REITs with Chinese assets (Chinese S-REITs) listed in Singapore have attracted a lot of attention with their recent announcements, but unfortunately, not the right kind. Instead of buying interest, Chinese S-REITs have experienced selling, and are trading at significant discounts to their net asset values (NAVs) and at relatively higher yields than their Singapore peers. Yet, in general, the Chinese S-REITs’ distribution per unit (DPU) has either risen or stayed resilient.
REITs EC World REIT (ECW REIT), Sasseur REIT, BHG Retail REIT as well as business trust Dasin Retail Trust have one thing in common, in addition to owning assets in China. Slide 17 of Sasseur REIT’s results presentation, held on Feb 18, illustrates the problem. Sasseur REIT has three tranches of loans, the equivalent of $278 million onshore loan, and two offshore loans of $214 million and US$20 million. All three tranches mature in March 2023. Similarly, most of ECW REIT’s debt matures at more or less the same time. All of BHG Retail REIT’s debt matured on March 18.
During its results briefing, Cecilia Tan, CEO of Sasseur REIT’s manager, says: “Refinancing is well underway.” The ideal outcome would be a refinancing, and an acquisition, most probably, the sponsor’s outlet mall in Xi’an, which she says “is quite stabilised and growing. There is a good possibility of doing accretive deals at the right price and with the capital market at the right [level]”.
Tan adds: “Accretion is a function of valuation, income from the asset versus the capital structure.”
Generally, REITs use either 50% debt and 50% equity, or 60% debt and 40% equity depending on whether the arithmetic makes the deal accretive. There is a gearing ceiling of 50% subject to the interest coverage ratio being at a minimum of 2.5 times.
Tan says although the People’s Bank of China has lowered policy rates, offshore loans continue to cost less than onshore loans. Hence when renewing the maturing loans, Sasseur REIT is likely to maintain its pre-2023 ratio or increase the portion of offshore loans.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
Debt expiries need to be staggered
CapitaLand China Trust’s (CLCT) capital management model is a case in point — where debt maturities are staggered. This year, CLCT needs to refinance 10% of its total debt. “Our debt maturities are well-staggered facilities we are looking at in advanced stages of refinancing as they come due in 2022,” says Tan Tze Wooi, CEO of CLCT’s manager.
CLCT is the only Chinese S-REIT with well-staggered debt expiries (see Table 1). CLCT is also the only Chinese S-REIT with different sources of capital, including equity, perpetual securities, medium-term notes and bank loans. Futhemore, CLCT has fixed interest rates for around 77% of its debt.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
Tan’s early efforts at refinancing Sasseur REIT’s loans well ahead of their maturities do not appear to be the norm with Chinese based S-REITs.
In its 1HFY2021 financial statement for the six months to June 30, 2021, ECW REIT had already reported that all its loans and borrowings were classified as current liabilities. This implies that the loans would mature by June 30, 2022. Altogether, ECW REIT has $708.3 million maturing between now and end-June.
In November last year, a spokeswoman for ECW REIT’s manager had said that the manager expects the loans to be refinanced before their due date. In a statement on April 7, ECW REIT’s manager reiterated that it is in the final stages of refinancing the loans.
On April 8, ECW REIT was sold down. Analysts attributed this to queries by Singapore Exchange (SGX) and the auditor’s report. “ECW REIT announced that independent auditors’ report in the 2021 annual report included an emphasis of matter relating to … the going concern of ECW REIT given that the current liabilities of ECW REIT exceed its current assets, and … [concerns on] the ability of ECW REIT and its subsidiaries to refinance their existing borrowings before they become due for repayment,” DBS Research explains.
A similar emphasis of the matter was issued on March 29, 2019. In June 2019, ECW REIT announced that it had refinanced $424 million of offshore loans comprising a multicurrency term loan of $355 million, a Singapore dollar loan of $225 million and a multicurrency term loan of $47 million, coordinated by DBS Bank and United Overseas Bank. In 2019, the mainland Chinese branches of DBS and UOB also coordinated two onshore loan facilities of RMB1.018 billion and RMB77 million respectively. Both onshore and offshore loans were for a tenure of three years expiring this year, except for RMB77 million ($16.5 million) which has a tenure of 10 years.
In a reply to queries from the SGX, Goh Toh Sim, CEO of ECW REIT’s manager, says that the loans mature in May and July.
