by: Tam Ging Wien
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A new REIT is coming to town! Sasseur REIT has just lodged its preliminary prospectus on MAS Opera website on 07-Mar-2018. According to various new sources, the IPO is planned for 29-Mar-2018.
Quote from Sasseur REIT’s preliminary prospectus: “Sasseur REIT is the first outlet mall REIT to be listed in Asia with an Initial Portfolio comprising outlet malls located in the PRC. Unlike traditional retailing formats such as department stores and shopping malls, sales through outlet malls in the PRC are experiencing strong growth. Because of the strong growth momentum, the PRC’s outlet sector is expected to become the world’s largest outlet market by 2030.”.
See the Business Times new article entitled Sasseur Reit plans up to S$600 million IPO in March and Sasseur Reit cornerstone investors include JD.com and YCH boss.
For access to Sasseur REIT preliminary prospectus, do navigate to the following link on MAS Opera’s website:
As currently only the preliminary prospectus has been launched, the analysis below will be somewhat qualitative in nature and also make some assumptions with regards to the figures and numbers. Therefore, to take the analysis only as a preliminary guidance on the prospect of the REIT, there might be some information that may be added, different, changed or modified later. The figures are also not available and therefore some information will need to be assumed throughout this analysis.
ProButterfly will release a revised analysis when the full public prospectus is released.
A REIT is short form for Real Estate Investment Trust. REITs are a type of professionally managed collective investment scheme with its primary business being the acquiring, owning and financing of income generating real estate.
Let’s take a closer look at Sasseur REIT with an emphasis on the qualitative aspects.
Source: Sasseur REIT Preliminary Prospectus (Page 40)
The appointed manager of Sasseur REIT is Sasseur Asset Management Pte. Ltd. and the trustee is DBS Trustee Limited. Sasseur REIT has a special entity known as the Entrusted Manager who is Sasseur (Shanghai) Holding Company Limited. Sasseur REIT is sponsored by Sasseur Cayman Holding Limited.
We will be discussing more about this Entrusted Manager model in the subsequent sections. This model is both unique and brings about fresh risk not present in other REITs and brings about its own pros and cons. This is due to a unique business model of outlet malls where rental income is not pre-agreed at a fixed amount but rather based on a percentage of sales turnover.
Sasseur REIT’s assets are made up of outlet malls rather than traditional shopping malls. The initial portfolio of Sasseur REIT comprises of 4:
Source: Sasseur REIT Preliminary Prospectus (Page 4, 5 & 6)
Sasseur REIT’s preliminary prospectus describes and tabulate the differences between the following types of retail channels:
Source: Sasseur REIT Preliminary Prospectus (Page 7 & 8)
From the above comparison table, outlet malls that Sasseur REIT owners are mainly for luxury and high-end brands which are largely discounted. This means that they are highly apparel and fashion focused. With the luxury and high-end brands, it also implies that they could be susceptible to economic cycles. Should there be a recession, the impact on the revenue to Sasseur REIT could be severely impacted negatively. Likewise, should there be extended and prolonged economic prosperity, Sasseur REIT could stand to benefit significantly. This is because the collect rentals not based on fixed pre-agreed rentals but rather based purely on the tenant’s sales turnover. More on this model in the later section.
However, according to Sasseur REIT preliminary prospectus, it claims that outlet malls tends to exhibit counter-cyclical behaviour and resilience during economic recessions. They quote an independent research report by China Insights Consultancy which was commissioned by related entities dated 05-Mar-2018. The report is attached as Appendix-F in the preliminary prospectus document for US based outlet malls.
This seems counter-intuitive to our rationale in the previous paragraph. However, while the commissioned study quotes only US based outlet malls, there is no firm evidence that the similar counter-cyclical behaviour will occur in China. Either way, Sasseur REIT revenue is expected to be impacted regardless of economic situation be it according to cyclic or counter-cyclic.
Source: Sasseur REIT Preliminary Prospectus (Page 18)
The assets injected by the sponsor uses a “Super Outlet” and “1+N” business model. The “1” representing the outlet mall business platform and “N” reflecting the various lifestyle options that are offered in each of the outlet malls operated by the Sponsor Group, such as entertainment and cultural activities, food and beverages, sports and health, children care centres, sports halls, ecological activities (such as farms) and furniture stores. Therefore these outlets are not a pure retail venue and are lifestyle destination in its own right.
