived from the experiential segment, which typically requires consumers to visit the malls. Experiential offerings include pony and horse-riding training for children (Figure 11), an Amazing Art Space at Beijing Hualian mall and a flea market for children at Chengdu Konggang (Figure 12).
Rental renewals in FY20 were 80%, in line with pre-Covid figures. BHG had also provided rental rebates to certain tenants and all instalments were paid by end-FY20.
Defensive lease structure. About 95% of its leases are structured on the higher of fixed rents or percentage of gross turnover. This allows BHG REIT to benefit from upside while downside is capped by fixed rents. In FY19, more than 90% of its GRI was derived from base rents. Less than 10% was from variable rental income. Furthermore, more than 90% of its leases come with built-in rental escalation, allowing for organic growth.
BHG has been enhancing its assets continuously. It is on the constant lookout for opportunities to enhance its malls. It completed AEI at Hefei Mengchenglu in 2QFY19. Other new introductions included a container-style food lane outside its Chengdu Konggang mall, which has enhanced the mall’s attractiveness and visibility to nearby communities (Figure 14).
2. Tapping China’s economic fundamentals
Disposable income and the expenditure of urban residents in China have been steadily increasing in the past decade, at CAGRs of 7.4% and 5.7% respectively (Figure 15). Urban retail sales grew at a CAGR of 6.5% to reach RMB29,424bn by end-2020.
Figure 15: Steadily growing disposable income and expenditure per capita of urban residents
3.M&A growth opportunities
Sponsor, Beijing Hualian Department Store Co. Ltd, has a pipeline of ROFR properties. Of these, BHG completed its acquisition of the Hefei Changjiangxilu mall in April 2019 for RMB334.0mn. The mall added NLA of 26,826 sqm and accounts for 13.3% of its portfolio valuation.
Under its ROFR agreement, BHG could potentially acquire 11 properties in various cities (Figure 18).
Figure 18: ROFR assets located in various cities
The REIT also continues to explore opportunities among third-party quality income-producing retail properties.
Gearing was 35.7% as of 30 September 2020. Borrowings of S$284.2mn were drawn down in FY19. Debt headroom for acquisitions remains comfortable, with a gearing limit of 45%. More than 80% of borrowings are offshore loans denominated in S$ and US$. About 60% of these offshore loans have been hedged using interest-rate swaps.
Figure 20: No major refinancing until 2022
Risks
Income support coming to an end. Its sponsor had waived its entitlement to dividends since IPO in December 2015. The amount of distributions waived, attributable to strategic investor units has been gradually falling from FY16 to FY20. In FY18 and FY19, total distributions waived amounted to S$5.3mn and S$3.6mn respectively or 25% and 15% of the REIT’s total units. The final distribution waiver was in FY20, during which distributions for 5% of total units were waived. For FY21, the drop in DPU and distribution yield from FY20, that is due to the distribution waiver falling off, would be minimal. Moving forward, on the back of continued economic growth, the REIT is poised for growth.
Comparables
BHG REIT’s FY19 DPU yields with and without distribution waiver were 6.8% and 5.8% respectively.
It is trading at a 4.6% yield vs 5.5-7.7% for comparables like Dasin Retail Trust (DASIN SP, Buy, TP S$0.90), Sasseur REIT (SASSR SP, Not Rated) and CapitaLand China Trust (CLCT SP, Not Rated) (Figure 21)
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Appendix 1: REIT structure
Appendix 2: Overview of cities
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