5 Things You Have To Know About BHG Retail REIT’s Upcoming IPO

Credit: Simon Cunningham

Investors in Singapore do not really have much choice in the stock market when it comes to real estate investment trusts (REITs) that focus predominantly on retail malls in China as CapitaLand Retail China Trust (SGX: AU8U) is the only one that fits the mold.

But, things might change soon. BHG Retail REIT, which will own shopping malls in China, has filed its preliminary IPO (initial public offering) prospectus with the Monetary Authority of Singapore yesterday.

Here are five important things you should know about the REIT’s potential upcoming listing.

1. The nitty-gritty

BHG Retail REIT has the intention to issue a total of 150.13 million units of itself (assuming the over-allotment option is not exercised) at a price of S$0.80 each to the public as well as to institutional investors.

For context, the REIT will have a total unit count of 492.725 million upon listing, thus giving it a market capitalisation of S$394.2 million (based on its offering price and total unit count).

A REIT’s sponsor and manager can play important roles in its future. The former can be a source of future real estate acquisition opportunities while the latter’s in charge of managing the REIT’s existing properties and future deals.

In BHG Retail REIT’s case, its sponsor and manager is the China-listed Beijing Hualian Department Store Co., Ltd. The company was established in May 1988 as a department store / retail mall business, but it has become a pure-play retail property outfit since early 2008. The company seems to have a mixed track record since its transformation, with its book value per share rising from RMB 1.78 in 2008 to RMB 3.33 in 2010, only to then fall to RMB 2.94 in the third-quarter of 2015.

It’s worth noting that Beijing Hualian Department Store is a part of the Beijing Hualian Group; the latter owns nearly 30% of the former. Beijing Hualian Group, which will be a Strategic Investor in BHG Retail REIT and own 30% of it, was established in 1993 and is currently “one of the top 10 largest retail operators in China by operational area.”

Timelines stated in the preliminary prospectus are subject to change, but BHG Retail REIT is currently slated for trading on 11 December 2015. The public offer for the REIT’s units will open on 2 December and close on 7 December.

2. Key business highlights

BHG Retail REIT’s portfolio at listing will consist of five retail malls that are located in “Tier 1, Tier 2 and other cities of significant economic potential in China.” These properties have a collective gross floor area and value (as of 30 June 2015) of 263,688 square metres and S$605.9 million, respectively.

Mall Location
Beijing Wanliu Mall Haidian District, downtown Beijing
Hefei Mengchenglu Mall North First Ring retail hub
Chengdu Konggang Mall Chengdu, Sichuan Province
Dalian Jinsanjiao Property Dalian
Xining Huayuan Mall Xining’s Ximen-Dashizi retail hub

Source: BHG Retail REIT’s preliminary prospectus

The REIT believes that China’s growing economy and the shift in reliance toward domestic consumption for growth can be strong tailwinds for it. Meanwhile, the prospectus also states rising urbanisation in China (the urban population in the giant Asian nation had jumped from 606.3 million in 2007 to 749.2 million in 2014) as another trend which can potentially benefit BHG Retail REIT.

Interestingly, the REIT believes that it has the ability to fend off the rising tide of e-commerce. To this point:

“The Sponsor’s malls are positioned as community-oriented retail properties which serve densely populated catchment areas in their vicinity… Through targeting and catering to this captive group of customers with a tenant mix which focuses on daily necessities and experiential consumption, the Manager believes that the properties in the IPO Portfolio are insulated from the increase in electronic commerce [emphasis mine].”

There have been recent reports of Chinese malls suffering under the onslaught of e-commerce (see here as an example), so it’d be worth keeping an eye on how BHG Retail REIT’s malls eventually performs.

3. Manager fees

Investing maestro Charlie Munger once said the following to drive home the importance of incentives when it comes to influencing human behaviour:

“Well I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.”

BHG Retail Trust seems to have incentives which can possibly help align the interests of its manager with that of its unitholders.

The REIT manager’s base fee each year is pegged at 10% of the REIT’s distributable income in that year. Meanwhile, the manager can also receive performance fees each year that amounts to “25% of the difference in DPU [distribution per unit] of BHG Retail REIT in a financial year with the DPU in the preceding financial year… multiplied by the weighted average number of Units in issue for such financial year.”

Here’s a hypothetical example of how BHG Retail Trust’s performance fee is calculated:

  • Assume that BHG Retail Trust has (1) a distribution per unit of S$0.05 in 2017 and S$0.04 in 2016; and (2) a weighted average unit count of 500 million in 2017.
  • The REIT’s hypothetical performance fee in 2017 would thus be: 0.25 x (S$0.05 – S$0.04) x 500 million = S$1.25 million.

4. Distributions

Distributions are an important thing to consider with REITs as alluded to earlier. In BHG Retail REIT’s case, here are what its forecasted distributions look like:

Period Yield based on list price of S$0.80 (DPU)
Last 2 months of 2015 Annualised yield of 5.7% (0.76 cents)
Year ended 31 December 2016 6.3% (5.08 cents)

Source: BHG Retail REIT’s preliminary prospectus

For context, CapitaLand Retail China Trust is yielding 6.9% at its current price of S$1.415 thanks to its annual distribution of 9.82 cents per unit in 2014.

It’s worth noting that BHG Retail REIT’s yields for 2015 and 2016 will fall to just 4% and 4.5%, respectively, if its Strategic Investor (Beijing Hualian Group) had not agreed to forgo its share of distributions for a number of years. Here’s the schedule for Beijing Hualian Group’s collection of distributions:

Period Number of units on which the Strategic Investor will collect distributions
Listing to 31 December 2016 492,800
Year ended 2017 12.8 million
Year ended 2018 25.1 million
Year ended 2019 74.4 million
Year ended 2020 123.7 million

Source: BHG Retail REIT’s preliminary prospectus

It won’t be until 2021 when Beijing Hualian Group will get to receive distributions from its full stake in BHG Retail Trust. This arrangement, like the income support method used by other REITs such as OUE Commercial Real Estate Investment Trust (SGX: TS0U), is something investors have to watch as it is a way for a REIT to artificially boost its distributions.

5. Future growth prospects

Beijing Hualian Department Store, BHG Retail REIT’s sponsor, has set up a list of 12 retail malls in China which could “potentially be offered to BHG Retail REIT as future pipeline assets.” The REIT will have right of first refusal (in our context, this is essentially the right for the REIT to strike up a deal with Beijing Hualian Department Store before anyone else can) on the aforementioned properties.

The 12 properties have a total gross floor area of 722,514 square metres, which is significantly higher than the area for BHG Retail REIT’s portfolio at listing.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.