Source: Sasseur REIT Preliminary Prospectus (Page 26)
We find this model rather unique and therefore creates a lifestyle destination to Sasseur REIT’s assets despite these locations being further out from the main city centre.
In the same independent research report q by China Insights Consultancy which was commissioned by related entities dated 05-Mar-2018, the China outlet malls are estimated to grow at a 24.2% compounded growth rate till 2021 and a further 17.9% compounded growth rate from 2021 to 2030.
The same report also quoted to show an 8.2% compounded growth rate in consumption expenditure till 2021 among urban households in China’s Tier-2 cities.
The report is attached as Appendix-F in the preliminary prospectus document.
If this forecast is correct, then Sasseur REIT’s assets would see a tremendous benefit from this explosive growth supported by growing per capita consumption expenditure.
However, it is ProButtefly’s view that these figures appear to be somewhat aggressive in their forecast.
Source: Sasseur REIT Preliminary Prospectus (Page 18)
Source: Sasseur REIT Preliminary Prospectus (Page 16)
Typically, REITs will lease out their assets and receive rental income. The rental income is then distributed proportionally to all unitholders according to their fractional ownership of units (or shares) in the REIT.
For Sasseur REIT however, this is not the case. Instead of charging a pre-agreed rental from its tenants, it has structured the agreement using an Individual Entrusted Manager Agreement (IEMA) where it received a percentage of the tenant’s sales turnover as the rental. Therefore it has a high dependency on the sales performance of its majority retail tenants. This results in a very active management of the assets as opposed to traditional REITs which are more passively managed and requires the appointment of an Entrusted Manager (EM).
The appointed Entrusted Manager (EM) is Sasseur Shanghai and the agreement duration are for 10 years from the Listing Date.
According to the preliminary prospectus, we quote “Sasseur REIT’s business model differs from other typical retail malls because of the atypical character of the lease agreements signed with the retail outlet mall tenants, as well as the method of collection of rental income from such tenants. Most of the tenants have entered into short term sales-based leases, whereby the rent is determined solely based on turnover as opposed to a fixed rent. Furthermore, to monitor the sales collection of each retail tenant, the Sponsor has in place a “point-of-sale and cash management system” in each shop unit of the retail tenant whereby the revenue collected from the sales of each retail tenant is retained by the Sponsor and the monthly rental will be deducted, after which the balance will be returned to the tenants. As a result, the income generated from the Properties is predominantly sales-driven and therefore, the Properties require very active management.”
In the Entrusted Manager (EM) modal, Sasseur Shanghai is appointed to operate, maintain, manage and market the assets in the REIT. Sasseur REIT will therefore be entitled to receive rental from the EM (i.e. Sasseur Shanghai) instead of from the individual tenants. This is similar to a master lease agreement. These rental consist of 2 components:
Pursuant to the EM Agreements, Sasseur REIT is entitled to a Minimum Rent and all the operating expenses of the assets shall be borne by the EM or the Sponsor. The Minimum Rent is for the following 2 periods:
The forecast of the fixed and variable component for the period “Listing Date to 31 December 2018” is shown in the table below as extracted from Sasseur REIT’s preliminary prospectus.
Source: Sasseur REIT Preliminary Prospectus (Page 5 & 33) with derived calculations added for clarity
According to the preliminary prospectus in page 33, we quote “for Forecast Period 2018, the Fixed Component is expected to contribute not more than 70% of the EMA Resultant Rent.”. Further we a quote “for Forecast Period 2018, the aggregate Variable Component is expected to contribute not less than 30% of the EMA Resultant Rent”.
From the above table, we can see that for the Forecast Period 2018, 67.4% of the EMA resultant rent is made up of a fixed rental component while at least 32.6% will be made up of a variable component in order to achieve the EMA resultant rent. For the Projection Year 2019, the amount is 53.7% and 46.3% respective. Therefore based on the projections in the preliminary prospectus, it seems that Sasseur REIT will increasingly depend on the growth of the sales from the individual outlets which contributes to the increase in the minimum variable component.
Beyond Forecast Period 2018, the Fixed Component shall step-up at an escalation rate of 3.0% per annum. According to the preliminary prospectus, this is done to be aligned with inflationary expectations.
The variable component for each asset is pegged to a percentage of each asset’s total sales in accordance with the following percentages:
Should there be any residual amount from the gross revenue paid by the EM to Sasseur REIT, after deducting the EMA Resultant Rent, EM Base Fee and EM Performance Fee will belong to Sasseur REIT. In other words, the residual amount will not be paid out to the unitholders.
