Sasseur Reit (SGX: CRPU), a hidden small-cap gem?

Personally, Sasseur REIT was never once on my radar or watchlist when it comes to investing in REITs. It was only when my fellow co-founder, Rayson, suggested analyzing Sasseur Reit did I then took a closer look at it. And boy was I actually surprised by this small-cap REIT! Hence, if you found this post useful, you know who to thank😉.

As with all the other REIT analysis posts, I will be doing a holistic analysis of Sasseur Reit’s performance. This would include aspects such as financial performance, growth, returns to investors etc. I will also be covering some of Sasseur Reit’s potential risks and its future outlook.

Before diving into the details, bear with me as I put forth the usual disclaimer.

This post should not be treated as a recommendation to purchase or sell units of Sasseur Reit. Rather, it is my own personal opinion of Sasseur Reit and should be seen as a source of insight and information. Any decision to purchase or sell units of Sasseur REIT should be done on the personal accord of the reader after careful consideration. As such, I bear no responsibility for any future gain or loss amounting from the trading of Sasseur Reit’s units. Lastly, I am also not currently vested in Sasseur Reit.

With that done, let’s get right in.

I have added this pretty handy table of contents below. If you are looking at a specific aspect of Sasseur Reit, you can just click on the link!

About

Sasseur Reit is the first S REIT which focuses purely on outlet malls in China. Having IPOed in March 2018, Sasseur Reit can be considered as a relatively new addition to the S REIT market. With a market capitalisation of 926.9 Mil, Sasseur Reit is one of the smaller REITs on the market.

Currently, there are 4 outlet malls in Sasseur Reit’s portfolio. They are all located in different provinces of China as seen below.

Source: Sasseur Reit 1H 2020 financial presentation

As compared to traditional shopping malls located in city centres, outlet malls are located in the suburbs and focus mainly on luxury and high-end fashion brands. To attract shoppers, outlet malls often have huge discounts all year round on luxury items and fashion apparels.

When it comes to the design and layout of Sasseur Reit outlet malls, there is a focus on both art and commerce.

Sasseur Reit art and commerce outlet malls
Source: Sasseur Reit FY 2019 annual report

As seen above, Sasseur’s vision for its outlet malls is to become a one-stop destination for retail and lifestyle experiences. As such besides just retail stores for fashion brands, the outlet malls also contain recreational buildings such as cinemas, children recreation facilities and even an indoor zoo. All of these initiatives are to enhance the retail experience to promote spending and customer loyalty to the malls.

Market performance

With an IPO price of $0.80, Sasseur Reit’s current market price of $0.77, represents a negative return of 3.75%. If dividends were taken into account, IPO investors would instead be sitting on positive returns of 8.78%. Based on this performance, it is fair to say that Sasseur Reit’s performance has been pretty average so far.

Unique income model

Unlike traditional retail REITs which mainly derive their income from the rental of shopping space, Sasseur Reit’s income instead comes from an entrusted manager agreement (EMA) model.

Under the EMA model, an entrusted manager, Sasseur (Shanghai) Holding Company Limited, is appointed to manage operations and maintenance of the outlet malls. This agreement is currently in place till 2028. As per the EMA, all property-related expenses is borne by the entrusted manager instead of the REIT.

To fully understand Sasseur Reit’s income model, we need to know how rental is being collected from tenants in the outlet malls. Instead of charging rental per square, the entrusted manager instead signs a sales-based lease with the tenants. This means that any sales proceeds generated by the tenants would first be collected by the mall management. Thereafter, an agreed percentage of the proceeds would be considered as rent while the remainder would be passed on to the respective tenants.

When it comes to Sasseur Reit, its income is based upon the rental that was collected by the entrusted manager and income from other forms of permissible investments. Sasseur Reit’s income, or what is termed as EMA rental income, is split into two parts, the fixed and variable component. The image below better illustrates Sasseur Reit’s income model.

Source: Sasseur Reit FY 2019 annual report

As seen, the fixed component escalates at 3% annually while the variable component is based upon a percentage of total sales in each outlet mall. In terms of the fixed component, it is based upon an agreed amount between Sasseur Reit and the entrusted manager for each outlet mall. The image below shows the agreed amount for each of the outlet mall.

Source: Sasseur Reit prospectus

As a whole, Sasseur Reit’s unique income model provides certain advantages and disadvantages.

Advantages

Firstly, the fixed component of Sasseur Reit’s rental income provides stability. This means that even if sales in the outlet malls aren’t stellar, unitholders can at least be assured that Sasseur Reit still has a source of regular income. This benefit really came to the fore this year when retail sales were heavily affected by Covid-19.

Secondly, as the variable component is based upon sales, it kind of aligns the interests of Sasseur Reit and unitholders. This means that Sasseur Reit, through the entrusted manager, would be inclined to introduce initiatives to boost sales at the outlet malls as it ultimately affects how much cash flows into the REIT.

Lastly, as Sasseur Reit does not have to contend with property-related expenses, a large portion of the derived rental income can be deemed as ‘distributable income’. This would certainly benefit unitholders in the long run as long as Sasseur Reit is able to keep its costs down. As of 1H 2020, distributable income amounted for 58.9% of the EMA rental income. This was significantly lower than the 66% and 62% seen in 2019 and 2018 respectively.

