We visited BHG REIT’s highest grossing asset in Beijing – Beijing Wanliu Shopping Mall (60% interest) and the soon-to-be acquired Beijing Badaling Outlets, a luxury fashion outlet destination. We also toured the BHG Group’s SKP Beijing and SKP South which are luxury department stores located in the CBD district and home to high-fashion brands.
BHG Retail REIT (BHG REIT) was listed on the mainboard of the SGX on 11 December 2015 with an investment mandate of owning income-producing real estate used primarily for retail purposes, with an initial focus on China. BHG REIT’s RMB3.6bn portfolio comprises 6 retail assets, 2 of which are master-leased assets, with the other four being multi-tenanted assets – namely Beijing Wanliu, Chengdu Konggang, Hefei Meichenglu and Hefei Changjiangxilu. The portfolio has an occupancy of 98.6% as at September 2019 and a WALE by GRI of 3.4 years.
BHG REIT announced the proposed RMB2.48bn (S$480.1mn) acquisition of Beijing Badaling outlets on 2 December 2019, which will be the first retail outlet asset in their portfolio. The acquisition is pro forma DPU and NAV accretive and will increase pro forma DPU and NAV by 5.8% and 2.4% respectively.
Site Visit Highlights
No stock rating or target price as we do not have coverage on BHG REIT.
Post-acquisition of Beijing Badaling Outlets, the luxury outlet segment will contribute to c.41% of FY20 revenue while the community malls will contribute the remaining c.59%. As such, we identify CapitaLand Retail China Trust (not rated), Dasin Retail Trust (Accumulate) and Sasseur REIT (not rated) as BHG REIT’s comparable peers. BHG REIT’s FY18 DPU yield with and without distribution waiver are 7.2% and 5.5% respectively while its comparables are trading in the range of 6.7% to 7.5% (Figure1).
Distribution waivers were put in place to provide income support for BHGREIT when the REIT was listed and would fall off progressively as the REIT stabilises. FY2020 will be the last year with distribution waivers. 5% of units have distribution waivers in FY2020.
Pro forma FY21 DPU yield post-acquisition of Badaling Outlets will be 7%.
Measures taken in the wake of Wuhan Coronovirus (Updated as of 28 Jan 2020):
(1) Beijing Wanliu, Chengdu Konggang, Hefei Mengchenglu, Hefei Changjiangxilu:
(2) Badaling Outlet
Revised operating hours with effect from 27 Jan 2020: 1100-1800
All tenants are currently operating.
Beijing Wanliu is a community mall located in Beijing’s Haidian district. Home to residents with one of the highest per-capita disposable income in Beijing. Beijing Wanliu boasts 55,069sqm of net lettable area (NLA) and c.300 shops. The higher purchasing power of the surrounding catchment is reflected in the tenant mix of the mall. We see a prevalence of international brands and emphasis on children education and enrichment. We estimate that c.40% of NLA is leased to tenants providing retail and services targeted at children and pre-teens such as enrichment classes, arts and craft, skill and hobby-related workshops. The mall is anchored by BHG supermarket and Golden Harvest Cinema with mini-anchors being H&M and Muji. F&B outlets are mostly located on the highest floors and include a 24-hour Haidilao outlet, as well as a popular local franchise, Green Tea.
Majority of the leases are structured on higher of fixed rent or percentage of gross turnover basis, allowing BHG REIT to benefit from the upside while being protected by a minimum (fixed) rent. 90% of the contributing revenue accrues from the fixed rent. Many of the F&B establishments on the highest floor are contributing to the Gross Turnover (GTO) rent. The same leasing strategy applies to the remaining 3 multi-tenanted malls in BHG REIT’s portfolio.
Beijing Badaling Outlets (Badaling)
The proposed acquisition of Beijing Badaling Outlets for an agreed price of RMB2,482.3mn (S$480.1mn) is at a 16.8% discount to the valuation of RMB2,982.2mn (S$576.8mn) and at a FY18/1H19 NPI yield of 8.7%/8.3%. Badaling will account for c.45% of revenue in the enlarged portfolio. Badaling will be managed under an Entrusted Management Agreement (EMA) for a term of 10 years.
