Brief Growth Ideas: REIT Discover: Sasseur Sizzles with 9% Yield and more

In this briefing:

1. REIT Discover: Sasseur Sizzles with 9% Yield

1. REIT Discover: Sasseur Sizzles with 9% Yield

REIT Discover is an insight series featuring under-researched and off-the-radar REITs in an attempt to identify hidden gems and gems in-the-making. In this issue, we follow up on the first China outlet mall REIT listed in Singapore, Sasseur Real Estate Investment (SASSR SP) , whose share price is down 7.5% from its IPO price of S$0.80 since its debut on 28 March 2018. Its distributable income exceeded its IPO forecast for FY2018. Annualized distribution per unit (DPU) yield for FY2018 was 9.1% based on current price. Moving forward, FY2019 DPU projection is S$0.06, translating into a DPU yield of 8.1% compared to FY2018. It is likely that the DPU for the projection years are conservative and the REIT manager will endeavour to beat the IPO forecast for FY2019 and even the annualized DPU for FY2018.

Sasseur REIT’s business model differs from other typical retail malls which lease out assets and receive rental income based on an agreed rental rate. Instead, it has structured a complex form of master lease, called the Entrusted Management Agreement (EMA), where it received a percentage of tenants’ sales turnover as the rental. As such, income generated its portfolio of properties are mainly sales-driven and hence may be unstable.

Essentially, the EMA encompasses a set of obligations that binds the sponsor to a two-year income support to Sasseur REIT in exchange for a long-term master lease which limits DPU upside. This is because a large chunk of the portfolio’s potential revenue growth will go to the sponsor. 

We are not saying this is all bad; the master lease under the EMA provides income stability to the REIT given that gross revenue is sales-driven. Rather, we acknowledge the resilience of the outlet mall business model as seen from the long and successful track record of Tanger Factory Outlet Centers Inc (SKT US) in the United States and strong growth of Bailian Group’s outlet business in China.  What is striking is China’s small outlet market size relatively to the mature regions despite the sheer size of its growing middle to upper-middle class population. This suggests that China’s outlet industry could grow significantly.

At 29% gearing ratio, Sasseur REIT has additional debt headroom of S$283mn to tap on its right-of-first-refusal (ROFR) pipeline of assets to grow its S$1.5bn initial portfolio. Even without inorganic growth, two of its properties, representing 43% of total portfolio valuation, are relatively new assets in their third year of operation, suggesting strong potential for growth. Sasseur REIT looks promising based its results in the last three quarters. Sasseur REIT’s premium P/NAV of 1.03x at the point of listing was surprisingly expensive given that its properties are non-prime outlet malls in China’s Tier-Two cities. P/NAV has since fallen to an attractive 0.8x.