Disadvantages

Right off the bat, the whole EMA model can be considered as disadvantageous to Sasseur Reit. This is due to the fact that Sasseur Reit is entirely dependent on the entrusted manager for its income. As such, the solvency of the entrusted manager is crucial in preventing any potential income disruptions to Sasseur Reit. Unfortunately, there is no insight into the financial health of the entrusted manager in any of Sasseur Reit’s annual reports. Thus, we can only take the Reit Manager’s word that all is alright with the entrusted manager.

In addition, due to the EMA, Sasseur Reit does not actively partake in the negotiation of lease with tenants in the outlet malls. This means that the REIT does not have control over the duration of new or renewed tenant leases.

Lastly, although Sasseur Reit does not have property-related expenses, a portion of its overall potential income is paid to the entrusted manager as base and performance fees. In the event that these fees significantly exceeds the related property expenses, Sasseur Reit would be better off just managing the outlet malls by themselves. For better or worse, the EMA runs till 2028, thus potential investors have to be comfortable with the EMA model before investing in Sasseur Reit.

Business overview

Out of the 4 outlet malls in Sasseur Reit’s portfolio, Chongqing outlet mall has the highest contribution to rental income.

As seen, the Chongqing outlet mall made up slightly less than half of Sasseur Reit’s rental income. This trend is also observed when looking at the sales figures of Sasseur Reit.

Sales wise, Chongqing outlet mall contributed to almost half of total sales figures in 2019.

Looking at both Sasseur Reit’s rental income and sales from its outlet malls, there is definitely an obvious concentration risk. Whether one should be concerned over such a risk would be dependant on the performance and attractiveness of Chongqing outlet mall. For the next section, I will be looking at Sasseur Reit’s financial performance.

Financial performance

Although Sasseur Reit has an income model that is quite different from a traditional REIT, assessing its performance is still pretty much the same as any other REIT. As such, looking at figures such as distributable income and revenue growth is still very much relevant. In addition, I will also be looking at the AFFO, DPU and NAV growth for Sasseur Reit.

EMA rental income

In the short time span that Sasseur Reit has been on the market, its EMA rental income growth has been positive. However, due to the Covid-19 pandemic, EMA rental income saw a sizeable decline in 1H 2020.

As seen above, there was a huge increase of around 26.2% in EMA rental income from 2018 to 2019. This can mostly be attributed to higher outlet sales as it increased by 12.1% as compared to 2018.

Another factor for lower EMA rental income in 2018 is also due to the period in which the results were reported. EMA rental income for 2018 only accounted from March onwards as that was the month in which Sasseur Reit was listed. Hence, it would naturally be lower than expected since the full-year result was not considered.

With regards to rental income for 2020, there would definitely be a sizeable decrease from that of 2019. This is largely due to the closure of outlet malls in late January due to the Covid-19 pandemic. Although all four outlet malls have since reopened in March, it remains difficult to predict the full extent of the decline for 2020. Looking at Sasseur Reit’s 1H 2020 financial results also paints an uncertain picture.

Source: Sasseur Reit 1H 2020 financial presentation

As seen, rental income decreased by more than 10% when comparing 1H 2020 and 1H 2019. Although there was a slight recovery in 2Q 2020 as compared to 1Q 2020, I feel this is mostly down to a release of pent up retail urges from shoppers. As such, it would be premature to conclude that business would be as per normal for Sasseur Reit’s rental income growth in 2020.

Distributable income

For Sasseur Reit’s distributable income growth, it followed the same trajectory as that of its rental income.

As seen, Sasseur Reit’s distributable income had a positive growth of 8.3% from 2018 to 2019. Unsurprisingly, distributable income for 1H 2020 had taken a big hit, similar to that of rental income.

Besides considering just the overall value of distributable income, I also like to look at distributable income per unit. Doing so allows me to see if the REIT is returning real value to its unitholders. This is similar to looking at earnings per share (EPS) when analyzing companies or corporations.

In terms of distributable income per unit, there was also positive growth from 2018 to 2019, albeit at a slightly slower pace. This is not surprising given that Sasseur Reit’s manager has so far chosen to receive 100% of its management fees in units. Against an enlarged unit base, it is natural for distributable income per unit to grow at a slightly slower pace as compared to distributable income.

Adjusted funds from operations (AFFO)

If you had read my other REIT analysis posts, you would know I like to look at AFFO to determine if a REIT is really growing, in terms of generating more cash from its business. After all, cash does not lie, either you have it or you don’t.

In terms of AFFO per unit, we can see there was a huge jump from 2018 to 2019. However, let’s not get carried away as 2018 was not a full-year result. Nevertheless, it was still nice to see an increase in AFFO per unit for Sasseur Reit.

AFFO per unit for 2020 would likely remain depressed given the high probability of a fall in EMA rental income. However, 2H 2020 should see a better performance in AFFO per unit as compared to 1H 2020, if shopper traffic and sales at the outlet malls continue to recover steadily.

Distribution per unit (DPU)

DPU directly represents the amount of dividends that were paid out to unitholders. This is not to be confused with distributable income per unit which represents the amount of income that can be paid out.

As seen, there was a huge increase in the DPU between from 2018 to 2019. This is generally good news for investors since dividends received would be more.

In regards to 2020, there would highly likely be a dip in DPU due to the mall closures from January till March. However, I still expect dividends paid out to be considerable. The question of whether the dividends are sustainable and if there is room for future increases would be covered in later parts of this post.

