SINGAPORE (June 10): Anthony Ang, CEO of Sasseur Real Estate Investment Trust’s manager, and Harold Woo, senior adviser to Sasseur REIT’s manager, are old hands at retail property, REITs and China. Sasseur REIT owns four outlet malls in China’s secondary cities — Chongqing, Bishan, Hefei and Kunming — valued at more than $1 billion.
Ang and Woo have done a good job explaining the REIT’s complex leasing strategy in simple terms. Since Woo joined -earlier this year, Sasseur REIT has received analyst coverage. DBS Group Research and Maybank-Kim Eng initiated coverage in February, while UOB Kay Hian issued an unrated report. The coverage helped trigger a price recovery from a low of 64 cents in January, prior to Woo’s commencement at the REIT’s manager. Sasseur REIT is also being increasingly noticed by financial bloggers.
Even then, since Sasseur REIT’s IPO in March 2018 at 80 cents, its unit price has been unable to breach that level. However, distributions per unit (DPUs) have exceeded forecasts. When REITs list, they are required to provide two years of forecast, and Sasseur REIT has outperformed on that score.
For 4QFY2018, Sasseur REIT reported DPU of 1.999 cents, or 28% above forecast, and for FY2018, DPU of 5.128 cents was 12.6% above forecast. In 1QFY2019, DPU of 1.656 cents was 9.3% above forecast. Although DPU in 1QFY2019 was lower than that in 4QFY2019, it was still higher than forecast.
How does Sasseur REIT get its DPU? Unlike retail REITs such as CapitaLand Mall Trust, Frasers Centrepoint Trust and Fortune REIT — which Ang once managed — Sasseur REIT depends on tenant sales, or gross turnover (GTO) rent, for its net property income. The leases of CMT, FCT and Fortune REIT have a portion of GTO rent, but this is limited to single digits — usually 5% to 7% of gross rental income. REITs need stabilised NPIs so that DPUs can be predictable. Sasseur REIT’s rental income comprises 100% of GTO rent.
Sales at outlet malls growing faster than e-commerce sales
Two features set Sasseur REIT apart from traditional retail REITs. Ang says outlet malls are doing very well in China and growing at a faster clip than e-commerce sales. “Our growth strategy is to rely on [tenant] sales growth because we’re in an industry that is growing very fast. It’s a sunrise industry. This works perfectly,” Ang says. “The outlet business is the fastest-growing retail sector in China, at 25% per annum; e-commerce sales are [growing at] less than 20% per annum.”
What about the US-China trade war? Won’t it hurt consumer confidence? “The trade war hasn’t affected us,” Ang says. Why? “Outlet malls are driven by middle-class consumption in China. [These people] are aspirational buyers and China is still growing by 6.4% a year, fuelled by domestic consumption of the middle class,” Ang notes.
According to Sasseur REIT’s 1QFY2019 presentation, it has 948,800 VIP members — shoppers who spend a minimum amount at the outlet malls. This membership forms part of Sasseur REIT’s “A x (1+N) + DT” formula.
“A” stands for art into commerce, according to Ang. “In China, the outlet mall business is barely 12 years old, and the model is entirely different,” he says. For instance, Sasseur REIT believes in making outlet malls an attractive place for people to go to — one of the malls is designed like an Italian castle.
The “1+N” part is the strategy of the basic outlet business, where N refers to lifestyle. Outlet malls are popular because of the rising consumption patterns of the middle class, and Sasseur REIT’s outlet malls have additional attractions for the entire family.
Ang’s strategy is for the outlet malls to provide value-for-money bargains. As with other malls, women are the main spenders. Tenants are arranged such that international brands are usually on the first level and local Chinese brands — which comprise around 70% of the brands — are on the other levels. The malls offer products that are of good quality and from good brands.
The “DT” of the equation stands for data technology — the management mines the data of its VIP members and lets them know about discounts and special offers.
Lease structure
Retail REITs face two challenges: e-commerce and the need to keep increasing rents to satisfy analysts about the outlook for positive rental reversions. Tenants, meanwhile, naturally do not want rents to increase.
“Sasseur REIT can solve this problem because its business is not affected by e-commerce. And, in terms of alignment of interests, the interests of the operating manager, sponsor and tenant are aligned,” Ang claims.
“It’s a sales-based lease. We collect a commission based on sales. So, if the retailer sells $100 of goods, we take $10. The operator’s interest is 100% aligned with the tenant’s, which is unlike traditional models, and this solves the pain point of the business model,” Ang explains.
However, to list in Singapore as a REIT, income stability is required by the Singapore Exchange. “For the REIT, the income collected from the property was variable. And SGX pointed out that this was not stable. We had to do either a master lease or a hybrid,” Ang elaborates.
Instead, Sasseur REIT introduced the entrusted management agreement for 10 years. The REIT’s income, that is, 70% EMA rental income in the first year, is fixed to satisfy regulators, and this would give a yield of 7.5% on 80 cents. This fixed portion has a step-up of 3% for the next nine years. The remaining 30% of the EMA rental income is variable, pegged to 4% to 5.5% of gross sales for individual malls.