In the event that the individual assets EMA Resultant Rent falls below the Minimum Rent, Sasseur REIT shall be entitled to receive the shortfall. The Minimum Rents for Forecast Period 2018 and Projection Year 2019 amount to RMB472.9mil (S$95.9mil) and RMB611.4mil (S$124.0mil). The Minimum Rent condition will fall away if the initial portfolio achieves the Minimum Rent for two consecutive years; i.e. Forecast Period 2018 and Projection Year 2019. The Minimum Rent from FY2020 onwards (if the Minimum Rent condition doesn’t fall away based on the performance of the initial portfolio) shall be equivalent to the Projection Year 2019 Minimum Rent.
This entire structure is basically a complex form of income support within the entity where the EM guarantees Sasseur REIT a minimum rental.
The benefit of this structure is that unitholders will be able to ride a DPU upside growth should the individual asset’s total sales exceed expectations. Unitholders will get to ride the growth as there is a revenue sharing component built into the calculation of the EMA Resultant Rent. Should sales fall below expectation, the shortfall will be made up the EM (i.e. Sasseur Shanghai) and/or the sponsor while the Minimum Rent condition is in force.
However, in the scenario where for 2 consecutive years should the payout of the EMA Resultant Rent exceed the Minimum Rent, the Minimum Rent condition will fall away. Therefore if the sales performance of the outlets suddenly fall, there will not be any Minimum Rent conditions to buffer this DPU.
We think that for such an agreement to exist would obviously require an agreement between the sponsor and the EM (i.e. Sasseur Shanghai) which are related entities. If the EM is not confident of meeting this target of the Minimum Rent, the agreement is unlikely to be signed. Therefore, in our view, the targets will most probably be met and the Minimum Rent condition will most likely fall away from the 3rd year onwards where the risk is now transferred from the EM to the unitholders.
Therefore, investors in this REIT must have keep a close eye on the performance of the EM (i.e. Sasseur Shanghai) and keep in mind that performance in the 3rd year may be easily predictable. The performance risk of the EM is shouldered by the EM in the first 2 years while it is highly likely that the risk beyond the 2nd year will be shouldered by the unitholders.
We found the understanding of the EM model rather difficult to comprehend as we were deciphering the preliminary prospectus. The modal also makes it difficult to predict as income is derived from the sales of the outlets and therefore susceptible to retail risk which could be out of control of Sasseur REIT, the manager or sponsor. We doubt many retail investors would be aware of this complexity and risk within Sasseur REIT when considering this investment.
The sponsor of Sasseur REIT is Sasseur Cayman Holding Ltd and is headquartered in Chongqing, China. The sponsor is one of China’s largest retail outlet mall operators and currently manages and operates nine retail outlet malls (a total NLA ~620,240sqm).
Sasseur Cayman Holding Ltd through its 100.0% interest in the Cayman Holdco will be the largest single unitholder in Sasseur REIT with between ~55% (assuming the Over-Allotment Option is exercised in full) to ~58% (assuming the Over-Allotment Option is not exercised) interest.
On top of that, the manager receive a base fee of 10.0% per annum of the Distributable Income and a performance fee of 25.0% of the difference in DPU between financial years multiplied by the weighted average number of units in issue for such financial year.
This is very attractive has the sponsor holds a very high interest in the REIT and certainly have an aligned interest for the REIT to perform well. The management fee structure is also based on distributable income and DPU growth which further aligning the interest of the manager and the unitholders.
We find this structure and policy very attractive from the perspective of the unitholder.
Sasseur REIT has been granted a right of first refusal (ROFR) to acquire outlet malls from the sponsor. At this present moment, the sponsor owns two rights of first refusal properties which Sasseur REIT could potentially acquire in the future:
Xi’an Outlets only commenced operations on 30 September 2017 while Guiyang Outlets only commenced operations on 9 December 2017.
Further to these 2 ROFR assets, the sponsor also manages and operates but does not own (i.e. held by an unrelated 3rd party) the following 3 assets:
While managed and operated by the sponsor, these are not managed by the Entrusted Manager (EM). Despite not being owned by the sponsor, the sponsor has rights of first refusal to acquire these 3 assets should the 3rd party entity decide to divest these assets.