Net asset value (NAV)

Looking at Sasseur Reit’s NAV, it has remained pretty much constant so far.

The slight decrease in NAV from 2018 to 2019 was mainly due to negative cash flow in 2019. The reason for this was due to a one-off acquisition of shop units in the Hefei outlet mall for around 20 Mil.

Although cash flow has also been negative so far in 1H 2020, the rise in NAV can be attributed to lesser payables and accruals as a result of lesser sales at the outlet malls.

Looking at Sasseur Reit’s financial performance so far, it has actually performed quite well in 2019. However, the Covid-19 pandemic has definitely thrown a spanner in the works. While the worst might already be over, 2020 would most likely remain a bad year for Sasseur Reit. How bad it would be would depend heavily on the recovery in China’s consumer market. As such, much would depend on Sasseur Reit’s 2H 2020 results in evaluating its performance for 2020.

Is Sasseur Reit financially stable?

For a REIT to perform well, financial stability and performance have to go hand in hand. After all, good performance can only be sustained if the REIT is financially stable. In this portion of the post, I will be assessing the financial stability of Sasseur Reit.

Some of the metrics I will look at include interest cover ratio, aggregate leverage and dividend payout ratio. In addition, I will also be looking at Sasseur Reit’s debt profile to see if there are any short term refinancing risks.

Interest cover ratio

As of 1H 2020, Sasseur Reit’s interest coverage stands at around 5 times. This means that current earnings are able to service 5 times of interest expenses.

As a matter of fact, Sasseur Reit’s interest coverage has been on a steady increase since its IPO, as seen above. I was actually surprised that the interest coverage actually increased in 1H 2020 despite a lower EMA rental income.

All in all, Sasseur Reit’s current interest cover ratio provides sufficient leeway to cover interest expenses should there be a hit to the REIT’s rental income. From a REIT investor point of view, there is really nothing to complain about.

Aggregate leverage

Since its IPO, Sasseur Reit always has one of the lowest aggregate leverage level in the entire S REIT market. As of 1H 2020, Sasseur Reit’s aggregate leverage level stands at 28.1%.

As seen, Sasseur Reit’s aggregate leverage levels since its IPO has been pretty low by market standards. This provides a big advantage to the REIT as lower aggregate leverage levels means more debt headroom to potentially grow the REIT. With its current aggregate leverage of 28.1%, Sasseur REIT has debt headroom of 387 Mil before hitting the regulatory limit of 50%.

Dividend payout percentage

Looking at a REIT’s dividend payout percentage allows one to see if the dividends paid out are sustainable. It also provides insight into the probability of future dividend cuts.

In determining Sasseur Reit’s dividend payout percentage, I will be using both its AFFO and distributable income.

So far, Sasseur Reit has paid out 100% of its distributable income in dividends. For 2018 the payout was not 100% as the remaining 15.9% of distributable income was used for IPO related expenses.

In terms of AFFO, Sasseur Reit’s dividends have not exceeded it at all yet. This means that dividends are well covered by the cash brought it from the REIT’s operations.

All in all, Sasseur Reit’s dividends have definitely been sustainable so far. This is quite admirable given that various S REITs on the market often have dividends exceeding their AFFO.

Debt profile

Looking at a REIT’s debt profile allows investors to see the cost of debt and any short term debt risk. Currently, Sasseur Reit has a total of 495.3 Mil in loans and borrowings. Of this total, 125 Mil are offshore loans in SGD while approximately 370 Mil are onshore loans in RMB.

Usage of onshore loans

While Sasseur Reit’s onshore RMB loans are mainly used for working capital purposes, the purpose of its offshore SGD loans is a little more interesting. According to Sasseur Reit’s prospectus, the offshore SGD loan is used to support Sasseur Reit’s distribution in the event of changing tax rules in China.

Currently, Sasseur Reit has a intricate tax structure to minimize the effects of corporate and withholding tax.

Source: Sasseur Reit FY 2019 annual report

As seen, dividends gained from the entrusted manager in China is transferred to holding companies in Hong Kong and the British Virgin Islands (BVI) before eventually reaching Singapore. Between China and Hong Kong, there is a preferential withholding tax of 5% instead of the usual 10%. Thereafter, there is no other subsequent withholding tax on the dividends when it leaves Hong Kong and reaches Singapore.

In addition to paying a preferential withholding tax, Sasseur Reit also only pays a corporate tax of 17% in Singapore. No corporate tax is paid in China as the REIT is incorporated in Singapore and its day to day operations is based in Singapore.

Hence, it can be said that Sasseur Reit’s offshore loan is a sort of contingency plan should China alter any of its tax laws. For instance, removing the preferential withholding tax treaty with Hong Kong or redefining what companies should be tax under China corporate tax laws.

Cost of debt

For Sasseur Reit, its current weighted average cost of debt stands at 4.17% per annum. This is on the high side as compared to other REITs on the market. On the bright side, at least Sasseur Reit’s cost of debt has decreased slightly.

Given that Sasseur Reit is in the latter stages of refinancing its 125 Mil offshore loan, I expect the cost of debt to continue decreasing in the current low-interest-rate environment.

Debt maturity profile

With only two main loan avenues, Sasseur Reit’s debt maturity profile is not well spread out at all.

