One REIT You Should Watch If You Want To Invest In China

Listed in 2013, Spring REIT is a HKEX-listed REIT which owns and derives income from China Central Place (CCP) Office Tower 1 & 2 located at Beijing CBD and 84 commercial real estate across the United Kingdom. As of 10 May 2019, the REIT is worth HK$ 4.35 billion in market capitalisation. In this article, I’ll bring you an update on its latest financial results and valuation figures.

Thus, here are 7 things to know about Spring REIT:

• CCP
  It consists of Office Tower 1 & 2 and a car park facility measuring a total of 145,372 sq. m. in Gross Floor Area (GFA). As of 31 March 2019, CCP’s occupancy rate stood at 93% with 180+ tenants. These tenants include:
  
  
  

No.	Major Tenants	% of Total Leased Gross Floor Area
1	Epson	5.9%
2	Delsk	4.5%
3	Conde Nast	4.2%
4	Zhong De Securities	4.2%
5	Deutsche Bank	4.2%
CCP’s 5 Major Tenants	23.0%

Source: Spring REIT’s Annual Reports


Overall, CCP has delivered US$ 75 – 80 million in revenue and has made
Around US$ 60 million in net property income (NPI) for the last 5 years.

Source: Spring REIT’s Annual Reports

• 84 Properties in the United Kingdom (U.K.)
  As of 14 July 2017, Spring REIT had completed its acquisition of 84 real estate measuring as much as 500,000 sq. ft. of gross internal area (GIA) for a total consideration of US$ 93.3 million.
  
  The 84 properties are leased separately to a single tenant: Kwik-Fit. The tenant is a leading car services provider in the U.K., which specialises in servicing of tyres, brakes, and exhausts and performance of annual test requirements of vehicle safety required by relevant laws in the U.K. The tenant is owned by ITOCHU Corporation, Japan’s second largest general trading company and a Fortune 500 company.
  
  Except for one lease, the other 83 leases have a remaining lease period of 15 years. The one lease stated has a remaining lease of 7 years. They yield Spring REIT an initial gross rental yield of 6.1% and their leases are to be reviewed every 5 years once based on the higher of:
  
  – The Then Prevailing Market Rate; or
  – The Then Annual Rate
  
  In 2018, the 84 properties have contributed US$ 5.6 million in revenues and US$ 5.4 million in NPI, thus, remained a small contributor to Spring REIT’s financial results.
  
  
  
• Financial Results
  Spring REIT has generated around US$ 80 million in revenue per annum for the last 5 years. However, due to marginal increase in expenses, the REIT has recorded a drop in distributable income, from US$ 38.4 million in 2015 to US$ 31.2 million in 2018. For 2018, it is also noteworthy that Spring REIT had incurred US$ 3.1 million in one-off expense in relations to due diligence for a proposed acquisition that failed to materialise. If I exclude the expense, distributable income would be US$ 34.3 million in 2018. Overall, Spring REIT’s distribution per unit (DPU) has dipped from HK$ 0.266 in 2015 to HK$ 0.192 in 2018.  
  
  
  

Source: Spring REIT’s Annual Reports

• Net Asset Value (NAV) per Unit
  Spring REIT has reported a fall in NAV per unit from HK$ 6.09 in 2014 to HK$ 5.69 in 2018. The REIT’s trophy asset: CCP has maintained its value at US$ 1.3 billion over the past 5 years, despite an increase in valuation from RMB 8.1 billion in 2014 to RMB 9.1 billion. CCP’s valuation did not grow in U.S. Dollar as the U.S.Dollar has appreciated against the RMB in that 5-year period. NAV has fallen as Spring REIT has gradually enlarged its number of units issued for the last 5 years.
  
  
  

Source: Spring REIT’s Annual Reports

• Balance Sheet Strength
  As of 31 December 2018, Spring REIT has total borrowings of US$ 531.3 million and total assets of S$ 1.50 billion. Its gearing ratio is 35.5%. The REIT’s debt facilities are:
  
  

No.	Debt Facility	Amount (US$ Million)	Expiry on
1	USD Term Loan	468.0	April 2020
2	USD Revolving Facility	18.0	April 2020
3	GBP Facility	63.3	January 2022
Spring REIT’s Total Debt Facilities	531.3	n/a

Source: Spring REIT’s Annual Reports

• P/B Ratio
  As of 11 May 2019, Spring REIT is trading at HK$ 3.42 per unit. In 2018, it has reported NAV an unit of HK$ 5.69. Hence, its current P/B Ratio is 0.601, which is marginally above its 5-year P/B Ratio average of 0.560.
  
  
  

• Dividend Yields
  In 2018, Spring REIT has paid out HK$ 0.192 in DPU.
  
  
  
• Based on this figure, its gross dividend yield works out to be 5.61% per annum.
  
  However, if I exclude the US$ 3.1 million in one-off expenses, the REIT’s DPU would be HK$ 0.212. As such, if DPU is based on this figure, Spring REIT’s dividend yield is 6.19% per annum.
  
  Both of these figures: 5.61% and 6.19% are below its 5-year average of 6.99% per annum.
  
  
  

VIA’s Verdict

Overall, Spring REIT has reported a relatively flat / marginal drop in its revenue, distributable income, DPU and NAV per unit for the last 5 years. Hence, its unit price had remained relatively stagnant since its listing in 2013. Evidently, Spring REIT has maintained its market capitalisation at about HK$ 4 billion throughout the 5-year period.

Source: Google Finance

In terms of valuation, its current P/B Ratio is above its 5-year average. Dividend yield is offered at below its 5-year average.

The question is: ‘Would you invest in Spring REIT at HK$ 3.42 per unit?’

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