The SGX asked whether the REIT “should be suspended pursuant to Listing Rule 1303(3)”. Goh replied: “Given that management is confident that the refinancing exercise will be completed before the term loans become due for repayment, the board is of the opinion that it is not necessary to suspend the trading of ECW REIT’s units at this juncture.”
For more stories about where money flows, click here for Capital Section
Goh added: “The board has been informed by management that the refinancing exercise in respect of all of ECW REIT’s onshore and offshore term loans due in 2022 is in the final stages of negotiation and that management is confident that the refinancing exercise will be successfully completed prior to the maturity dates of the term loans.”
Related party master leases
Separately, ECW REIT’s manager announced that Fu Zhuo Industrial is being expropriated by the local government. The compensation of RMB108.5 million is 92.8% of ECW REIT’s valuation of Fu Zhuo Industrial as at Dec 31, 2021, and 26.8% higher than ECW REIT’s purchase price of RMB85.6 million. In a March 9 announcement, the manager had indicated its intention to disburse the proceeds to unitholders.
One of the reasons that ECW REIT consistently trades at a discount to NAV (which was 93 cents as at Dec 31) could be because of its master lease structure. According to ECW REIT’s annual report, four of the ECW REIT’s eight properties are on master leases with fixed rental escalation. The master leases are to entities related to sponsor Forchn Group. Based on notes to the financial statements, related party transactions accounted for $105.9 million in rental income or 84% of total rental income of $125.2 million.
BHG Retail REIT cuts it fine
All of BHG Retail REIT’s debt matured in March this year. On March 18, BHG Retail REIT’s manager announced it had entered into a facilities agreement for $252 million, subject to Beijing Hualian Group owning at least 30% of the BHG Retail REIT. A facilities agreement is one in which the lender (usually a bank) sets out the terms and conditions (including the conditions precedent) on which it is prepared to make a loan facility available to a borrower. The REIT also finalised an onshore loan of RMB232 million. The facilities mature within three years.
The Chinese S-REIT which appears to have the most challenges is perhaps Dasin Retail Trust. On March 21, Dasin Retail Trust’s manager announced that it had managed to extend the maturity of its loans due on March 19 by three months to give the manager time to explore the proposal in the announcement on March 20. The manager entered into a non-binding memorandum of understanding (MOU) with Wuhu Yuanche Bisheng Investment Center to explore the potential divestment of Shiqi Metro Mall and Xiaolan Metro Mall — which are located in Zhongshan.
Attempting a sale
Wuhu Yuanche Bisheng is a buyout fund with institutional and private investors and will be managed jointly by GSUM Real Estate Fund Management Co, a subsidiary of Sino-Ocean Capital Holding. Sino-Ocean Capital owns 6.3% of Dasin Retail Trust, and 70% of the manager.
The non-binding MOU proposes a put option to be granted by the buyout fund to the manager and it does not restrict the manager from soliciting a higher or better offer from third parties. The net proceeds from the sale will be used to repay Dasin Retail Trust’s existing syndicated loans.
In August 2021, Zhang Zhengcheng, who used to control Dasin Retail Trust’s manager and holds a controlling stake in the trust, divested a 70% stake in the manager to Sino-Ocean Capital. At the same time, Aqua Wealth, which is controlled by Zhang and which holds Zhang’s stake in Dasin Retail Trust, granted a call option of up to one year from July 2021, to Sino-Ocean Capital to acquire either the total units of Dasin Retail Trust owned by Aqua Wealth or 26% of the total units, whichever is lower.
At the time of the divestment, market watchers reckoned that Dasin Retail Trust, with the new owner of the manager, would have been able to refinance its loans with ease. However, that has not happened, and the same $742.2 million tranche gets renewed on a three monthly basis.
Interestingly, although Dasin Retail Trust’s revenue, NPI, distributable income and DPU rose by healthy double digits in FY2021, its interest coverage ratio is less than 2x. In addition, at a yield of 16% and P/NAV of just 0.22x, the trust is trading at distressed levels.
The potential divestment of Shiqi Metro Mall and Xiaolan Metro Mall at valuation would change the perception of Dasin Retail Trust and narrow the discount to NAV.
ECW REIT is also starting to trade at increasingly low valuations although not at Dasin’s distressed level. The refinancing of its loans, and clarity on the master leases and related party rental income would help narrow its P/NAV and compress its yield.