Sasseur Reit debt maturity profile
Source: Sasseur Reit 1H 2020 financial presentation

Given that majority of Sasseur Reit’s debt refinances in two years time, there is definitely a risk there. Consequently, this also leads to Sasseur Reit’s low average debt maturity of 2.23 years.

On the bright side, the management of Sasseur Reit does not foresee issues in refinancing its loan which expires in 2021. With this refinancing, it should also improve Sasseur Reit’s overall debt profile. In addition, Sasseur Reit’s significant debt headroom also provides flexibility in improving its debt maturity profile should the need arises.

Declining cash position

While I was assessing the financial strength of Sasseur Reit, I can’t help but notice its declining cash pile since its IPO.

As seen, there was a huge decrease in Sasseur Reit’s cash between 2018 and 2019. With its 1H 2020 results, its cash pile also took a further hit, reducing by around 23%. Thus, I decided to take a closer look at the reason behind the decrease and what the cash is being spent on.

Source: Sasseur Reit FY 2019 annual report

For FY 2019, a majority of its cash went towards the paying of dividends. This is not surprising given that Sasseur Reit committed to paying out 100% of its distributable income for FY 2019. For the subsequent years, Sasseur Reit would instead payout at least 90% of its distributable income. This should help improve future cash flow for Sasseur Reit.

Besides the paying of dividends, a substantial amount of cash was also used in the one-off purchase of shop units in its Hefei outlet. This should not worry investors that much since it would not be a recurring expense moving forth.

Lastly, as Sasseur Reit has fully drawn down on its loans, there would not be cash inflows from its loan facility. As such, cash flow from Sasseur Reit’s loan facilities would be negative due to interest payments and repayment of 1% of the principal amount of its onshore loans semi-annually.

Impact of Covid-19

With regards to the decrease in cash for 1H 2020, much of it is down to the mall closures due to Covid-19, resulting in lesser sales.

Source: Sasseur Reit 1H 2020 financial presentation

As seen, despite a positive value in payables and accruals in 2Q 2020, it was still an overall decrease for 1H 2020. This means that for 1H 2020, the REIT paid out more in terms of what it previously owe to its tenants than what was collected on behalf of them.

I know that the other payables portion can be a little confusing. Just know that a bulk of Sasseur Reit’s other payables and accruals consist of sales collected on behalf of its tenants. This sales amount would then have to be transferred to the respective tenants within the financial year. Hence, Sasseur Reit’s cash has to cover for these payables amount else it might run into short term cash flow problems.

Thankfully, based on its 1H 2020 results, Sasseur Reit is able to cover its short term payables with its current cash amount.

Source: Sasseur Reit 1H 2020 financial statement

As seen, Sasseur Reit’s cash, as of 1H 2020, currently stands at 119.7 Mil. This adequately covers the total payable amount of around 112.3 Mil. Thus, it can be considered that Sasseur Reit does not have any near-term risk in not being able to fulfil its liabilities.

While the current trend of Sasseur Reit’s decreasing cash can be a little worrying, much of it is due to the high current payout of distributable income and reduced sales from the outlet malls. As China continues its recovery from the effects of Covid-19, Sasseur Reit’s cash should also improve in tandem.

Property performance

Besides looking at the financial side of things, considering the individual property’s performance is equally crucial. In the case of Sasseur Reit, this is even more pronounced given that a portion of its rental income is based on sales at the outlet malls. Furthermore, looking at a mall’s performance can also shed some light on its attractiveness to both shoppers and tenants.

Property occupancy

While overall property occupancy has increased between 2018 and 2019, 1H 2020 has seen a slight drop in occupancy rates.

From the above, we can see that overall occupancy dropped by around 2.4% in 1H 2020. This was mainly due to a considerable drop of around 8% for Bishan outlet mall. This was fortunately mitigated by the good performance of Chongqing and Kunming outlet malls. This discrepancy in occupancy rates between the outlet malls definitely warrants a deeper look.

Accessibility

When it comes to malls, accessibility is a very important component of a mall’s attractiveness. No shopper would visit a mall that is out of place or not near to any public transport node unless they have no other better alternative. This has a subsequent knock-on effect on the retention of current tenants or the possibility of new tenants moving in.

In terms of accessibility, Sasseur Reit’s outlet malls are all quite accessible. All four outlet malls are connected by major highways and road networks. In addition, Chongqing and Hefei outlet malls are also located near to public metro stations.

Of the four outlet malls, Chongqing outlet mall has to be the most accessible. According to Sasseur Reit’s management, the outlet mall is located a mere 15-minute drive away from the city’s central commercial hub and international airport. In addition, it is also located next to two metro stations operating on different lines.

This high transport connectivity means that Chongqing outlet mall is easily accessible to shoppers. Its proximity to the city’s central commercial hub also potentially attracts the high and middle-income earners of China consumer market. This perhaps explains why Chongqing outlet mall remains the main rental and sales contributor to Sasseur Reit.

On the other spectrum, Bishan outlet mall has to be the most ‘obscure’ in terms of accessibility. Although it is linked to major roads and highways, there are no major transportation nodes near it. Its nearest is Chongqing’s international airport which is about an hour drive away, according to Sasseur Reit’s management. Yes, this is the same airport located near to the Chongqing outlet mall. Bishan outlet mall’s saving grace is that it is located next to a tourism spot and near the downtown area of Chongqing.

