BHG Retail REIT: What I like about this IPO, and some of my concerns

BHG Retail REIT ("BHG" or the "REIT") is offering 151.169m units at S$0.80 per unit. The placement tranche comprises 143.169m units with the retail tranche making up the balance of 8m units. The gross proceeds raised will be around S$394.2m.

Based on the IPO price, the market cap is ~$597.2m. The IPO will close on Dec 7 and start trading on Dec 11.

There is an over-allotment option of up to 24.636m units. This over-allotment option will be a strong indicator if there is demand for the IPO.

What I like about BHG

» China will be the biggest consumer market by 2018 and with rising income and middle class, consumer expenditure will drive the China economy. The relaxing of the one child policy is also positive for this sector

» Experienced management team

» Strong sponsor in BHG. They have 12 other malls which they own and another 26 managed by the Group

» Some decent cornerstone investors such as China Life, China Hi-Tech Holding Company, China Merchant Banks

» BHG didn't max out the valuation and mark it up and based on existing valuation, there is modest leverage around 34% with more headroom if required for acquisition

» Strong pipeline with 12 properties identified under ROFR which will triple BHG's size



Some of my concerns

» Competitive landscape – In my limited understanding, while each property is unique and location dependent, the landscape for retail is pretty competitive

» Changing consumer habits. With investors making purchases online via smartphones, a physical store may become obsolete over time and we can see that happening in China with rising online sales

» Financial engineering in increasing the distribution yields. Without the financial engineering, the yield for FY2016 would drop from 6.3% to 4.5%! Yucks.

» The manager has elected to receive the fees in units, which would further dilute the yield from FY2017 onwards.

» While BHG group and its affiliates will continue to own about ~31.5% of BHG REIT, the alignment is not as strong



Potential conflict of interest with other sponsor properties

» The properties have less than 32 years of lease tenure balance