All in all, ProButterfly views that the potential acquisition of the 2 Xi’an and Guiyang outlets by Sasseur REIT to be of fairly high potential but will discount the probability that Sasseur REIT will acquire the remaining 3 assets.
Therefore only considering the potential acquisition of the Xi’an and Guiyang outlets, the net lettable area of Sasseur REIT has the potential to increase by 45% from the initial portfolio.
Sasseur REIT counts among the highest number of cornerstone investors among Singapore listed REITs with a total of 12. They are listed as follows:-
There are a number of significant cornerstone investors. However the breakdown of percentage of units or ownership is not provided in the preliminary prospectus.
We will have to see what are their take up rates in terms of ownership in Sasseur REIT and how many units are left over for institutional investors and retail investors to make further comments. However, we do view these cornerstone investors as favorable.
Source: Sasseur REIT Preliminary Prospectus (Page 209)
Source: Sasseur REIT Preliminary Prospectus (Page 210)
From the 2 charts above, it would be glaringly obvious that the majority of the sales and hence revenue is derived from Chongqing Outlets. This implies that Chongqing Outlets is the anchor asset and without it, there would be no significant revenue generated to the EM. This is a very high concentration risk to Sasseur REIT.
Source: Sasseur REIT Preliminary Prospectus (Page 209 & 210)
Source: Sasseur REIT Preliminary Prospectus (Page 4, 5 & 6)
From the charts and table above, the both the independent valuations from JLL and Savills provided assigned a higher valuation with the Entrusted Management Agreements (EMA) in place. On average, the EMA boosted the valuations of the 4 initial portfolio assets from RMB7,250.0mil to RMB7,338.0mil. This is a 1.21% increase in valuation.
Strangely from the table above, 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 Kungming outlets are also significantly larger than the Chongqing outlets.
We are not able to identify the explanation of the above from the preliminary prospectus, but we can only speculate that it is because the sales turnover of the tenants at the Chongqing outlets are significantly much more that the others. If this speculation is true, we would question if the actual valuation of the Bishan, Hefei and Kunming Outlets are actually reasonable based on the vastly different EMA Rental Income Forecast.
In independent valuer’s report provided in the Appendix E mentions that the properties are valued based on a discounted cash flow analysis by did not state the growth rates, discount rates and other assumptions in the analysis. Therefore we can again speculate that the reason is due to a very high growth rate at the Bishan, Hefei and Kunming outlets as detailed in the preliminary prospectus page 174.
Source: Sasseur REIT Preliminary Prospectus (Page 4, 5 & 6) with derived calculations added
Source: Sasseur REIT Preliminary Prospectus (Page 174)
Therefore, we decided to derive our own valuations with the assumption that Chongqing Outlet’s is valuation base. Using a valuation base, we take the ratio of the EMA Resultant Rent for 2019 across all the assets. Using the same ratio and Chongqing Outlet as the valuation base, we revalued the Bishan, Hefei and Kunming. Be found that the 3 assets respectively are 29.8%, 28.4% and 19.6% overvalued. This results in an overall 16.5% overvaluation of Sasseur REIT’s portfolio.
Using the Balance Sheet on page 155 of the preliminary prospectus, we see that the value of Investment Properties on its balance sheet is S$1,386mil. Assuming this value is 16.5% overvalued, then it could be adjusted down to S$1,157.3mil. This would reduce its Net Asset Value from S$921.3mil to S$692.61 which is approximately 25% discount.
Therefore, we expect that in the final IPO prospectus, Sasseur REIT is likely to be offered at a unit price that is about 25% or more discount to NAV per unit. If they do not provide at least a 25% discount to NAV, we would view the issue price to be overvalued from a NAV perspective.
Source: Sasseur REIT Preliminary Prospectus (Page 155)
Source: Sasseur REIT Preliminary Prospectus (Page 170)
We are not able to comment further on these valuation and numbers and would likely need to see the final prospectus to understand this situation better.
Source: Sasseur REIT Preliminary Prospectus (Page 170)
Based on the trade sector breakdown, it is obvious that there is a high concentration of fashion retail comprising:
We suspect that Trendy Brands (8.1%) and International Brands (17.8%) also likely consist of high level of fashion retail. Hence, we suspect that more than 50% of Sasseur REIT trade sector is likely concentrated in fashion. This is a generally discretionary sector and could potentially be impacted by economic cycles.