Mall profile and targeted audience

Besides just accessibility possibly affecting occupancy rates at outlet malls, its profile might also affect the occupancy. In my own humble definition, mall profile is basically how a mall is being made up to be.

A deciding factor for a mall’s profile is its intended attraction of shopper demographic. This would then directly affect the type of tenants the mall would have, the design of the mall and its corresponding facilities.

In the case of Sasseur Reit, its Chongqing, Hefei and Kunming outlet malls typically cater to the upper and middle-income class of China’s consumer market. This can be seen in the location of these malls and the facilities provided.

Both Chonqing and Hefei outlet malls are located near to commercial business hubs. In addition to vast retail stores, they also house family recreational facilities such as cinemas, restaurants and child recreational facilities. Besides, Hefei outlet mall also has one of the largest cinema in East China, an indoor zoo and children edutainment centres. All these facilities mean that these two malls are attractive spots for affluent Chinese families.

For Kunming outlet mall, although its location is not as accessible, I feel its targeted shopper demographic remains similar to Chongqing and Hefei outlet malls due to the similar facilities available. In addition, Kunming outlet mall also contains hotel facilities and domestic fashion brands. All these could possibly encourage spending from Chinese families.

While Chongqing, Hefei and Kunming outlet malls mainly target spending from adults on themselves, Bishan outlet mall focuses on the younger demographic instead. For Bishan outlet mall, it features two distinct retail sections focusing on fitness brands and infant and children brands. In addition, several pubs and bars in the outlet mall also mean its more attractive to the younger demographic as compared to families. This could perhaps explain the fall in occupancy rate as this younger demographic of shoppers does not have the spending power as compared to their older peers.

Shopper traffic and sales

Besides occupancy rate, a crucial part of evaluating a mall’s performance is its sales and shopper traffic. An increasing trend of shopper traffic and sales means that the mall remains an attractive location for shoppers. This then as an additional benefit to the occupancy rate as current tenants would be encouraged to renew their leases while new tenants would be attracted by the sales performance of the mall.

Sales figures

In terms of sales, the Covid-19 pandemic has heavily affected Sasseur Reit’s results for 1H 2020.

For 2018, Sasseur Reit did not publish sale figures for its individual outlet malls. Year-on-year, there was an overall increase of around 43.2% in sales from 2018 to 2019. Thereafter, the Covid-19 pandemic then laid waste to whatever positive sales momentum there was.

Source: Sasseur Reit 1H 2020 financial presentation

Comparing 1H 2020 and 1H 2019 sales figures, the effects of the pandemic caused a decrease of 38.6% in overall sales. Based on individual mall’s performance, Chongqing and Bishan had the worst comparative results to the previous year. This could be due to the fact that they were closed for the most number of days out of the four outlet malls. Another possible explanation is that both these outlet malls are more dependant on domestic tourists. Due to lockdown measures in China, domestic flights were banned within the country. As such, coupled with the closure of the outlet malls, it can be seen as a double whammy to the Chongqing and Bishan outlet malls.

Moving forth, I expect Chongqing and Hefei to have a better recovery as compared to Bishan and Kunming. This is due to their malls being much more accessible as compared to the other two. This can already be seen in comparing between 2Q 2020 and 1Q 2020 sales figures. However, we still have to await for 2H 2020 results to see if the recovery can be sustained.

Shopper traffic

In relation to shopper traffic, Sasseur Reit did not release numbers for 1H 2020. As such, I could only compare between 2018 and 2019.

From the above, there was a positive increase of around 5.83% in overall shopper traffic from 2018 to 2019. Out of the four outlet malls, only Chongqing outlet mall had lesser shopper traffic in 2019 as compared to 2018. While this might be a little worrying, this fall in footfall had no adverse impact on the sales figures. Nevertheless, it still warrants some form of monitoring in the near future.

Assessing Sasseur Reit’s outlet malls performance as a whole, they have actually done pretty well prior to the Covid-19 pandemic. While China’s consumer market has been steadily recovering, it is still anyone’s guess as to whether it would reach levels witnessed pre-Covid-19. Thus, Sasseur Reit’s 2H 2020 results would be crucial in predicting its recovery trajectory.

Tenancy profile

Looking at a REIT’s tenancy profile allows one to see if there is any risk in relation to the tenants. This can be concentration risks or short-term lease renewal risks. For Sasseur Reit, there were a few interesting points to highlight.

Tenant mix

With regards to Sasseur Reit’s tenancy profile, due to the outlet malls, a majority of its tenants unsurprisingly belong to the fashion and sports industry.

Source: Sasseur Reit 1H 2020 financial presentation

As of 1H 2020, close to 77% of Sasseur Reit’s revenue came from fashion, sports and international brands. Interestingly, the same trade sectors only took up around 56% of the net leasable area of the outlet malls. This can signify two things; 1) Sasseur Reit’s individual tenants contribute a large portion of revenue or 2) mall space is optimised to generate revenue. To determine if it is the former or latter, I looked at Sasseur Reit’s top 10 tenants by gross revenue.

Source: Sasseur Reit FY 2019 annual report

As seen, Sasseur Reit’s largest tenant contributed to 7.45% of gross revenue. While this is definitely on the high side, Sasseur Reit’s top 10 tenants only contributed to 18% of total gross revenue. Taken as a whole, this is really not that high an amount actually. As such, I think it can be said that Sasseur Reit has managed to optimize its retail space for stores relating to fashion, sports and international brands.