“In year three, the variable portion should grow to more than 30% as gross sales increase as the newer malls become more mature. Overall, EMA rental income should grow at a minimum rate of 8% to 10% per annum,” Woo says. The fixed portion during the first year of listing (2018) is 70% and the variable is 30%. The fixed portion grows at 3% a year and the variable portion depends on sales.
“If the full portion grows at more than 10% a year for 10 years, our DPU will grow correspondingly,” Ang says. In the beginning, it was quite hard to convey that this model is possible because business is growing fast.
Fee income is tied to sales. The base fee comprises up to 30% of gross revenue, and the performance fee is made up of whatever is left after distributions to the unitholders and base fee are paid. “We pay the REIT [unitholders] first before the expenses. Usually, REITs pay out expenses first, then pay the unitholders,” Ang points out. “Our model aligns the interests of the operating manager with those of the REIT.”
The manager is incentivised to grow sales and help the tenant do well, so the approach it takes is active and joint management, Ang points out.
In terms of acquisitions, Sasseur REIT has the right of first refusal to two pipeline malls — one in Xi’an and the other in Guiyang — from sponsor Sasseur Cayman Holding. Guiyang is a relatively modest second- or third-tier city, but fast growing. Sasseur Cayman Holding also manages four malls that could be pipeline malls.
The Xi’an mall is likely to be ready soon. Ang has a timeline of 12 to 24 months for the REIT’s first full mall acquisition, which he reckons will cost between $200 million and $400 million. The REIT’s debt headroom is around $280 million.
In April, Sasseur REIT acquired additional shop units with existing tenancies at the annex block of its Hefei site for RMB98.3 million ($19.6 million). The shop units are fully occupied and have a gross floor area of 6,133.84 sq m.
Not without risk
Sentiment is fragile globally, given the US-China trade war. On May 24, the Chinese government took over Baoshang Bank, citing severe credit risk, and will guarantee depositors’ money. It remains to be seen whether this move will cause funding costs to rise, borrowers to default and economic growth to slow.
While Ang remains upbeat about growth, bad loans and an economic slowdown will have an impact on discretionary spending. Outlet malls are all about discretionary spending. Moreover, they are niche malls, not at transport nodes with catchment population in the manner of suburban malls.
The other risk that is peculiar to Sasseur REIT is the reliance on the -sponsor that owns the entrusted manager. Sasseur REIT provides income support for the first two years (FY2019 is the second year); in the third year, this could fall away and unitholders are likely to assume performance risk. Moreover, even if the malls outperform, a large portion of the resultant rent (up to 30%) goes to the sponsor.
Annualised, Sasseur REIT’s 1QFY2019 DPU of 1.656 cents, or 6.624 cents, is 6.8% above the forecast DPU of 6.2 cents for this year. At the last traded price of 77.5 cents, this gives a yield of 8.5%. While the REIT is likely to beat forecasts for the year, what happens next year? DBS Group Research is forecasting DPU of 6.87 cents for FY2020 and 7.01 cents for FY2021. This is assuming that the renminbi does not weaken against the Singapore dollar and sales continue to grow apace.
Interestingly, the REIT’s net asset value fell 1.5% y-o-y in 1QFY2019 to 88.97 cents. It attributed this to the higher number of units issued (for fees and so on). However, net assets also dropped 1.3% to $1.06 billion.
Sasseur REIT looks interesting for investors looking for a short-term yield play, but could be somewhat volatile for retirement money.
Complex lease structure dissuades retail investors
(June 10): When it listed last year, Sasseur Real Estate Investment Trust introduced the entrusted management agreement (EMA). The entrusted manager is the operator of the malls and a unit of the sponsor, Sasseur Cayman Holding.
The EMA was introduced to satisfy the regulators’ requirement for the REIT to offer stable net property incomes and distribution yields. Gross revenue comprises the portfolio’s gross rental income, which is 100% of tenant sales. From the gross revenue, the REIT pays a resultant rent to unitholders. RR comprises a fixed component and a variable component. In FY2018, FC was 70% of RR and VC was 30%. The variable rent comprises 4% to 5.5% of sales at the outlet malls.
RR is subject to a minimum rent arrangement. Minimum rents are $115 million for FY2018 and $124 million for FY2019 (see Chart 1). According to Sasseur REIT’s annual report, the actual EMA rental income for the period from the listing date of March 28, 2018 to Dec 31, 2018 has exceeded the minimum rent by 2.2% (in renminbi terms)
The minimum rent for FY2020 onwards will be RMB611.4 million. The minimum rent condition will fall away if the initial portfolio achieves the minimum rent for two consecutive years commencing from FY2018. Sasseur REIT has already outperformed its minimum rent in FY2018, and appears on track to outperform the minimum rent this year (see Chart 1).
Anthony Ang, CEO of Sasseur REIT’s manager, explains the EMA resultant rent for unitholders this way. For the first year, the minimum income is $115 million (annualised), in the second year, it is $124 million. For the third and fourth years, the minimum income remains at $124 million. If the minimum rent forecasts are met and exceeded for 2018 and 2019, the entrusted manager does not have to continually guarantee a minimum rent. However, if the minimum rent is not met in the third year, the entrusted manager will have to guarantee $124 million.
