Bonyan REIT eyes landmark assets, attractive returns

The asset management team of Bonyan REIT told Argaam that the fund, which is offering part of its assets in IPO until May 3, seeks to offer an optimal mix of quality investment, asset diversification and growth.

The Shariah-compliant fund has a total size of SAR 1.62 billion, and is offering 40 percent of its assets to the public.

Argaam posed the following questions to the team at the helm:

Q: What are the unique selling propositions (USPs) of Bonyan REIT vis-à-vis peers?

A: The Bonyan REIT is built on three pillars: quality, asset mix and capital structure.

Quality for us is not just looking at the current yield, current price and location. What we are trying to identify assets that have sustainability and competitive advantages, and offer growth.

This is precisely why the core of the portfolio is built on strong brands such as Al-Rashid Malls and City Walk Dubai as their brand equity significantly enhances the sustainability and attractiveness of the underlying portfolio.

The other differentiating feature is its asset mix. Our concentration is on areas that we believe are the most attractive over the long term – geographically, that would be the secondary cities of Saudi Arabia which have specific triggers that are highly supportive under the transformation plan -- be it the expansion of religious tourism (Medina), expansion of general tourism (Abha), or expansion of economic and industrial base cities (Jazan). In terms of sector concentration, we have focused primarily on retail and hospitality.

The capital structure has been designed to achieve an efficient equity base (equity capital of SAR 1.62 billion with assets of SAR 1.8 billion and no leverage) that provides highly attractive returns forecast to be on average 7.8 percent over a four-year period.

Besides, the fund provides investors with protection against underperformance of the newer assets. The fund will pay only 60 percent of the purchase price of the assets with the remaining balance payable up to 18 months after the assets have reached optimal occupancy.

Finally, the asset mix is designed to allow for active asset rotation whereby a portion of the initial portfolio has been targeted to deliver capital gains over the medium term.

Q: Can you give us more details about the fund's investment strategy?

A: Bonyan REIT will aggressively acquire new assets domestically and internationally, with the use of leverage and active asset rotation. We intend to take advantage of special situations -- whether in distressed assets or the opportunity to lock in capital gains on a certain part of the portfolio.

We already are in talks with financial institutions over setting up facilities. Our internal target is to expand the asset base to close to SAR 2.5 billion over 18-24 months.

Q: Investing in branded properties and assets -- how does it add value in your respective markets and sectors?

A: Like with all investments, an investor needs to assess both the qualitative and quantitative factors of the investment under consideration.

As part of the assessment of qualitative factors, we put a lot of emphasis on the quality of the brand the real estate asset is associated with, as that provides long-term sustainability.

An integral part of this is the people behind the brand, i.e. the management -- possibly the most important factor.

Brands such as Al-Rashid Malls and City Walk Dubai are specifically attractive, as they command impressive loyalty, a reputation of dependability, and ensure comfort to investors who are investing for the medium and long term.

Q: The fund forecasts an average net return of 7.8 for the next four years. Are you confident you can comfortably achieve such returns?

A: These forecasts have been conducted by an independent consultant and we believe they are quite conservative. We are confident we can achieve them comfortably.

Nearly 70 percent of Bonyan REIT's income and majority of anticipated income growth are coming from retail assets (malls).

For Al-Rashid Malls in Medina, Jazan and Abha, the average occupancy over 2018-2021 is kept at 95 percent -- thereby making these malls among the most visited in their cities, with a combined foot traffic of around 85,000 visitors per day.

Now the occupancy at Al-Rashid Mall Jazan and Medina Mall is north of 99 percent. Likewise, the annual rent is assumed to be incremented by two percent.

Revenue growth at Al-Rashid Mall (Medina) and Al-Rashid Mall (Jazan) stood at 26 and 19 percent respectively between 2014 and 2017.

As for our hospitality assets, the expected occupancy assumption is also set below what we experienced in the past. Average assumptions for our three hospitality assets over 2018-2021 is expected at 61 percent.

Lastly, the leasing activity at City Walk 2B Dubai has been successful with 66 out of 69 apartments, were leased out. We bought this property when the Dubai market was at its bottom.

The overall Dubai economy is showing early signs of recovery (tourist arrivals up 6.2 percent; preparations of Expo 2020 are in full swing). Hence, we expect apartment prices to increase in Downtown Dubai and adjoining areas, and we will use the opportunity to sell off some assets for capital gains.