While it might be good news that Sasseur Reit was able to optimize space relating to the sector which provided the most revenue, we should not forget that this also means that Sasseur Reit’s gross revenue is heavily cyclical in nature. I will be touching on this more when discussing the future outlook of Sasseur Reit.

Weighted average lease expiry (WALE)

Looking at a REIT’s WALE provides insight into potential risks relating to a REIT’s income. For Sasseur Reit, there is considerable risk when assessing its WALE.

Source: Sasseur Reit 1H 2020 financial presentation

As seen, tenant leases contributing to 62.4% of Sasseur Reit’s gross revenue are up for renewal this year. Given the current economic climate, this could potentially be a major stumbling block for Sasseur Reit in the short term. While Sasseur Reit’s management has emphasized that short leases allow under-performing brands to be readily replaced to keep up with consumer trends and maintain the attractiveness of its outlet malls, I do not think having a huge chunk of gross revenue being potentially affected by lease renewals in a single year is a wise decision.

Comparing the WALE for FY 2019 and 1H 2020 also got me a little worried.

Source: Sasseur Reit FY 2019 annual report

As seen, the WALE decreased slightly from December 2019 to June 2020. In addition, in the span of 6 months, Sasseur Reit only managed to reduce its gross revenue that was up for renewal this year by 11.2%. I would have expected Sasseur Reit’s management to hasten the process given the significant potential short-term risk to the REIT’s income.

Nevertheless, investors should still rely on Sasseur Reit’s 2H 2020 results to determine the REIT’s success in retaining or attracting new tenants. In particular, investors would want to look at both the occupancy rate and WALE in tandem.

Future outlook

When it comes to predicting the outlook for Sasseur Reit, there can be an endless amount of factors which could influence it. For this section of the post, I would just mention a few more significant ones which I feel would directly affect Sasseur Reit. Do note that these are just rough predictions of mine and may or may not directly affect the future performance of Sasseur Reit.

China’s consumer market

Given that international flights continue to remain close to non-existent, Sasseur Reit has to predominantly depend on China’s domestic market for its income. As such, to predict the near term income trajectory of Sasseur Reit, looking at domestic retail spending and household income might yield some clues. After all, individuals would be more inclined to increase their discretionary spending when they have higher incomes.

Retail spending

In September 2020, China recorded a 3.3% year-on-year increase in its retail sales of consumer goods. However, total retail sales of consumer goods from January to September 2020 still recorded a 7.2% decline.

Source: National Bureau of Statistics of China

While total retail sales might tell a general pattern, retail sales in relation to garments, footwear, hats and knitwear would be more relevant to Sasseur Reit. From the statistics above, it was great to see a year-on-year increase of 8.3% in September 2020. However, overall spending for 2020 has still decreased by 12.4% so far.

For the year-on-year increase of 8.3%, I feel it can mainly be attributed to pent-up shopping urges and efforts by the Chinese government to increase domestic spending. Amidst the Covid-19 pandemic and deteriorating relations with the USA, China has increasingly looked to boost its domestic spending and curb reliance on foreign exports. This is not surprising given that China is the most populous country in the world.

To encourage domestic spending, the Chinese government has issued electronic retail vouchers to its citizens. Furthermore, retail malls across the country, including Sasseur Reit’s outlet malls, have also held various sales events to attract and encourage shoppers’ spending.

As such, based on these efforts to increase domestic spending and the statistics above, I expect Sasseur Reit to continue on its path of recovery in 2H 2020. However, replicating or improving upon 2019 results would literally be a downright impossible task.

To determine if this recovery can be carried into 2021, I decided to look at China’s household income and expenditure trends.

Household income and expenditure

The rationale of looking at household income is simple, if household income increases, individuals would have more room for discretionary spending, or otherwise known as spending on their wants.

Given that the luxury and fashion apparels industry contributed to a significant portion of Sasseur Reit’s income, an increase in household income would also increase the probability of retail spending for such items. As such, I thus looked at household income and expenditure in China over the past 5 years.

More specifically, I would be looking at per capita income of urban households, given that the targeted audience of Sasseur Reit’s outlet malls is middle to high-income earners. In terms of expenditure, I would be looking at expenditure on clothing.

As seen, there has been steady growth in the per capita income levels of urban households in China over the past 5 years. This is potentially good news for Sasseur Reit as individuals would have more disposable income for retail spending. However, this increased in income levels has not really translated to increased spending on clothing.

Over the past 5 years, spending on clothing has only increased at a CAGR of 1.9%. While this might be a relatively tiny growth, any positive growth in clothing spending is still a good sign for outlet malls.

Looking at the past growth trend of income and clothing spending, I feel that the ongoing recovery in retail spending can be sustained through 2021. This is based on the fact that China’s economy has seen positive growth in Q2 and Q3 of 2020. Furthermore, the unemployment rate in urban areas has also slightly decreased by 0.2% in September as compared to August. The current unemployment rate in urban areas stands at 5.4%.

All in all, I believe that Sasseur Reit should continue to experience positive growth in tandem with China’s consumer market.

Huge potential growth in China’s luxury market

Besides positive recovery and growth in retail spending, another boon for Sasseur Reit would be the potential growth of China’s luxury market. Make no mistake though, the luxury market in China is currently already huge. However, there is potential that it might get even bigger in the coming years. This is due to several of these driving factors.

