• Strategic Investor undertaking to forgo its entitlement to distributions until 2020
• Forecasted FY15 and FY16 DPU yield of 4% and 4.5% (excluding distribution undertaking) pales in comparison to similar REIT. Wait for better entry price
BHG Retail REIT (BHG REIT) is set to become the lone SGX Mainboard listing this year. With a portfolio of five retail malls in China, BHG REIT will be the second pure China retail REIT listed on SGX, after CapitaLand Retail China Trust (CRCT, BUY, TP $1.90), that offers investors exposure to the Chinese consumer growth story. Initial portfolio properties are strategically located in Tier 1, Tier 2 and other “cities of significant economic potential” in China.
Product Highlights Sheet :
Offering Price :
At an IPO offer price of S$0.80, annualised distribution yield for forecast year 2015 and projection year 2016 will be 5.7% and 6.3%. This is after factoring in strategic investor Beijing Hualian Group’s (30% of enlarged share capital) undertaking to give up its rights to distributions until December 31 2020 in a bid to “demonstrate support for BHG REIT and its commitment to the long-term growth and development of BHG REIT”. Without the Distributions undertaking, annualised distribution yields would drop to 4% and 4.5% for 2015 and forecasted 2016. Post listing date, BHG REIT has an aggregate leverage of 33.5%.
BHG REIT’s sponsor is established PRC home-grown retail property operator, Beijing Hualian Department Store Co. Ltd, who owns 12 and manages another 17 malls across China. BHG REIT has been offered the Right of First Refusal (ROFR) to these 12 sponsorowned properties, which provides a strong acquisition pipeline for the REIT.
However, investors should note that most of these malls are not “stabilized” or ready for injection into BHG REIT until at least 2018. Reasons, as cited in the IPO Prospectus, are that some of these malls are proposed to undergo Asset Enhancement Initiatives (AEIs), tenant re-positioning/remixing, or have yet to commence operations.
Cornerstone Investors and Use of Proceeds
Concurrent with the public and private institutional tranche offering, BHG REIT has entered into subscription agreements with reputed cornerstone Investors who will subscribe to 168.8m Units in total, representing 34.4% of the enlarged share capital.
With a dividend yield of 4% and 4.5% (without the strategic investor’s undertaking to forgo distributions until 2020), BHG REIT’s yield pales in comparison with nearest peer listed on SGX, CRCT, who has an annualised FY15 yield of 7.1% and FY16E yield of 7.4%.
Both REITs are primarily plays on growing Chinese consumption, with strong sponsor backing and ROFR on the sponsor pipeline of properties. Using CRCT’s average yield of c.6.6% (post Global Financial Crisis, 2009-Present) on BHG REIT’s projected 2016 DPU of 3.56cents and 5.08cents (if strategic investor forgoes entitled distributions), we view the fair value for BHG REIT to be around S$0.54 (exclusive of the Distributions Undertaking) and $0.77 (inclusive of the Distributions Undertaking). We do not see any justification for BHG REIT trading at a discounted yield to CRCT, given that the latter has similar strong sponsor backing and ROFR, strong mall operating track record and lower cost of debt.
FY13 and FY14 earnings have been boosted by the commencement of operations of Hefei Mall (Feb 13) and Chengdu Mall (Dec 13). These two malls are slowly stabilizing and are expected to drive DPU growth in FY16 and FY17 (barring any acquisitions). Nonetheless, even with a 10% y/y DPU growth in FY17, DPU yield of 4.5% and 4.95% for FY16 and FY17 offers scant spread over the Singapore 10year government bond yield of c.2.5% and China’s at c.3.1%.
For investors still keen on buying exposure to the growing Chinese consumption story with BHG REIT, we believe the IPO price of S$0.80 is on the high side and advocate waiting out for a better entry price. For a similar exposure, we prefer CRCT (BUY, target price S$1.90). (Read Report)
Read Related Reports
1) BHG Retail REIT - IPO Note by Phillip Securities Research, published on 7 December 2015
2) Idea Of The Day - BHG Retail REIT by Lim & Tan Research, published on 4 December 2015
Source : Phillip Securities Research