Should You Invest In BHG Retail REIT?

BHG Retail REIT (BHG) is a SGX-listed REIT that invests and derives income from a portfolio of five retail properties in Mainland China. Presently, BHG is worth a total of S$ 343.18 million in market capitalisation. In this article, I’ll cover on its portfolio, latest financial results, and valuation figures. Thus, here are 12 things that you need to know about BHG before you invest. 

• Property 1: Beijing Wanliu (60%-Owned)
  It is an upmarket mall situated in the Haidian district in Beijing, which is also close to prestigious universities namely Peking University, Tsinghua University, and RenMin University, and Summer Place anda Wanliu Golf Club. As of 30 June 2016, it has reported 96% occupancy rate, thus, has sustained well above 95% occupancy rate since its IPO listing in 2015. It is worth S$ 474.4 million and had achieved an increase in revenues and net property income over the last three years.
  
  
  

Source: BHG’s Annual Reports

• Property 2: Chengdu Konggang
  It is an upmarket mall in Chengdu valued at S$ 126.8 million. The retail mall has an occupancy rate of 97% and achieved a marginal increase in both revenues and net property income for the last three years.
  
  
  

Source: BHG’s Annual Reports 

• Property 3: Hefei Mengchenglu Mall
  It is one of the most popular retail malls in Hefei City, which is worth S$ 119.8 million. Presently, it has attained a 98.8% occupancy rate and has sustained its revenue and net property income at S$ 9.0-9.5 million and S$ 5.5-6.0 million per annum since its listing in 2015.
  
  
  

Source: BHG’s Annual Reports

• Property 4: Xining Huayuan Mall
  It is a four-storey retail hub which is leased to its Master Lessee, Beijing Hualian Hypermarket. The property is valued at S$ 55.4 million and has contributed approximately S$ 3.0 million in net property income a year for the last three years.
  
  
  

Source: BHG’s Annual Reports

• Property 5: Dalian Jinsanjiao
  Leased to its Master Lessee, Beijing Hualian Hypermarket, the property is worth S$ 32.1 million and has contributed S$ 2.0-2.1 million a year in net property income for the last three years.
  
  
  

Source: BHG’s Annual Reports

• Group Financial Results
  Over the last three years, BHG had achieved growth in its revenues and net property income. Revenues had grown from S$ 62.6 million in 2016 to S$ 69.7 million in 2018. As such, net property income increased from S$ 40.3 million in 2016 to S$ 45.6 million in 2018.
  
  Its distributable income has dipped marginally in 2018 despite increase in revenues and net property income during the year. This is because it had incurred higher income tax expenses in 2018, which had effectively cancelled out the growth in revenues and net property income.
  
  
  

Source: BHG’s Annual Reports

• Quarterly Financial Results
  BHG has recorded a fall in distributable income over the last 12 months or last four quarters. This is due to an increase in both finance cost and income tax expenses during the period.
  
  

Figures in S$ Million unless stated otherwise 

Period	Revenue	Net Property Income	FinanceCost	Income Tax Expense	Income Available for Distribution	DPU(Cents)
Q3 2018	17,304	10,902	(2,359)	(1,260)	5,109	1.33
Q4 2018	17,198	11,129	(2,463)	(8,745)	4,193	1.09
Q1 2019	17,874	11,822	(3,051)	(2,015)	4,762	1.10
Q2 2019	20,202	13,396	(4,018)	(10,369)	4,260	0.98
Total	72,578	47,249	(11,891)	(22,389)	18,325	4.50

Source: BHG’s Quarterly Reports

Overall, it had declared and paid out 4.50 cents in distribution per unit (DPU) for the last 12 months.

• Balance Sheet Strength
  As of 30 June 2019, BHG has total borrowings of S$ 294.0 million. Thus, its gearing ratio is 30.0% based on its total assets of S$ 978.9 million. It has an average cost of debt of 4.4% per year, where 80% of its debt are denominated in SGD and USD.
  
  
  
• Growth Prospect 1: Changjiangxilu Mall (CJX) 
  On 2 April 2019, BHG has completed its acquisition of CJX for around S$ 69.7 million. Located in Hefei City, it is a five-storey retail mall where its occupancy rate is 99.4% presently with main tenants namely, KFC, Pizza Hut, Watsons, Golden Harvest Cinema and BHG Supermarket. Thus, the inclusion of CJX has raised BHG’s the value of its portfolio to as much as S$ 899.9 million in Q2 2019, from S$ 830.8 million in Q1 2019.
  
  
  
• Growth Prospect 2: Rights of First Refusal (ROFR) Properties
  Presently, BHG has 11 remaining ROFR Properties in its pipelines, which could be included into its portfolio in future years. They include:
  
  Sponsor: Beijing Hualian Department Store Co. Ltd
  
  
  

No.	Properties	Location	Gross Floor Area (Sq. M.)
1	Changying Mall	Beijing	115,000
2	Gangtiedajie Mall	Baotou, Inner Mongolia	102,476
3	Yinchuan Mall	Yinchuan, Ningxia	94,131
4	Libao Mall	Beijing	91,455
5	Huhhot Mall	Huhhot, Inner Mongolia	88,000
6	Tongchengjie Mall	Beijing	60,635
7	Shenyang Wulihe Mall	Shenyang	50,561
8	Guanganmen Mall	Beijing	25,340
9	Jinzhai Mall	Hefei	20,280
10	Zhonghualu Mall	Wuhan	14,575
11	Zijin Mall	Nanjing	12,646
Total	675,099

Source: BHG IPO Documents

If BHG acquires all of the properties stated above, it would increase its portfolio from five properties sizing 310,472 sq. m. in Gross Floor Area (GFA) presently to having sixteen properties sizing 985,571 sq. m.

• Valuation 1: P/B Ratio
  As of 18 September 2019, BHG is trading at S$ 0.68 per unit. Hence, its current P/B Ratio is 0.81 based on its net asset value of S$ 0.84 an unit, which is below with its 3-year average of 0.85.
  
  
  
• Valuation 2: Distribution Yield
  From above, it declared 4.50 cents in DPU for the last 12 months. Thus, its distribution yield is 6.62% per annum, the lowest in three years. 

VIA’s Verdict

BHG has delivered relatively stable financial results for the last three years until the last 3-4 quarters when it incurred higher financial cost (more borrowings to finance its acquisition of CJX) and income tax expenses. Thus, it caused a dip in its DPU and current distribution yields. 

The question is: ‘Should you invest in BHG at S$ 0.68 per unit today?’ 

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