It aims to build a robust internal corporate culture that prepares the group and employees for the intense competition in the future

 

THE Chinese economy has faced headwinds amid a property crisis and prudent consumer behaviour, which has weighed heavily across property groups as well as some real estate investment trusts (Reits).

 

But outlet-mall player Sasseur Reit is confident that its focus on operational performance, coupled with financial prudence, will allow it to ride out the headwinds in the sector as it eyes long-term growth.

 

Vito Xu, chairman of Sasseur Reit&rsquo s sponsor, Sasseur Group, told The Business Times in an interview that an increasingly saturated outlet market in China coupled with economic downturn poses both challenges and opportunities for Sasseur Group.

 

While China&rsquo s economy is going through challenges, with the property crisis weighing on sentiment, Chinese consumers are favouring cheaper goods. This, in Xu&rsquo s opinion, is playing in outlets&rsquo favour.

 

&ldquo Economic downturn requires people to be more prudent when it comes to spending ... which actually drives traffic in outlets,&rdquo he said in Chinese.

 

&ldquo There are also more end-of-line goods from high-end brands, allowing us to push for greater discounts,&rdquo added Xu, noting that the group is implementing an even more strict pricing system to get better deals.

 

Xu established his first outlet in Chongqing in 2008. The group has since expanded to some 17 managed outlets across China, of which four are owned by Sasseur Reit.

 

But the outlet segment has also been experiencing rising competition with certain cities already saturated with outlets, Xu noted. The Reit is thus focused on building a robust internal corporate culture that prepares the group and employees for the intense competition in the future.

 

Operation is key

Enforcing high standards over tenants&rsquo sales performances is among the strategies for the group to ensure strong operational performance despite the economic headwinds in China.

 

Sasseur Reit&rsquo s revenue is directly linked to sales performance of the tenants, and the sponsor is focused on managing outlets&rsquo operation to drive higher sales. Instead of charging tenants a fixed rent, it takes a cut of tenant sales at its outlets.

 

&ldquo We have ... formed a joint venture or association with the tenants &ndash a very different model from traditional Reits,&rdquo said Xu.

 

He noted that the group&rsquo s malls are located outside city limits, but its model has meant that the effective rent received is higher than city properties, which would not be possible on a fixed rental basis.

 

&ldquo That&rsquo s why we need strong operational management to drive higher sales for the tenants, which translates into greater revenue growth for the Reit,&rdquo he added.

 

The group conducts company-wide reviews every year, and the bottom-performing tenants in terms of sales will be replaced with others, said Xu. The Reit sponsor is also highly involved in setting up the pricing terms for the tenants.

 

Xu noted that outlet customers are not shopping for cheap items, but are looking for value and the feeling of getting a good discount. He said: &ldquo We need to provide a wide range of selections at the most cost-effective prices, focusing on meeting customers&rsquo needs.&rdquo

 

Sassuer Reit has operated on an entrusted management agreement (EMA) model since it listed on the Singapore Exchange in 2018 in view of its unique rental model. The EMA structure provides greater stability for Reit investors, instead of more volatile cash flows from variable sales.

 

Unlike the typical rental model, the EMA model comprises a fixed component, with a built-in 3 per cent annual step-up, and a variable component that captures sales growth of the outlets.

 

The model also provided downside support to the Reit&rsquo s young projects in two second-tier cities Hefei and Kunming, said the chief executive officer of Sasseur Reit&rsquo s manager Cecilia Tan.

 

In the first quarter of 2024, the Reit&rsquo s EMA rental income grew 1.2 per cent on year in renminbi terms. This was despite outlet sales falling 2.6 per cent over the same period due to a higher sales base in the year-ago period.

 

For the full year ended December 2023, Sasseur Reit&rsquo s EMA rental income in renminbi terms was up 10.7 per cent, led by strength in the variable component. Meanwhile, distribution per unit (DPU) was down 4.6 per cent on year to S$0.06249, partly due to the impact of the stronger Singapore dollar. Excluding the impact of foreign currency translation, DPU would have been 4.1 per cent higher year-on-year.

