PhillipCapital has initiated coverage on BHG Retail REIT in an unrated report dated Feb 8.

The report also had no financial forecasts or target price estimates.

The REIT, which was listed on the Singapore Exchange (SGX) on Dec 11, 2015, has six retail properties located in the Chinese cities of Beijing, Chengdu, Hefei, Xining and Dalian. The six malls are valued at RMB3.71 billion ($761 million) and span 178,538 sqm of net lettable area (NLA).

In her report, PhillipCapital research analyst Vivian Ye highlights the REIT’s stable portfolio and quality assets, its accessibility to China’s economic fundamentals and growth opportunities in terms of mergers and acquisitions (M&A).

As at Sept 30, 2020, the REIT reported a healthy occupancy rate of 91.5%.

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Net property income (NPI) grew at a 5.8% compound annual growth rate (CAGR) from FY2016 to FY2019. Rental renewals in FY2020 were about 80% of pre-Covid-19 levels.

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“BHG REIT has a defensive lease structure. About 95% of its leases are structured on the higher of fixed rents or percentage of gross turnover, allowing BHG to benefit from upside while protected by fixed rents,” note Ye.

The REIT, which is based in China, also has accessibility to tap on the country’s economic fundamentals.

“Over the past decade, disposable income and expenditure per capita of urban residents in China grew at CAGRs of 7.4% and 5.7% respectively. Urban retail sales grew at a CAGR of 6.5% to reach RMB29,424 billion at end-2020,” she says.

“With the Covid-19 pandemic largely under control in China, y-o-y changes in monthly retail sales have turned positive again since September 2020. With China’s GDP forecast to expand 8.2% in 2021, retail sales are expected to sustain their strong growth,” she adds.

See: BHG Retail REIT's 1H DPU slashed by more than half to 0.89 cent due to Covid-19 pandemic

On M&A growth opportunities, the REIT has a ready right of first refusal (ROFR) pipeline of 11 properties in 10 cities.

“Its most recent acquisition of Hefei Changjiangxilu mall for RMB334.0 million has added NLA of 26,828 sqm, and NPI yield of the acquisition is 0.7%.”

“BHG REIT’s gearing was 35.7% as of 30 September 2020, providing comfortable debt headroom for growth via acquisitions before reaching its gearing limit of 45%,” writes Ye.

As at 4.32pm, units in BHG REIT are trading 0.5 cent higher or 0.9% up at 58.5 cents.