The resilience of a REIT’s property portfolio will determine how well the REIT performs over the long-term. A portfolio of properties that is well diversified and attractive to tenants will lead to consistent and stable returns for unitholders.
With that in mind, I wish to assess the quality of BHG Retail REIT’s (SGX:BMGU) property portfolio. As a quick primer, BHG Retail REIT, or simply BHG for short, is one of the four China retail REITs in Singapore. Its portfolio consists of five shopping malls located in China. They include three multi-tenanted malls and two master-leased malls.
The first aspect of the portfolio I want to look at is its diversity. BHG’s properties are all retail properties that are located in just one country – China. Because of the geographical concentration, its property income is susceptible to macroeconomic headwinds that may affect the Chinese retail market.
Its portfolio is also fairly small, as compared to other retail REITs like CapitaLand Retail China Trust (SGX: AU8U) and CapitaLand Mall Trust (SGX: C38U), which have 11 and 16 properties respectively. The relatively concentrated portfolio means that BHG is at a higher risk if any single property fails to deliver.
As of 31 December 2017, BHG had a relatively high occupancy rate of 99.7%. This was an improvement from the occupancy rate of 97.6% achieved in 2016. However, investors should be aware that BHG only has a relatively short history as a listed REIT (since 2015). As such, it is perhaps useful to continue monitoring the occupancy rate of the REIT over a longer period of time to get a better reflection of the resilience of its properties.
Portfolio lease expiry profile
Finally, the portfolio lease expiry profile will give us a better picture of the stability of the REIT’s rental income and, consequently, distributions.
Source: BHG Retail REIT 2017 Annual Report
The above chart displays the lease expiry of the trust’s rental contracts. As you can see, there is a large percentage of tenant contracts expiring in 2018. This provides the REIT with the opportunity to increase its property yield through rental reversions. At the same time, there are also longer contracts in place that only expire beyond 2023. These contracts provide the REIT with stable and secure rental income for the longer term.
The Foolish bottom line
There are certainly many positive about BHG’s property portfolio. Its high occupancy rate and well spaced out rental contracts provide an opportunity for positive rental reversions, as well as long-term stability.
However, there are a few downsides that investors need to be aware of. First, the REIT’s portfolio of just five properties in China is very concentrated. Second, BHG only has a short history in the public eye, and the true long-term resilience of the portfolio cannot be accurately reflected over just a three-year history as a public entity. Third, the five properties that the REIT owns have land use terms expiring between 2042 and 2047. This is only less than thirty years away. Therefore, the REIT may have to fork out additional capital when the time comes to renew the land leases.
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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 contributor Jeremy Chia doesn’t own shares in any companies mentioned.