Chinese retail mall owner Beijing Hualian Group (BHG) has launched pre-marketing for an initial public offering that could mark Singapore's first Real Estate Investment Trust (Reit) listing of the year.
DBS is sole sponsor for the IPO, which is being marketed under the name of BHG Retail Reit.
The bank has assigned a fair value of S$331 million to S$402 million ($236 million to $287 million) to the Reit, equating to a 2016 forecast price to book valuation of 0.84 to 1.03 times.
Pre-marketing will continue until November 10, with formal roadshows provisionally scheduled for November 16 to 20 and a target listing date of December 2.
Rising interest rates do not typically provide a conducive environment for Reit deals but BHG is trying to take advantage of a new issuance window that has emerged over the past month.
Equity markets have generally been on a re-bounding trend since the beginning of October and many investors are still very dubious the US Federal Reserve will raise rates over the near-term, notwithstanding the more hawkish tone of its most recent minutes.
This has helped the S-Reit sector claw back just over a third of its year-to-date losses over the past four to five weeks. As of Thursday’s close, the FTSE ST Reit Index was down 7.26% on the year compared to a 10.2% drop in the Straits Times Index over the same period. This means the Reit Index is now averaging a forward yield around the 6% mark.
So far this year, only Canadian financial services group Manulife has come close to getting a Reit listing done. It got as far as the pricing date for an S$569 million ($426 million) IPO in early July before pulling the deal in the face of deteriorating market conditions. The failure was a blow for Singapore, which has relied on a steady flow of Reit-related offerings over the past few years to keep primary volumes afloat.
However, there have been stirrings of life over the past month with an S$69.7 million rights issue by Croesus Retail Trust at the end of September and an S$100 million placement by Cache Logistics Trust earlier this week, which was comfortably oversubscribed and performed well in the aftermarket. The stock closed on Wednesday at S$0.975, above the placement price of S$0.94, which in turn represented a 6.4% discount to Tuesday's close.
"We like the acquisition they're making," a fund manager told FinanceAsia.
Valuation
BHG Retail Reit’s proposed IPO will comprise 65% of BHG’s issued share capital and the sponsor has agreed to waive its entitlement to dividends through to 2020 in an effort to boost the upfront yield. With the boost, the pre-marketed range represents a 2016 forecast dividend yield of 6.3% to 7.6%; without it the range would be 4.4% to 5.3%.
Singapore's four listed retail Reits average a 2016 dividend yield of 5.9%, based on DBS estimates. The bank forecasts 2.7% growth in dividends per unit for 2014 through to 2016.
Greater China Reits currently average a forward yield of 5.5% and forecast dividend per unit growth of 7.6%.
The closest comparable for the BHG Retail Reit’s IPO is CapitaLand Retail China Trust (CRCT), which is yielding 7.1% on a forward basis and forecast dividend per unit growth of 5.7%.
However, there are differences between the two. CRCT is a lot bigger than BHG, with an asset valuation of S$2.5 billion compared to BHG's IPO valuation of S$605.9 million. It is also more highly concentrated in Beijing, which accounts for 51% of its net leasable area (NLA) compared to BHG's 34.9%.
BHG's initial portfolio encompasses five key assets: Beijing Wanliu Mall, Hefei Mengchenglu Mall, Chengdu Konggang Mall, Dalian Jinsanjiao property and Xining Huayuan Mall in Anhui province. The five malls have a gross floor area (GFA) of 263,688.8 square metres and a purchase consideration of S$573.1 million. Their annualised weighted average lease to expiry (WALE) was 9.9 years as of August, while their annualised occupancy rate was 99.4%.
According to DBS research, the top 10 tenants account for 33% of net income, while 58.6% of the malls' net income was derived from food and beverages (23.6%), supermarkets (23.2%) and services (11.8%).
The sponsor is an anchor or master lease tenant in every single one of list co’s properties. The ultimate parent also has two listed vehicles in China: Shenzhen-listed Beijing Hualian Department Store and Shanghai-listed Beijing Hualian Hypermarkets.
Acquisition pipeline
One of the deal’s biggest selling points is its highly visible acquisition pipeline, which could potentially triple the size of the listed vehicle's portfolio.
This pipeline comprises 11 malls with a GFA of 620,038 square metres. The majority of the potential asset injections are located in Beijing but are also sited in Yinchuan (Ningxia province), Wuhan, Hefei, Nanjing, Huhot (Inner Mongolia) and Shenyang (Shandong province).
Overall, BHG owns or manages 45 malls in China. It has joint ventures with British retail operators Costa Coffee and Clarks Shoes.
However, fund managers say one key question will be how the Reit intends to fund future acquisitions given the uncertain interest rate environment and the impact that may have on future equity capital raising. Given the Reit’s current gearing of 33% there is room for more debt but its small overall size means that it would need to raise a combination of equity and debt to achieve greater scale.
In addition to the potential for asset injections, DBS forecasts the portfolio’s net property income will grow by a compound annual growth rate of 13.4% from 2014 to 2016 because the Hefei and Chengdu malls are going through their first reversion cycle.
It also predicts distribution income to increase by 11% from 2015 to 2016, another key selling point given that analysts currently favour the sustainable dividend growth offered by Reits.
Based on its pre-marketed range, BHG Retail Reit offers a 378bp to 508bp pick-up to Singapore government bonds, which were yielding 2.52% on November 4. Like US Treasuries, Singapore government bonds were on a rising trend until August and have been declining since.
However, whereas the US Federal Reserve is hinting at rate rises, Singapore is still on an easing cycle. It only just escaped a recession after its economic growth dipped to 0.1% during the third quarter. Analysts expect the Singapore dollar to weaken against the US dollar until the end of the year, a factor that could weigh on the minds of international investors considering the deal.