Expected increase in domestic spending

As I mentioned earlier, China is looking to boost its domestic consumer spending due to current international travel bans. Pre Covid-19, China luxury brand consumers would often do their shopping overseas as it was cheaper and safer (from counterfeit goods). Indeed, close to 70% of these consumers did their shopping overseas. However, with passenger air travel not expected to recover any time soon, these consumers would be ‘forced’ to spend domestically instead.

Even before the onset of Covid-19, China was already expected to account for 28% of the global luxury market by 2025, up from just 11% in 2019. China consumers were also expected to make up nearly half of the global luxury consumer market by 2025. In addition, the Chinese government has also done their part by slashing import tariffs and expanding the limit for duty-free shopping. This provides a major boon for the mainland luxury market and further encourages domestic spending among Chinese luxury consumers.

A growing luxury market would bode well for Sasseur Reit given its focus on outlet malls. Furthermore, Sasseur Reit would also continue to be attractive to luxury buyers due to its rigorous system of prohibiting the sale of counterfeit goods. This would inspire confidence from shoppers at Sasseur Reit’s outlet malls.

A new generation of luxury consumers

Currently, the major contributor to China’s luxury buying population is those born in the post-1980s. However, in recent years, the post-1990s generation has become increasingly prevalent in the luxury market.

Already as of 2019, post-1990s generation contributed to around 29% of luxury spending, similar to the 1960s to 1970s generation.

This is not really surprising given that this generation is the most digitally savvy and prominent on social media platforms. Hence, there is a pressure to look good and stand out amongst their peers. This can be seen in younger individuals chasing the ‘hypebeast’ trend and buying the most popular and trendy luxury brands.

Moving forth, Gen Y and Gen Z consumers are expected to continue being the majority of China luxury consumers.

Luxury brands are buying into the China market

With China being a major player in the luxury consumer market, major luxury brands have also been expanding their reach in the Chinese market. As a matter of fact, this trend is nothing new as luxury demand in China has been growing since 2015. However, given that Covid-19 has practically laid waste to global demand, luxury brands have no choice but to pivot to the Chinese market.

In the midst of this pivot, Sasseur Reit should be able to capitalize on it given that outlet malls traditionally attract more crowd than retail malls when it comes to luxury shopping. This is due to the difference in prices of luxury items in outlet malls as compared to traditional retail malls. As such, I expect Sasseur Reit to benefit from the opportunities that come with China’s growing luxury market.

The growth of the second-hand luxury market

The growing proportion of Gen Z luxury shoppers can be a double-edged sword for Sasseur Reit. On one hand, they provide a catalyst to luxury consumption which can provide more sales for Sasseur Reit. On the other hand, this demographic of shoppers are also becoming increasingly environmentally conscious when it comes to purchasing fashion apparels.

Indeed there is already a growing market for second-hand luxury items spurned by the demand of millennial shoppers. This is both due to greater environmental awareness and lesser earning capacity of millennials as compared to their older counterparts. After all, the prospect of getting an authentic luxury product cheaper is definitely attractive in the current economic climate.

While the second-hand luxury market is growing, it might not pose a big threat to Sasseur Reit in the short term. This is due to the cultural significance of luxury items among the middle-aged Chinese population, who are also the biggest consumers in the luxury market.

Among the affluent middle-aged Chinese, luxury items are a symbol of social status and wealth. Such thinking is shaped by Confucianism whereby the individual does not exist independent of society. Thus, individuals are expected to adhere to social norms, which in the case of luxury items, is seeing such items as badges of economic success. This is slightly similar to the idea of how we Singaporeans equate owning big houses and cars as a sign of success. Hence, buying second-hand luxury items might be frowned upon as it might be seen as betraying one’s own self-worth.

On the other hand, millennial shoppers often do not abide by such ‘old-fashioned’ thinking. Young affluent luxury shoppers instead view luxury items as an expression of their own personalities. Hence, they would be more open to buying second-hand luxury items.

As a whole, the impact of the second-hand luxury market on Sasseur Reit can go either way. Personally, for me, I feel that issues of sustainability and cost would significantly affect the way in which consumers shop in the future. Thus, I am more inclined to think that the second-hand luxury market would negatively affect the growth of Sasseur Reit. Nevertheless, I still think it is a long term process and Sasseur Reit should still do well in the short term.

Potential acquisitions

In addition to China’s luxury market, Sasseur Reit’s growth also depends upon acquisition opportunities. As per Sasseur Reit’s management, there is an investment mandate to focus on outlet malls in Asia. In terms of acquisitions, Sasseur Reit can potentially tap upon its sponsor’s pipeline of properties.

Source: Sasseur Reit 1H 2020 financial presentation

Sasseur Reit’s potential pipeline of acquisitions is considerable, given that it has 2 ROFR properties and 5 operational pipeline properties managed by its sponsor. Investors should take note that the sponsor only owns and operates the 2 ROFR properties. The other 5 pipeline properties are managed but not owned by the sponsor.

While the properties provide Sasseur Reit with potential room to grow, there is not much geographical diversification given that all these outlet malls are situated in China. However, this might not be that huge an issue given the size of China’s domestic market.

All things considered, while Covid-19 has dampened the short term outlook of Sasseur Reit, it should perform well in the long term. This is largely due to increased retail and luxury spending in China coupled with growth opportunities from the REIT’s sponsor.

