An Honest and Blunt View of the Sasseur REIT IPO

by: Tam Ging Wien


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In last week's post, we shared with our ProButtefly readers a Qualitative Analysis of Sasseur REIT. This was because only the preliminary prospectus was released and the figures were not available to us to do any quantitative for analysis.

Sasseur REIT released its prospectus mid-week and now that we have finally gotten hold of numbers, we can only say that we are highly disappointed. Sasseur REIT did a great job of attracting attention by being the first REIT Singapore IPO of 2018 and the first China Outlet Mall REIT to be listed in Singapore. However, its creative and complex structuring, income support, poor valuation, high concentration risk and high price makes it rather unappetizing to us.

Therefore, this is a follow up blog post where we would like to point out the points about Sasseur REIT that we find unattractive. We have decided to release this post today instead of of on our regular Tuesday blog post due to Sasseur REIT's IPO deadline being 12pm today. We are sure some readers would find the information beneficial to consider before subscribing to this IPO.

If you have not read our post on the Qualitative Analysis of Upcoming Sasseur REIT IPO, please do so before reading on.

EM Agreement is a Complex Form of Master Lease

It is ProButterfly personal view that the Entrusted Management Agreement (EMA) structured within Sasseur REIT is a complex form of a master lease.

In traditional master leases, a single tenant would rent the entire asset from the REIT for a certain period of time. In the case of Sasseur REIT, the appointed Entrusted Manager would manage the entire REIT portfolio for a period of 10 years and take a large performance fee limiting the upside.

A poorly structured master lease could negatively affect a REIT’s performance as with the case of Soilbuild Business Space REIT and Sabana REIT.

Master Leases creates a counter-party risk to the REIT where they are highly dependent on the tenant to fulfil the master lease obligations. In the case of Soilbuild REIT, it was hit by a default of one of its largest tenants – Technics Oil & Gas in 2016. In 2017, it was hit with a second defaults from NK Ingredients which is also among its largest tenant. News are now swirling on a possible 3rd default by KTL Offshore who is currently plagued with cashflow problems. The issues with Sabana REIT is similar and needs no introduction.

Could the Entrusted Manager run into problems as well? Would the sponsor step-in to help should problems arise between the Entrusted Manager and the REIT? Either way, should anything happen, it would be too late as investors would have faced a major stock price decline should problems arise with the Entrusted Manager.

In addition to the counter-party risk, the complex structure, calculations and formulas within the Entrusted Management Agreement (EMA) between the REIT and the Entrusted Manager and between the Entrusted Manager and the tenants create many layers that makes the entire arrangement rather opaque to investors. This could result in significant leakage of revenue to the detriment REIT unitholders or other complex obligations that could implode later in the future.

Investors Takes on the Risk of Poor Performance of the Tenants

By structuring a complex income support structure that could fall away indicates to us that the management is highly confident of achieving a target above the minimum rent for the first 2 years.

As the income of the REIT is highly dependent on the sales turnover of the tenants, should the income support falls away, investors are left to take on the risk of the poor performance of the tenants.

Sasseur REIT’s Sister Company Is Listed on China’s Third Board

Source: http://www.sasseur.com/fzlc/index_117.aspx

Major Chinese corporations would usually be listed on the Shanghai or Shenzhen exchange with a cross-listing on the Hong Kong Stock Exchange.

Sasseur however decided to list on China National Equities Exchange and Quotations Center (NEEQ) which is also unofficially known as the "The New Third Board". The NEEQ is an over-the-counter system for trading shares of public limited company that are not listed on the two stock exchanges in Shenzhen and Shanghai.

I quote a comment made by Wei Ran, an analyst at Sinolink Securities: “Smaller companies thirsty for cash are turning to the mainland NEEQ market as it gives a higher valuation with a lower threshold, and the costs are also cheaper” (Source: http://www.scmp.com/business/article/2005157/chinas-new-third-board-booming-ipo-queue-main-market-still-backed). Enough said.

This appears to indicate that Sasseur REIT’s sponsor is probably not a “First Class Pedigree” unlike the sponsors of other locally listed REITs like CapitaLand, Ascendas, Keppel and Mapletree.

Expensive Valuations

Source: https://reitdata.com/

We have tabulated the DPU Yield, Gearing and Price-to-NAV per Unit retail trust with significant real estate asset exposure in China and Hong Kong.

What we found that that Sasseur REITs gearing is slightly higher than the average while its Price-to-NAV per Unit is significantly higher that all its peers.

It also has the highest yield among its peers at 7.5% in the first year. This increases to 7.8% in the second year at the IPO price of $0.80.

The high yields are a result of the Entrusted Management Agreement (EMA) with the minimum rental guarantee. Without it, the yield would be significantly lower. This high yield also likely resulted in a high asset valuation from the valuers.

Similarly without the EMA, the real estate value is likely to be lower. Which brings us to the next point about questions around its asset valuation.

