You’ve probably heard about China’s government crackdown, which has resulted in numerous counters’ share prices diving down.
However, there is one counter that stands out: Sasseur REIT (SGX:CRPU).
This REIT appears to have escaped the CCP’s wrath, while other Chinese companies continue to be hammered. Its stock price was S$0.91 on August 21, 2021, up 16.67% from the previous year. So what makes Sasseur REIT so unique and resilient? Is it a REIT that is worth investing in?
Let’s take a look at its fundamentals!
Sasseur REIT’s Portfolio Overview
Sasseur REIT, the first outlet mall real estate investment trust listed in Asia, with a portfolio of outlet malls in China, was listed on the Singapore Exchange on March 28, 2018. Currently, its portfolio consists of four properties:
- Sasseur (Chongqing Liangjiang) Outlets
- Sasseur (Chongqing Bishan) Outlets
- Sasseur (Hefei) Outlets
- Sasseur (Kunming) Outlets
Sasseur (Chongqing Liangjiang) Outlets caters to middle and upper-class consumers who have more disposable income. It is one of the malls in Chongqing that offers the most international brands.
Sasseur (Chongqing Bishan) Outlets is a one-stop shopping destination located in Bishan and West Chongqing that combines retail shopping with entertainment, food, education, and leisure. The outlets follow the “Super Outlet” business model, which is common across the assets of its sponsors. This business concept strives to transform outlet malls from purely retail destinations to shopping and lifestyle destinations, thereby attracting more visitors. For this particular outlet, you can find a “Super Children’s Center”, which includes a wide variety of baby and children’s clothing stores, an early childhood education and enrichment centre, a playground and photography place for kids, and a children’s theatre. It also has a “Super Sports Hall”, where you can find a sports training centre and outlet stores of different sports brands.
Sasseur (Hefei) Outlets caters to middle-class consumers and features a number of recreational options and luxury brand retailers. It also houses one of east China’s largest cinemas and Hefei’s first five-star cinema under the UME cinema chain.
Sasseur (Kunming) Outlets is Yunnan province’s largest outlet mall (in terms of GFA). It is aimed at middle-class shoppers who are becoming increasingly interested in premium labels. It also provides a diverse range of retail alternatives, including outlet mall shopping, healthcare services, entertainment, and cultural facilities, giving clients a complete lifestyle and leisure experience that encourages more spending and loyalty.
Financial Performance of Sasseur REIT
Revenue
When we look at the financial performance of Sasseur REIT in the last three years, we can see that it has been doing relatively well from 2018 to 2020. Sasseur’s tenants were impacted by the pandemic, as was the case with several other REITs, resulting in fewer outlet sales in 2020 than in 2019.
As a result, its rental income declined compared to the previous year. However, I was surprised to see that Sasseur’s 2020 distributable income was higher than 2019. Upon further investigation, this discrepancy was due to distribution adjustments* and fair value adjustments and tax, which made 2020 appear to be a better year for the company.
If we consider only the overall return before fair value adjustments and taxes and exclude the distribution adjustments, 2020 came in at S$80.2 million, whereas in 2019 it came in at S$84.3 million, indicating that 2020 did exhibit a slight reduction.
*Distribution adjustments include non-tax deductible expenses for the manager’s management fees paid in units, amortization of upfront debt-related transaction costs, change in fair value of investment properties, deferred tax expense, change in fair value of financial derivatives, and unrealized exchange differences.
After looking at its latest quarter earnings, investors feel at rest knowing that rental income increased 17.4% in the first half of 2021 compared to the first half of 2020 or from S$53.2 million to S$62.5 million, according to the company’s latest Q2 2021 results.
Similarly, its distributable income has climbed by 32% or from S$34.2 million in the first half of 2020 to S$45.4 million in the first half of 2021, indicating that the REIT is on the road to recovery.
Revenue Stream
Before I go any further, I want to share with you Sasseur REIT’s rental income model, which is considerably different from other retail REITs. It employs a ‘Sales-Driven’ Asset Management Model, which links rental income to the actual sales success of its tenants.
As a result, Sasseur REIT’s earnings are split in two. First is the fixed component, which is subject to an annual increase of 3%, and a variable component that is pegged at a percentage of the tenant’s respective total sales.
This strategy allows management to align its interests with those of its tenants, which is a healthy paradigm that will produce a resilient tenant base.
