Sasseur REIT – Emerging Stronger from the Pandemic

reits sasseur reit stocks Mar 01, 2021

by: Tam Ging Wien

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As shareholders of Sasseur REIT, we were prepared for the worse as the COVID-19 pandemic forced the management to shutter their outlets malls throughout China, namely Chongqing, Bishan, Hefei and Kunming back in January 2020.

However, we were delightfully surprised that they still managed to eke out a 1.0% increase in distributable income and 0.2% DPU. In ordinary times, we would describe this set of results as “flat”, but for FY2020, we think this is stellar!

We had written back in May-2019 on why we had decided to invest in Sasseur REIT and held on to our positions while averaging down in Mar-2020. As for the results release on Friday, 26-Feb-2021, we are well above our entry cost. If any readers are interested in the background and context of Sasseur REIT, our previous articles would be a good starting point:

In this article, we will be doing a review of Sasseur REIT’s FY2020 results so that we can get a gripes on what went well and what lies ahead. We will be looking deeper into Sasseur REIT’s post-pandemic emergence and growth potential in a separate article in the future.

A Quick Introduction to Sasseur REIT’s EM and Leasing Model

Sasseur REIT does not follow a conventional “landlord” leasing out space to “tenant” at a fixed price and duration model. Instead, it leases its space to only one intermediary known as the Entrusted Manager (EM). The EM is controlled by the sponsor and works with the overall benefit of the group.

Unlikely passive landlords, the EM plays a more active management role in collaboration with the tenants where they oversee day-to-day operations of the outlet malls, assist with mall wide event organisations, seasonable marketing activities, manage VIP memberships, and the cash collection and accounting body.

In return for these active management activities as well as the space, the EM collects the rentals based on a percentage sales turnover instead of a conventional fixed rental during the leasing period.

Source: ProButterfly ResearchREITScreener Research

As the master lessee, the EM pays Sasseur REIT a rent based on a Fixed (FC) and Variable Components (VC). The FC will step-up at an escalation rate of 3.0% per annum while the VC is pegged to a percentage of each asset’s total sales between 4.0% to 5.5%.

Any residual revenue from then EM after accounting for the EM’s base fee and the payment of the FC and VC will be split 60%-40% with the 60% going to the EM and the 40% to Sasseur REIT.

Source: Sasseur REIT

For readers who wish to understand the EM model as well as the rental model better, we have explained the modal and rental forecast in our past articles. Note that the article was drafted before the COVID-19 pandemic and the forecast would not have considered closures of their various outlet malls in 2020.

Sasseur REIT’s FY2020 Performance Review

1. EMA Rental Income Buffered by the Fixed Component and Stronger RMB

Source: Sasseur REIT

For FY2019, Sasseur REIT’s 4 outlets raked in a total of RMB 4,826.0mil in sales, but due to the COVID-19 pandemic, outlet sales fell by RMB 1,100.3mil in FY2020 or 22.8%. Sasseur REIT had closed all their malls in late January 2020 and reopened them in late March 2020. It also took time for the foot traffic to ramp up as China gradually relaxed the movement restrictions to phase in the reopening of China’s economy.

As a result, the VC fell by 23.1% across FY2020, falling from RMB 221.3mil to RMB 170.2mil – wiping out almost one quarter worth of income. Thanks to the EM model having a fixed component that rose 3.3%, the net fall in the total EM income in FY2020 was only 6.1% from FY2019 to FY2020.

Another significant factor was the RMB which had strengthened which further buffered the fall in the EM rental income in SGD terms by 5.2%, or from S$122.1mil to S$115.8mil. On a blended average, the SGD to RMB exchange rate strengthened from about RMB 5.053 in FY2019 to RMB 5.007 in FY2020 for every 1 Singapore Dollar.

As investors, we are extremely thankful for what we think is a marginal fall in such extraordinary times as the 2020 COVID-19 pandemic.


2. Distributable Income Increased Aided by Lower Interest Rates and Taxes

Source: Sasseur REIT

In an unexpected surprise, FY2020 distributable income had actually increased 1.0%, from S$77.9mil to S$78.7mil. Sasseur REIT management had shared that two significant factors had played a part in this increase:

  • Cost savings from lower interest rates
  • Lower overall taxes due to lower operating profits

Source: Sasseur REIT

Sasseur REIT’s weighted average interest rate in Q4-2019 was 4.41% p.a. and this fell to 3.20% p.a. in Q4-2020. That is over a 120 basis points fall over the course of 1 year, reducing interest cost materially while also improving its interest coverage ratio from 4.7x to 7.8x. This lower interest rate is going to be permanent for the next 2.2 years with their next major loan refinancing due in 2023.

Source: Sasseur REIT

Income tax on the other hand for the period FY2020 has fallen by 30.5% from S$20.08mil to S$13.95mil, excluding deferred tax which does not materially affect the distributions and pay-outs of FY2020 compared to FY2019.

