• Tenant sales at Sasseur REIT' s outlet malls came in stronger-than-expected, putting it on track to achieve its forecasted sales target for the full year.


• The REIT' s stellar results were driven mainly by stronger sales registered at all four of its portfolio properties, all of which delivered sales that exceeded the management' s forecasts.


• With a healthy gearing ratio and ample debt headroom, Sasseur REIT has the flexibility to make further yield-accretive acquisitions.


• Sasseur REIT offers investors an attractive distribution yield of about 8.22% in 2018 (8.55% in 2019), which is guaranteed due to the presence of the minimum rent condition.



 

Sasseur REIT (SGX.CRPU), a Shanghai-based operator of outlet malls in China, recently released its inaugural earnings report since  its debut on the SGX in March this year, with the REIT delivering an encouraging set of financial performance that topped its IPO forecasts. We analysed Sasseur REIT' s results, and share some of our key takeaways from its maiden earnings report.

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1. Healthy Performance Despite Seasonally Slower Quarter

Despite the second quarter being a seasonally slower quarter for the outlet mall industry, tenant sales at Sasseur REIT' s four outlet malls totalled SGD 193.3 million in 2Q18, a sharp improvement of more than 40% from the same period last year. The latest top-line figure was also above the REIT' s projection of about SGD 177.7 million, putting it on track to achieve its forecasted sales target for the full year.

Meanwhile, its 2Q18 rental income of SGD 32.3 million was roughly 3% ahead of its IPO projection of SGD 31.4 million, while its distribution per unit (DPU) of SGD 1.587 cents was also higher than the SGD 1.517 cents that the management has initially guided for. This translates into an annualised distribution yield of about 8.4% this year (based on its last traded price of SGD 0.73 as of 30 Aug 2018).

Given that Sasseur REIT' s distributions in FY18 and FY19 are downside-protected under the minimum rent condition, we believe that the risks to Sasseur REIT' s distributions are currently skewed to the upside, especially since 2Q18 results came in stronger-than-expected. The management expects to see growth accelerate in 2H18, with autumn and winter being typically stronger seasons. Retail takings at its outlet malls will also be supported by a healthy pipeline of major promotional events that will be taking place in the second half of this year.

2. Individual Malls Posted Strong Performance

Sasseur REIT' s stellar results were driven mainly by stronger sales registered at all four of its portfolio properties, namely Chongqing, Bishan, Hefei and Kunming outlets, all of which delivered outlet sales that exceeded the management' s initial forecasts (Table 1). The malls also saw double-digit sales growth from the same period last year, with the Kunming outlet in particular seeing its retail takings more than double.

Table 1: All Four Outlet Malls Delivered Strong Performance

 

While the portfolio' s average occupancy rate of 94.5% (as of 30 June 2018) was a slight decline from 95.1% in Feb 2018, we do not think it is a major cause for concern, given that the REIT' s leases are primarily sales-based, whereby the rent is determined based on an agreed percentage of tenants' turnover. As such, sales growth would be a better proxy of Sasseur REIT' s performance.

In any case, the four outlet malls are favourably located near high-end residential properties, and are also well-supported by the transportation infrastructure in their respective cities. Sasseur REIT should have no issues bringing in new tenants (selected from its carefully-curated database of domestic and international retail brands that are in fashion) to occupy its vacant units.

As most of the lease agreements are short-term in nature, the portfolio' s weighted average lease to expiry (WALE) of 3.2 years by net lettable area (NLA) is also relatively short (Chart 1) compared to its SGX-listed peers like Capitaland Retail China Trust and Dasin Retail Trust, both of which have much longer WALEs of 5.6 years and 6.4 years respectively.

This is a deliberate strategy employed by Sasseur REIT, as short-term leases give it the flexibility to adjust the tenant mix, ensuring that the portfolio is managed in an optimal manner that drives turnover growth, which in turn increases Sasseur REIT' s property income.

Chart 1: Relative Short WALE Due To Short-Term Lease Agreements

 

3. Balance Sheet Remains In Good Shape

Sasseur REIT continues to maintain a healthy gearing ratio of 33.2% that remains well below the 45% gearing limit. With a debt headroom of about SGD 189 million before it hits the gearing limit, Sasseur REIT has the flexibility to make further yield-accretive acquisitions. The right of first refusal (ROFR) option provided by its sponsor allows Sasseur REIT to leverage on group synergies to obtain new assets.

There are currently five outlet malls in the sponsor pipeline that could potentially be injected into Sasseur REIT. Assuming Sasseur REIT acquires full interest in these properties, the aggregate GFA of the portfolio will expand by approximately 0.7 million sqm &ndash that' s almost triple the GFA of the initial four outlet malls. While some of the ROFR properties are relatively new, their sales performances have been very strong and the management have reiterated that they will only undertake acquisitions only if they are yield-accretive.

4. Return Potential Remains Attractive

At its current share price of SGD 0.73 (as of 30 August 2018), Sasseur REIT offers investors an  attractive distribution yield of about 8.22% in 2018  (8.55% in 2019), higher than most of its other listed peers in the China retail space (Table 2).  The distribution yields for 2018 and 2019 are also guaranteed due to the presence of the minimum rent condition.

Sasseur REIT is currently trading at a discount to its net asset value per share of about SGD 0.806. While its current valuations are on the upper end of the value scale compared to its peers, it is worth noting that the fundamentals of the outlet mall industry is vastly different from traditional retail, which is currently on a decline, and a higher valuation is perhaps justified due to the strong growth potential of China' s outlet mall industry.

Table 2: Valuations of China Retail REITs And Business Trusts

 

It is also worth noting that the REIT' s sponsor (Sasseur Group) has been increasing its stake in the REIT since mid-July at an average price of about SGD 0.71 (Table 3), while the CEO himself, Mr Anthony Ang, has also purchased units of Sasseur REIT this month at about SGD 0.74 apiece &ndash a reflection of the management' s confidence in the REIT' s prospects, and also a sign that Sasseur REIT is perhaps undervalued at its current price.

Table 3: Changes In Interest Of Substantial Unitholders And CEO Since July

 

Participate In China' s Thriving Outlet Mall Industry With Sasseur REIT

For a country with China' s population and spending power, there are relatively few factory outlet malls compared to developed economies such as the US, Europe and Japan. Given the increasing popularity of outlet malls and rising consumer purchasing power, we believe that China' s outlet mall industry has immense room for further market expansion. In fact, outlet sales is forecasted to hit RMB 640.2 billion by 2030 (that' s an impressive 20.1% CAGR from 2016 &ndash 2030), surpassing the US to become the world' s largest outlet market.

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Investors who want a piece of the action can strongly consider investing in Sasseur REIT. As one of the leading premium outlet mall groups in China, it is a strong proxy to the fast-growing outlet industry in China. The good news for investors? They are at least guaranteed to receive distribution yields of about 8.22% and 8.55% in 2018 and 2019 respectively due to the minimum rent condition.  

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report has a position in Sasseur REIT.

The Research Team is part of iFAST Financial Pte Ltd.