Sasseur REIT works with Diversified Tenents
Sasseur REIT has a well-balanced portfolio that includes 11 different trade sectors. Fashion, sports, and foreign brands are the top three trade sectors, which accounts for over 59.3% of portfolio NLA and 75.1% of portfolio revenue.
In my opinion, Sasseur is currently concentrated on only a few sectors. But hey, it’s an outlet mall, so what can I say?
According to the management, more food and beverage alternatives and lifestyle activities will be introduced in the near future, which is definitely something to look forward to.
When it comes to individual tenants, the top ten accounted for roughly 15.5% of overall gross revenue at the end of FY2020. This diversification of tenants decreases its dependence on a single tenant and enhances the resilience of Sasseur’s portfolio.
Occupancy and Lease Expiry
Sasseur’s portfolio occupancy has been relatively stable over the years, even when the pandemic hit last year.
Compared to other retail REITs, Sasseur’s lease expiry is relatively short. Major tenants have lease terms of 5 to 10 years, while other tenants have lease terms of 1 to 3 years.
According to Sasseur’s management, this was done on purpose. It chose to offer a shorter lease term to phase out underperforming businesses and replace them with brands that are more in line with consumer trends. It also extended leases of successful brands at higher rates.
This appears to be a fantastic idea because Sasseur REIT can keep its mall up to date with the market trends, thus more appealing to consumers. However, it’s also a double-edged sword because a shorter lease term involves a higher risk of vacancy.
Nonetheless, there is no right or wrong way of doing things, and it appears that Sasseur REIT has maintained a high occupancy rate, which is a positive indication their strategy works.
Sasseur REIT’s Dividend Per Unit (DPU)
With a relatively flat distributable income, Sasseur’s DPU has also remained relatively flat over the past three years since its inception.
Additionally, Sasseur REIT’s dividend payout ratio is quite high, with most quarters exceeding 100%.
When a company payout is more than 100%, it is giving away more money than it earns, which is not sustainable in the long run. To me, this is a huge red flag.
Sasseur REIT’s Net Asset Value (NAV)
Next, we see that its NAV hasn’t changed significantly in the past three years, which could be due to the REIT’s lack of large purchases.
- 31 December 2020: S$0.91 NAV per share
- 31 December 2019: S$0.89 NAV per share
- 31 December 2018: S$0.90 NAV per share
Sasseur REIT’s Financial Strength
REITs with a strong balance sheet are the ones that perform well even during trying times.
As of June 30, 2020, Sasseur REIT’s gearing ratio is at 27.8%, which is well below the regulatory limit of 50%. Moreover, they have a 4.5x interest coverage ratio, which gives the REIT some breathing room if needed.
Watch Out!: Debt Maturity in 2023
Sasseur’s debt maturity is largely concentrated in 2023, as shown in the chart below:
With total assets of S$1,857 million, this debt is almost one-third of the company’s entire assets – which makes me nervous.
We need to keep an eye on this total debt if ever we decide to invest in Sasseur and see whether the management can spread or reduce it before 2023. Otherwise, it’s possible that Sasseur will face a credit crunch soon.
Sasseur’s Sponsor: could do better
Good REITs are usually those that have strong financial backing.
The sponsor of Sasseur REITs is Sasseur Cayman Holding Limited, which has 57.82% ownership in the company. This percentage is significantly larger than other REITs, but it’s a positive thing since it ensures that both Sasseur REIT and its sponsor’s interests are aligned.
A REIT with a good sponsor is able to establish its reputation, thus it can get a cheaper interest rate on loans from financial institutions. However, based on Sasseur’s data, its sponsor appears to be feeble, since the current weighted average cost of financing is at 4.4%. With other low-interest options, this can be considered high.
A good sponsor also ensures a pipeline of assets which Sasseur REIT can acquire and it’s great that Sasseur REIT’s sponsor, one of China’s premier outlet mall operators, has a total of 12 projects in the pipeline that Sasseur REIT can potentially acquire.
*The REIT and its sponsor normally have a right of first refusal agreement in place. As a result, when the sponsor wishes to sell its property, the REIT will be given the opportunity to acquire it before it opens to the market.
Sassuer’s (potential) growth
China’s customers spent US$111 billion on luxury items in 2019, accounting for more than a third of worldwide spending in this category. As the Chinese economy improves, Sassuer’s management expects this value to increase in 2021.