3. Sasseur REIT Maintained 100% Distribution Payout

Sasseur REIT in FY2020 had decided to maintain its 100% distribution payout ratio which provided stability to the distributable income and DPU.

Sasseur REIT makes distribution to the Unitholders on a quarterly basis. Sasseur REIT’s distribution policy is to distribute at least 90.0% of its annual distributable income for each financial year. The actual level of distribution will be determined at the discretion of the Board of Directors of the Manager and the decision for FY2021 distribution policy has not been made public yet.

Therefore, investors should note that depending on the distribution policy for FY2021 which has yet to be disclosed for FY2021, there is a possibility that the distribution may potentially fall if the management decides to reduce its distribution payout ratio.

Management has guided that while in the short term, the distribution policy has not been determined, the longer term direction is to reduce the payout ratio to 90% in order to maintain cash for future growth.

4. Occupancy Remained Relatively Stable Throughout FY2020, Slightly Lower Compared to Q4-2019

Sasseur REIT achieved relatively stable occupancy rate throughout FY2020 with occupancy rate coming in at 94.8%, 93.6%, 93.1% and 93.5% for Q1-FY2020, Q2-FY2020, Q3-FY2020, and Q4-FY2020.

However, if compared to Q4-FY2019’s occupancy of 96.0%, we could certainly observe that occupancy rate had fallen about 2.5%.

WALE (by gross revenue) stands at 1.1 years and the management has shared that this is intentionally kept short so that any underperforming tenants can be switched out easily.

Source: Sasseur REIT

Source: Sasseur REIT

5. VIP Member Growth Remains Strong with Focus on Media Outreach & Customer Engagement

Over the course of the year, the total outlet VIP membership figures had increased 33% from end 2019 to reach 2.11 million members at the end of 2020 despite the pandemic ranging in China and around the world.

The Sasseur VIP programme comes in 3 tiers, Normal, Gold and Platinum.

Sasseur REIT’s online and offline marketing channels, social media presence, and big data strategies are a crucial part of their customer outreach and engagement strategy. Through their VIP membership database, it allows the EM to better understanding their customers changing preferences, experiences and feedback allowed them to rapidly adapt and bring new and refreshing concepts to help their outlets remain competitive.

Besides boosting their social media presence, Sasseur will still continue to utilise traditional media like T.V. for outreach purposes and maintain their media exposure.

Frequent review of tenant mix is reviewed to ensure that the offerings are matched with customer preferences and demands.

The management also has targeted to host at least 3 key events each year while hosting 6 more thematic but smaller events throughout the year in order to drive foot traffic and tenant sales.

The management also intends to work together to push sales of certain high potential and promising brands to bring them into the “RMB 10 million sales” club. The strategy to achieve this is to work with the brands to raise brand awareness, increase promotional activities and increase publicity. They have plans to execute about 6 brand specific events per year.

Some promising brands which have managed to clock over RMB 10 million of sales include Michael Kors and Versace.

Source: Sasseur REIT

6. China Continues to Remain the Focus of Sasseur REIT

Management has shared that they have been considering various opportunities including the sponsor’s ROFR properties, pipeline assets, and overseas retail concepts outside of China. While many of the potential overseas opportunities are “interesting”, the management has firmly iterated it’s commitment remains in China due to home ground advantage, sponsor support, economies of scale and other synergistic advantages

7. Merging of operations of Chongqing and Bishan Outlets

Management has shared that they plan to merge and operations of the Chongqing and Bishan Outlets in order to achieve:

  • Higher sales
  • Better economies of scale
  • Higher management inventory efficiency

8. Focused on Wants and Needs of the Customers – Trendy and Sports Offerings

Sasseur REIT has been initiated a number of asset enhancement last year at the Chongqing and the Hefei Outlets which are targeted to complete by Q1-2021 and Q2-2021 respectively. Sections of the AEIs have already opened for business with focus on preferences of their customers – mainly trendy brands and sports apparel.

Source: Sasseur REIT

Source: Sasseur REIT

Concluding Remarks

Our main thesis surrounding our investment in Sasseur REIT is the explosion of the Chinese middle class with significant earning power and an appetite for aspirational and trendy brands. The strong rebound in foot traffic and sales after reopening in early Q2-2020 is a testament that the retail demand among the Chinese consumers is still strong. It was most unfortunate that the COVID-19 pandemic stalled this growth trajectory for Sasseur REIT.

However, going forward in FY2021 as the world recovers from the COVID-19 pandemic and the widespread vaccination drive, we can see strong signs of economic rebound in China.

We believe that Sasseur REIT is well structured and positioned to ride the Chinese consumer boom in the coming years thanks to management’s keen focus on China as well as the EM lease structure that takes a significant portion of the rental income based on a percentage of tenant sales. This mutual business formula brings alignment of interest between Sasseur REIT, the EM and the tenants. EM needs the tenant to do well while the tenants want to do well themselves.

Besides its better-than-expected results, we think that its time to put the pandemic of 2020 behind us and look forward to a better FY2021 for Sasseur REIT.

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:

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


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