Valuation

Before ending this post (yes, I know it is really long), I would take a look at Sasseur Reit’s current valuation to determine a suitable entry price. As usual, I will be looking at three aspects; PB ratio, AFFO yield and distribution yield.

PB ratio

With a market price of $0.77, Sasseur Reit’s PB ratio stands at 0.86. As a comparison to other S REITs on the market, this PB ratio is on the low side. This could be due to the fact that Sasseur Reit is relatively new and its sponsor has an unproven track record.

To determine a fair entry price, I decided to look at the median PB trend for Sasseur Reit. What I did was to compare the highest and lowest price of Sasseur Reit in a year and their corresponding PB ratio. The rationale for doing this was to determine a fair PB ratio based upon the market’s sentiment of Sasseur Reit.

From the above, we can see that Sasseur Reit’s median PB ratio hovers around the mid to high 0.80s. This means that the current PB ratio of 0.86 can be deemed as quite a fair PB ratio. However, to have a more comfortable margin of safety, I would look to invest in Sasseur Reit when its PB ratio falls to around 0.7. This translates to a market price of $0.63.

AFFO yield

At the market price of $0.77, Sasseur Reit’s AFFO yield stands at 7.71%. For Sasseur Reit, using AFFO yield as a form of valuation is difficult as there is no comparative market cap rate for outlet malls. Furthermore, Sasseur Reit’s unique income model makes it tough to be used for comparison even if there is a market cap rate.

For the sake of simplicity, I thus decided to use Sasseur Reit’s own cap rate as a form of measurement. Using an annualized value based on Sasseur Reit’s 1H 2020 results, its cap rate comes up to around 7.17%. As AFFO yield takes into account the predicted future growth of AFFO, I assigned an expected growth of 15%. While 15% might be a high amount, I actually have my reasons for assigning this value.

The huge drop in Sasseur Reit’s AFFO for 2020 is mainly due to the Covid-19 pandemic. Given that China has managed to control the spread of Covid-19, I expect Sasseur Reit to continue recovering to results shown pre IPO. Thus, with a 15% growth in AFFO, Sasseur Reit’s AFFO for 2021 would be around 6.83 cents. This would be slightly lower than the annualised AFFO of 6.89 cents for 2018 and significantly lower than the 7.43 cents seen in 2019.

With a predicted AFFO growth rate of 15%, the current market price of $0.77 can be considered to be undervalued. Furthermore, with the market AFFO yield being lower than Sasseur Reit’s own internal cap rate, there might also be room for future unit price growth.

Distribution yield

Based on Sasseur Reit’s current market price, the annualized distribution yield for 2020 stands at 7.38%. In comparison, the distribution yield for FY 2019 and 2018 stood at 8.2% and 10.3% respectively. If we were to simply compare the numbers, it might seem that Sasseur Reit is quite overvalued.

However, in calculating the annualized distribution yield for 2020, I assumed that results for 2H 2020 would be similar to that of 1H 2020.

This would most likely not be the case as China’s retail market has shown signs of recovery. As such, 2H 2020 results should improve upon 1H 2020 results, resulting in a higher distribution amount to unitholders. This would then push the annualized distribution yield closer to the figure seen in 2019. On this basis, I thus think that the current market price is considered fair.

Personally, for me, a comfortable entry price based upon distribution yield would be $0.65. This would provide a distribution yield of 9.2%, assuming that the annualized distributable income per unit for 2020 recovers to 6 cents.

Based on the three valuation methods, I feel that a comfortable entry price for Sasseur Reit would be between $0.62 to $0.65. Of course, this price range is entirely based upon my own perspective and opinion. For some individuals, they might choose to enter at a lower range due to the perceived risk of the REIT. Thus, if you do want to invest in Sasseur Reit, you will have to find your own acceptable risk tolerance level.

Concluding thoughts

All things considered, I feel that Sasseur Reit is a worthy addition if anyone is looking for exposure to the China consumer market. While Covid-19 has certainly put the brakes on any positive momentum of Sasseur Reit’s unit price, I remain cautiously optimistic of its long-term potential. This is due to the fact that China remains the only country in the world to record positive economic growth in 2020.

Nevertheless, Sasseur Reit remains a retail-focused REIT at its core and thus its ups and downs would be dependent on spending power and patterns. As such, investors should be psychologically ready to accept that it will be a rocky ride, at least till the end of next year, given the debilitating economic effects of the pandemic.

At its current market price, I do not think that Sasseur Reit is a great buy given the risk factors. However, I will most likely be buying into Sasseur Reit at the next market correction if its results continue to recover.

So there it is, my own review and analysis of Sasseur Reit. This has to be the longest post I have written on this blog to date, thus I apologize if some of you guys found it too lengthy😅.

Do let me know what your opinions are, I will also try to make future posts shorter and more concise:).

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4 thoughts on “Sasseur Reit (SGX: CRPU), a hidden small-cap gem?”

  1. Sasseur only reports EMA rental income in the financial statement and annual report, but no figure for gross revenue. Do you have any luck finding gross revenue info?

    1. Hmm…the only figures I got for gross revenue were from the prospectus. But then again it is not relevant anymore.

      You could work backwards from the EMA rental income to get a rough figure though haha.

    1. Haha yeap that’s why it can only be a rough estimation.

      This is also one of the disadvantages of the whole EMA model due to certain degrees of opaqueness when it comes to the income source.

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