According to China Insights Consultancy, between 2021 and 2030, the retail outlets market in China is predicted to grow at a compound annual growth rate of 17.9%.
This can be partially due to China’s middle class, which is expanding in size and spending power. Buyers are becoming smarter and more conscious of good brands, design, and trends, even in second and third-tier cities.
A considerable need exists for outlets to provide lifestyle experiences as well. This means that, while some luxury things can be purchased online, many buyers will still choose to visit a physical store if it provides an aspirational lifestyle and shopping experience.
VIP membership is also critical to meeting the company’s sales goals. It’s fantastic to see the number of VIP members grow every year. In fact, the overall number of VIP members climbed by 12.5%, reaching 2.37 million in the first half of 2021.
2 Key Risks
1 – Unsustainable Payout Ratio
As I have noted previously, the dividend payout ratio of Sasseur REIT is quite high, with most quarters topping 100%. When a company pays out more than it earns, it is not sustainable long-term.
While it’s wonderful that investors are receiving a higher dividend, we should also make sure the REIT can sustain it in the long run. I recommend that investors keep a close eye on this if ever they decide to invest in Sasseur REIT.
2 – Growing online shopping trend
As mentioned in the article on Capitaland China Trust, the growing online shopping trend is one area investors must pay close attention to. Online purchases in China have been steadily increasing over the year, thanks to the growth of low-cost delivery platforms like Taobao and Pinduoduo. According to eMarketer, in 2021, e-commerce transactions will account for 52.1% of all retail sales in China, up from 44.8% last year.
In addition, brick-and-mortar sales would likely shrink by 9.8% in 2021, following an 18.6% loss the previous year based on the report by eMarketer. If this trend continues, Sasseur REIT will undoubtedly be affected, so investors should keep a careful watch of it.
Nonetheless, the Sassuer management is aware of the growing shift to online shopping and in response, it has implemented online sales initiatives like the WeChat Mini App. The WeChat Mini App allows its outlets to hold live streaming sessions in collaboration with brand partners. Each of the two-hour live stream held in the second quarter of 2021 attracted more than 90,000 viewers.
China also has a far lower retail space per capita than comparable developed nations, according to UBS. I predict that retail malls will thrive in the country over the next decade, given the underserved retail market and the rising income levels of its citizens.
Partnerships with internet behemoths and a shift toward ‘experience or convenience,’ according to UBS, will also be major drivers of success for these malls. It’s great to know that Sasseur REIT is already working on these factors.
Is Sasseur REIT safe?
This might be your first time to hear about Sasseur REIT, so you feel unsafe investing in it. However, investors can take comfort in the fact that Sasseur REIT has a high rank on the Singapore Governance and Transparency Index (SGTI).
For 2021, Sasseur REIT was in 17th place, up from 25th place last year. It is also notably higher in rank than popular REITs like SPH REIT, Keppel DC REIT and Frasers Centrepoint REIT.
Sasseur REIT’s Valuation
So, is Sasseur REIT a good investment right now?
Let’s take a look at how much it’s worth.
Price to book
Given that Sasseur REIT’s current PB Ratio is about 0.97 and its average PB Ratio over the last five years is around 0.92, I believe Sasseur REIT is presently fairly valued.
We can conclude that Sasseur REIT is slightly expensive compared to its peers, such as Capitaland China Trust and MapleTree NAC Trust, which have PB ratios of 0.78 and 0.79 respectively.
However, keep in mind that this is not an apple-to-apple comparison because Sasseur REIT, unlike other REITs, operates outlet malls.
Dividend yield
On the other hand, if you were to look at its dividend yield over the years, with an annualised dividend yield of 7.09% now, I would say Sasseur REIT is slightly overvalued as compared to the average return.
However, compared to its peers Capitaland China trust and Mapletree NAC trust, which has a dividend yield of 5.9% and 6.11%, respectively, Sasseur REIT’s dividend seems attractive.
My opinion
In conclusion, Sasseur REIT is noteworthy because of its unique Art-Commerce Business model and a rental structure that aligns the REIT’s interests with its tenants. It seems Sasseur REIT might be a suitable investment for many investors because of its consistent financial performance in the last three years.
However, because of the large dividend payout, I would hold off on investing in this REIT in the meantime because I’m not very sure how sustainable it is.
In addition, investors should take note that the current outbreak has lowered sales for 2021 following a year of recovery, as shown in the graph below.
I currently do not have any position in Sassuer REIT.
