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Does BHG Retail REIT Have The Financial Muscle For Acquisitions?

BHG Retail REIT (SGX: BMGU), or BHG for short, is one of the few pure-play China retail REITs listed in Singapore. It has a property portfolio which consists of five retail properties located in five cities across China. In an earlier article, I analysed the robustness of the REIT’s property portfolio. In this article, I will take a look at the trust’s debt profile to see if it has the financial muscle to make acquisitions in the future.

Gearing ratio

The gearing ratio is the trust’s borrowings in comparison with the total value of its assets.

As of 31 December 2017, BHG had a gearing ratio of 32.2%. This is well within the 45% gearing ratio limit set by the Monetary Authority of Singapore. This is also lower than the average REIT gearing ratio in Singapore of 35.2%. As a closer point of comparison, the gearing ratio for BHG is lower than similar retail trusts, such as CapitaLand Mall Trust (SGX: C38U) and CapitaLand Retail China Trust (SGX: AU8U), which have a gearing of 34.8% and 32.5% respectively.

The relatively low gearing ratio gives the REIT headroom to increase its debt load for future acquisitions.

Interest coverage ratio

The interest coverage ratio is calculated by dividing the net property income by the interest expense. It can tell us whether the trust is earning sufficient rental income to cover its interest expense and whether it has the earning capacity to further increase its debt load.

To calculate the interest coverage ratio, I will use the financial filings from the fourth quarter of 2017. For that quarter, the borrowing cost was $2.4 million. Net property income stood at $11.1 million. BHG, therefore, had an interest coverage of 4.63. As a rule of thumb, I consider an interest coverage ratio above five to be safe. By that metric, BHG falls short but is still within a manageable range.

Cost of debt

The average cost of debt is the amount of interest the trust pays per annum on its loans and borrowings. As of 31 December 2017, BHG Retail REIT had an average cost of debt of 3.7%.

This is a reasonable level in comparison with similar REITs in China and suggests that the REIT can finance its loans at competitive rates.

The Foolish bottom line

Overall, BHG’s debt profile looks well managed, with a headroom to increase its debt load further for growth. However, besides the company’s debt management profile, there are other aspects of the REIT’s business that investors should monitor such as the strength of its management, ability to grow organically, among others. Only then, can investors make a holistic investment decision.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on CapitaLand Retail China Trust. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.