Questions about Sasseur REIT’s Asset Valuation

As pointed out in our Qualitative Analysis of Upcoming Sasseur REIT IPO, we estimate that NAV stated in their balance sheet could be 25% overvalued.

The Hefei outlets are valued almost as much as the Chongqing outlets, yet derive significantly less EMA Rental Income. Yet, the occupancy rate is similar at above 95%. The GFA and NLA of the Hefei and Kunming outlets are also significantly larger than the Chongqing outlets.

If the Hefei, Kunming and Bishan Outlets fail to grow at the aggressive forecasted growth rates, we are likely to see a revision of the asset valuations downwards which may cause a spike in the gearing. This would lead to significant risk to investors especially when REITs are required to keep its gearing below the regulatory limit of 45.0%.

We believe that the management had structured Sasseur REIT with the Entrusted Management Agreement (EMA) in such a way to extract a higher valuation for its suburban assets. We suspect that intrinsically, those assets are unlikely to be valued so high.

Significant Concentration Risk

As pointed out in our Qualitative Analysis of Upcoming Sasseur REIT IPO, we think that Sasseur REIT is exposed to too much concentration risk, we list out the major concentration risk that we have identified:

  • Rental Over dependent on the Chongqing Outlet
  • Heavy Concentration in the Fashion Sector
  • Heavy Dependency on Turnover Performance of Tenants
  • Short Least Expiry Profiles

Concluding Remarks

Due to the above points, ProButterfly has therefore decided not to subscribe to the Sasseur REIT IPO.

However, if the price of the REIT falls significantly below the IPO price after the initial stabilisation period has ended and the yield is pushed up to double digits, we may consider an entry. However, we are unlikely to hold on to Sasseur REIT longer than its guaranteed income period, especially if it falls does indeed fall away in 2020.

Investors who have decided to invest in Sasseur REIT should monitor the outlet sales figures closely quarter-to-quarter. If the outlet malls are indeed able to ramp up sales as quickly as the projected figures, then perhaps we it might be worth holding on beyond the 2 year income support.

Investors should also take note that should there be any adverse situation that directly impact these Chinese outlet malls, Sasseur REIT will be likewise be significantly impacted. If the sales of these outlet malls outperform, Sasseur REIT could truly be a new class of actively managed REITs to allow investors to greatly benefit from the performance of the tenants.

The only silver lining we see with Sasseur REIT is the high alignment of interest of the sponsors and the significant number of cornerstone investors.

Positioning to Ride the Recovery

Opportunities and Risk Post-COVID-19 Pandemic in the various S-REIT Sectors

The COVID-19 crisis has brought about an unprecedented economic shock to many sectors, and yet it has also generated opportunities in others.

The tech sector has been a major beneficiary and along with that, S-REITs exposed to the Data Centre sector such as Keppel DC REIT and Mapletree Industrial Trust gained phenomenally.

But are the investment opportunities in REITs now gone? Personally, we do not think so. There are still many REITs below their pre-COVID-19 levels poise to recover strongly in the coming quarters – and now it is the best time to prepare to capture the post-COVID recovery.

Join us as we discuss the opportunities and risk in the S-REIT space sector-by-sector as we try to uncover recovery opportunities for FY2021 and beyond. Real estate sectors that we will be covering include the Retail, Hospitality, Offices, Healthcare, Industrial and Data Centres.

Our speaker Tam Ging Wien will be sharing his knowledge and experience including:

  • Part 1: A Survey of the REITs Landscape Around The World
  • Part 2: Key Metrics in Identifying Strong REITs
  • Part 3: Real Estate Sector Review Amidst the COVID Crisis
  • Part 4: Screening for Opportunities
  • Part 5: Q&A

Some key highlights that will be covered includes:

  • Real estate sector-by-sector review on COVID-19 impact and recovery opportunities. Sectors covered include the Retail, Hospitality, Offices, Healthcare, Industrial and Data Centres.
  • Opinion on which sector will continue to stay resilient and which are poised to recover quickly post-pandemic
  • The right metric to use when screening for high quality REITs
  • Case studies of REITs which are considered high quality
  • Step-by-step demo of how to screen for high quality REITs on your own

During the sharing session, various Singapore-listed REIT examples will be used.

There will also be a Q&A so that members of the investing community may engage in open dialog and discussions in order to deepen their understanding of REITs. Do prepare your writing materials for note taking.

Please note that the duration of the on-site seminar is 7pm to 9:45pm Singapore Time (GMT +8).

The details of the event are as follows:

  • Seminar: Positioning To Ride The Recovery
  • Date: 5th May 2021 (Wed)
  • Time: 7:00pm to 9:45pm
  • Venue: RNN Conference Centre - Kyoto Training Room (Level 4), 137 Cecil Street, Cecil Building #04-01, Singapore 069537
  • Fees: S$10.00
  • Sign-up Link: http://reitessentials.eventbrite.com/

To learn more about REITs, we recommend the article: What are REITs?

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