Source: Sasseur REIT Preliminary Prospectus (Page 214)
As stated earlier, Sasseur REIT’s performance is heavily dependent on its tenant’s sales turnover performance as majority of its revenue is calculated as a fraction of the tenant’s sales. This allows it to ride a good upside during times of high spending while it also could be severely affected during times of crisis where spending is drastically reduced.
This is mitigated somewhat by the minimum rent guaranteed through the EMAs. See the above sections for more details on this risk.
Source: Sasseur REIT Preliminary Prospectus (Page 215)
It is mentioned in the preliminary prospectus that lease profiles of tenants at Sasseur REIT assets tend to be short. This is shown by the chart above where up to 51.5% of their leases are concentrated in FY2018.
Also, the top 10 tenants contributed 13.4% of the for the month of September 2017. Therefore, we do not see any concentration risk with regards to any specific tenant.
The distribution policy of Sasseur REIT would be 100.0% of the Distributable Income from the Listing Date to 31 December 2019. Thereafter, Sasseur REIT will distribute at least 90.0% of its Distributable Income.
The distribution will be made on a semi-annual basis for the six-month periods ending 30 June and 31 December. Distributions, when paid, will be in Singapore dollars.
This is an important policy to be aware of as the percentage of the distributable income is expected to reduce by 10% after 2 years. This coupled with the possibility of expiry of the minimum rent guarantee from the 3rd year onwards require that investors be well aware of the performance of the REIT in order to avoid any nasty shock.
As the income is received in RMB and paid out in Singapore Dollars, investors also need to be aware of potential foreign exchange risk arising from this arrangement.
Sasseur REIT is a rather uniquely structured REIT with nothing remotely similar presently listed in Singapore. The REIT owns assets in outlet malls which majority of the tenants do not pay a fixed negotiated rent, but instead pays rent according to sales turnover.
Benefits claims such as the counter-cyclic behavour, lack of competition in the tier-2 cities, lifestyle destination “N+1” business model and high growth in Chinese middle class disposable income and consumption expenditure and high compounded sales growth in the China outlet industry are all huge positives for Sasseur REIT. On top of the business, the sponsor has a large stake, manager’s performance tied to DPU growth and a large number of interested cornerstone investors lend further credibility to the REIT.
However, high amounts of concentration risk due to short leases, geographically (China), sector wise (fashion) and anchor asset (Chongqing) would require a risk management and mitigation strategy when investing. There is also very little predictability in the outlet mall industry owning to its relatively young history and we are not sure if studies conducted in the US outlet malls with necessarily show the same behavioral patterns in China. The need for a high active management of the assets coupled with the Entrusted Manager (EM) model also breaks away from the traditional model of REITs being a relatively passive investment vehicle. Growth forecast and projections presented while look good are unheard off among the listed REITs in Singapore and therefore hard to gauge if they are achievable. Without a reference guide of the probability of these forecast materializing, we would want to err on the conservative side.
We found in particular the valuations of the assets to be rather skewed with the anchor asset generating a large portion of the sales turnover, but other assets with significantly less sales turnover valued relatively similarly. We therefore are concerned if the valuations of the assets are fair; should these valuations be impacted in the future they could potentially affect Sasseur REIT’s gearing significantly forcing it to raise funds either through equity or perpetual securities which may affect prices adverse.
Sasseur REIT’s Entrusted Manager (EM) model also is fairly complex and have waivers of the minimum rent should they achieve the minimum rent for the next 2 years. If the minimum rent is not achieved in the first 2 years, the 5 minimum rent guarantee will not be waived. This is a complex form of income support which introduces counter-party risk. At the same time, it could also catch investors by surprise if they are not aware that the minimum rent guarantee no longer applies and something adverse happens in the 3rd year affecting the DPU.
In the end, the investment viability of this REIT comes down to the final numbers such as gearing, DPU yield, DPU growth rates, price-to-NAV and interest cover, CapRates…etc. We are looking forward to look at the quantitative side of Sasseur REIT before making a decision on our investment.
Finally, our thoughts are that Sasseur REIT should have instead been structures as a Business Trust instead of a REIT. Based on our present understanding of Sasseur REIT, the structure and business model is very much an active business management and by allowing it to be listed as a REIT, it brings a false impression of the nature of its business.
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:
Some key highlights that will be covered includes:
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:
To learn more about REITs, we recommend the article: What are REITs?
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