BHG Retail REIT has proposed to acquire Badaling Outlets in Beijing for $455m, which will be its first investment in an outlet mall.
What you need to know
Background of the property
Badaling Outlets Malls is located at a strategic location, which is just next to major expressways with well-connected public transport such as buses and the intercity railway. The outlet mall comprises 14 buildings with a net lettable area of 38,797 square meters valued at $544.6m.
Full occupancy but low WALE
Badaling Outlets maintains a 100% occupancy rate with 200 over brands. This will help the REIT to diversify its tenant base as well as reducing the concentration risk from the top tenants. However, the weighted average lease to expire of the asset is rather low at 0.9 years.
The property will be operated by BHG Retail REIT's sponsor under a 10+10 year contract. Based on the agreement, the property will guarantee the REIT a fixed income of Rmb225.1m for the first year, with a built-in annual escalation of 3% as well as a 20% of excess NPI after taking into account the operator fees.
The REIT will finance the deal through a $260m of debt and a private placement of 260m new units at $0.75 per unit. Post-acquisition, this will boost the market capitalisation of the REIT by 72.7% to $606m.
While the shareholdings of the existing shareholders will be diluted, but the acquisition is expected to boost the DPU by 5.9%.
The acquisition will increase the BHG Retail REIT's portfolio to seven properties. The REIT has a strong track record of operating international luxury departmental stores. The acquisition should be favourable to the REIT's performance as it helps the REIT to tap on the rapid growth of the premier retail outlet market in China. The segment is expected to grow by 21.1% annually in the next five years.
Do you know that BHG Retail REIT is currently trading near it historical low yield?