 

The EMA model was designed to last for 10 years when it was set up in 2018. It expires in 2028, but the Reit has an option to extend for another 10 years.

 

Tan noted that a thorough analysis will be done on whether the EMA model should still be extended beyond 2028, with a possible solution to increase the variable component.

 

Partial acquisitions at right time

For longer-term growth, the Reit manager is also considering potential acquisitions.

 

&ldquo I will say acquisition is always on the table but we need to see how we can club the capital together,&rdquo Tan said, adding that an option would also be equity fund raising, but the market environment would need to improve.

 

The manager is prioritising prudent asset and capital management, given the turbulent macro environment.

 

As at Mar 31, 2024, Sasseur Reit&rsquo s aggregate leverage ratio of 25.2 per cent was the lowest gearing among all S-Reits.

 

Tan noted that the Reit would likely use a combination of equity and debt for any acquisition, and more debt may be an option, given the Reit&rsquo s debt headroom.

 

She observed that the Reit has the right of first refusal for two assets held by its sponsor. These are fairly large assets, but she said the Reit may also consider partial acquisitions at the right timing.

 

&ldquo It seems the market is becoming more receptive to partial acquisition,&rdquo she said. &ldquo That also requires Reit managers to be more vigilant with risk management and not over gearing because otherwise, you&rsquo re going to have another problem down the road where everyone is just liberally using their gearing.&rdquo

Rental income is down in Singapore-dollars terms

 

SASSEUR real estate investment trust&rsquo s (Reit) rental income under its entrusted management agreement (EMA) model for the first quarter ended March rose 1.2 per cent year on year to 172.6 million yuan (S$32.6 million).

 

However, the rental income was 1.4 per cent lower in Singapore-dollar terms due to a 2.5 per cent depreciation of yuan against Singapore dollars, the Reit manager said on Tuesday (May 14).

 

The moderate rise in rental income under EMA model in yuan was mainly driven by a 3 per cent rise for fixed component income of 115.2 million yuan. This was offset by a 2.2 per cent decline in the variable component of 57.4 million yuan due to a higher sales base in the first quarter last year from strong retail spending post-Covid, said the manager.

 

Additionally, the Reit has changed to half-yearly from quarterly distributions with effect from FY2024, to save compliance and administrative resources required for quarterly distributions.

 

To preserve unitholder value and minimise unit base dilution, the manager has elected to receive 20 per cent of its base management fee in cash and 80 per cent in units, as well as 100 per cent of performance management fee in cash, with effect from FY2024.

 

Sasseur Reit currently trades at around a 20 per cent discount to its book value.

 

As at Mar 31, 2024, the Reit&rsquo s aggregate leverage stood at 25.2 per cent, slightly down from 25.3 per cent as at the end of 2023. Interest coverage ratio was 4.5 times, and weighted average cost of debt per year stood at 5.4 per cent.

 

In terms of upcoming debt maturities, the Reit has a S$58 million sponsor loan maturing in 2025, and a further S$208 million of loans maturing in 2026.

 

The manager noted that borrowing costs in China have been on a downward trend, and it is planning to find cheaper debt to replace its sponsor loan that matures next year.

 

&ldquo Capital management is a big focus for us this year, because we see there is a great window of opportunity now,&rdquo said Cecilia Tan, chief executive of the manager. &ldquo If there is an opportunity for early refinancing, we may even tap that, we don&rsquo t have to wait till 2026.&rdquo

 

Tan added that the manager is taking a &ldquo calibrated&rdquo approach towards potential acquisitions for inorganic growth.

 

&ldquo We have been looking at that for a long time but I think to really activate that I want to feel a greater sense of confidence,&rdquo she said. &ldquo Given where our share price is trading, and also that the US is very very sticky with interest rates, we need to pay close attention to the whole environment.&rdquo

 

But Tan noted that the manager is still looking at &ldquo interesting opportunities&rdquo within the portfolio to unlock value. She added the manager is exploring potential asset enhancement initiatives and would share more in future.