Under the EMA, the Entrusted Manager (EM) of Badaling, Beijing Hualian Fashion Business Consulting Co., will receive a fee for their management services and are responsible for the performance of Badaling. BHG REIT will receive a minimum fixed rent and 20% of revenue generated in excess of the fixed income (if any). The fixed income will be RMB225.1mn in the first operating year and will escalate at 3% p.a. each year. Any shortfall in the fixed income is guaranteed by BHG SKP, the holding company of the Entrusted Manager (EM) of Badaling, Beijing Hualian Fashion Business Consulting Co.
Badaling is located in Changping District, 40km (1hr 10mins drive) from Beijing’s city centre, and has NLA of 38,797sqm. Beijing Badaling is organised into three categories; (A) International Fashion, (B) Young Fashion and (C) Domestic Fashion. The brands represented at Badaling include:
(A) International Fashion: Bally, Bvlgari, Burberry, Celine, Coach, Dolce&Gabanna, Fendi, Givenchy, Gucci, Jimmy Choo, Marc Jacobs, Max Mara, MCM, Moschino, Prada, Saint Laurent, Salvatore Ferragamo, Tod’s, Valentino, Versace
(B) Young Fashion: Adidas, Boy London, Brooks Brothers, Calvin Klein, Converse, Diesel, Evisu, Ed Hardy, Fila, Furla, Gap, Lacoste, Levis, Michael Kors, New Balance, Nike, Puma, Skechers, Superdry, The North Face, Timberland, Tommy Hilfiger, Under Armour, Ugg
(C) Domestic Fashion: Balabala, Clarks, Cottonfield, Dyson, Huawei, JNBY, The Simsons, Teenie Weenie, Villeroy&Boch, Wacoal, Zwilling J.A Henckels
Luxury goods sold at the Badaling outlets have discounts starting from 30% onwards, with selected items entitled discount-on-discount prices. There are complimentary shuttle buses that bring customers from 8 locations to and from the mall. Based on membership tracking, customers who shop at Badaling also shop at SKP Beijing, evidence that there are sufficient breadth and depth in the Beijing luxury market. 80% of sales are from Beijing residents with the remaining 20% of sales contributed from customers from neighbouring cities Hebei and Inner Mongolia.
SKP Beijing and SKP South
The pinnacle of luxury shopping in China – SKP Beijing is second to UK luxury department store Harrods in terms of sales. In the financial year ended February 2019, Harrods recorded sales revenue of £2bn (US$2.6bn) while SKP Beijing raked in RMB13.5bn (US$1.96bn) in the financial year ended December 2018. Each floor has specially curated scent, with art installations throughout the mall.
BHG Group has two stores within the mall, SKP Select and SKP Rendezvous. Their concept store SKP Rendezvous creates a minimalistic-themed mixed-use store, which combines a modern bookstore with an artisanal cheese grocer, wine bar and cellar, modern home décor store and F&B outlet.
Located across the road from SKP Beijing, SKP South is a futuristically themed creative space featuring innovative designs and art installations, newly opened in January 2020. BHG SKP is leading the way in “retailtainment”, emphasizing the experiential and immersive aspect of shopping malls. With Korean brand Gentle Monster as the creative lead, the mall was designed under the narrative of a “Digital-Analog Future”. Artworks and pop-up shops as well as in-shop displays have echoed the same futuristic theme creating an immersive and memorable experience.
As a wholly owned subsidiary of BHG SKP, the EM of Badaling will benefit from the relationships that SKP has built with the luxury brands and well as BHG SKP’s knowledge and expertise in the luxury retail sector. The strength and success of BHG SKP in the luxury scene also means more growth opportunities for BHG SKP that may eventually come to BHG REIT. BHG SKP has plans to open outlets stores in location where they have full-priced luxury department stores. As such, there will be a potential pipeline for luxury outlets for BHG REIT to acquire. The most likely location of the next outlet store would be Xi’an where there is an existing SKP store.