 

Net asset value per unit stood at S$0.84 at the end of March, as compared to S$0.82 at the end of 2023.

 

Portfolio occupancy of 97.9 per cent registered a new record high, said the manager.

 

Weighted average lease expiry (Wale) was two years by net lettable area and 1.1 years by gross revenue as at Mar 31, 2024, as the Reit employs &ldquo deliberate short leases to optimise tenant mix&rdquo . The manager highlighted that it is a strategy to adapt to fast-changing consumer preferences in China and provide flexibility to replace non-performing tenants with new brands.

 

 

THE distribution per unit (DPU) of Sasseur Real Estate Investment Trust : CRPU 0%(Sasseur Reit) fell by 7.2 per cent to S$0.01473 for its second quarter ended June, from S$0.01588 the year before.

 

Rental income under the Reit&rsquo s entrusted management agreement (EMA) model recorded a 0.5 per cent drop to S$29.5 million from S$29.7 million, excluding straight-line adjustments, mainly due to the weakening of the yuan against the Singapore dollar in 2023, said the Reit manager on Friday (Aug 11).

 

The Reit, which owns four outlet malls in China, recorded an 8.4 per cent rise in rental income to 155.4 million yuan in the second quarter amid China&rsquo s recovery.

 

The results bring distributable income to S$20.2 million, down 0.4 per cent from S$20.3 million in the corresponding period last year. The distribution will be paid out on Sep 26, after the record date on Sep 11.

 

The Reit&rsquo s portfolio average occupancy rate in Q2 reached a record high at 97.2 per cent, exceeding the pre-Covid level in FY2019, as well as the 96 per cent in the corresponding period last year.

 

This came on the back of new leases secured in its Kunming outlet mall, and a record high occupancy rate of 95.9 per cent in the Chongqing Bishan outlet mall after asset enhancement initiatives completed in 2022, the manager noted.

 

Its weighted average lease expiry by net lettable area stood at 2.1 years as at Jun 30.

 

For the half year ended June, DPU was 2.6 per cent lower to S$0.03322 from S$0.0341 in the same period last year, after distributable income fell 2.4 per cent to S$43.9 million. The drop in distributable income was mainly due to the strong Singapore dollar against the yuan as well as higher finance costs led by higher interest expenses.

 

EMA rental income eased 1.4 per cent to S$62.6 million from S$63.5 million for the half year on the impact of foreign currency translation.

 

The yuan had depreciated 8.7 per cent against the Singapore dollar for H1 2023 as compared with the same period in 2022, the manager added.

 

Finance costs for the half year were 17.5 per cent higher at S$14.5 million, as the weighted average cost of borrowings rose 1.3 percentage points to 5.8 per cent, with higher interest rates on offshore loans.

 

As at the end of June, Sasseur Reit&rsquo s gearing stood at 26.2 per cent &ndash below the regulatory limit of 50 per cent, compared with 27.6 per cent in the same period last year.

 

Meanwhile, the majority of the Reit&rsquo s loans are maturing in 2026. The manager also highlighted that about 77 per cent of the Reit&rsquo s total borrowings are hedged or pegged to fixed interest rates, with a weighted average debt to maturity of 3.3 years as at Jun 30.

 

While more than half of the Reit&rsquo s total loans are denominated in renminbi, the recent 10 basis point reduction of the five-year loan prime rate to 4.2 per cent per annum will help the mall owner to cushion its debt cost, according to the manager.

 

The stimulus measures to boost the Chinese economy will also benefit the Reit&rsquo s outlet malls, which are all located in high-growth cities.

 

Chairman of the Reit&rsquo s manager Vito Xu said that while they remain cautiously optimistic on the country&rsquo s economic outlook for the rest of the year, outlet malls can tap an emerging shift in Chinese consumers&rsquo preferences towards value-for-money products during economic downturns.

 

&ldquo The outlet industry in China has shown counter-cyclical characteristics in the past and displayed greater resilience under weak or uncertain economic growth conditions.

 

&ldquo We are confident that consumer spending at outlets in China will remain robust in the second half of this year.&rdquo