by: Tam Ging Wien
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In March 2018, ProButterfly covered the IPO of Sasseur REIT where we delved deep into the analysis of the REIT. Below are the 2 articles that we published:
Besides ProButterfly, our friends at Financial Horse had also covered this REIT in their article entitled Why I am so disappointed by this 7.5% yielding China REIT.
We advice our readers to refer to the 3 previously published articles above to get a better context of the REIT before proceeding with the rest of this article.
In this article, we cover 5 reasons why we decided to invest in Sasseur REIT and 5 risk that investors need to take note of. We also present our forecast estimations of Sasseur REIT’s rental income (Resultant Rent) over the next 10 years.
What makes Sasseur REIT complex to analyse is the fact that it doesn’t follow the traditional REIT model of receiving rentals, paying its expenses and then distributing the differences to its unitholders.
Therefore, understanding the Entrusted Manager (EM) model is key to deciding whether to invest in Sasseur REIT.
Sasseur REIT uses an intermediary called an Entrusted Manager (EM) that receives a portion of the sales revenue from the tenants and then in turn pays the REIT a rental based on a Fixed (FC) and Variable Components (VC).
The FC will step-up at an escalation rate of 3.0% per annum.
The VC is pegged to a percentage of each asset’s total sales in accordance with the following percentages:
Combining both the FC and the VC forms the Resultant Rent (RR) that is received by Sasseur REIT. This RR can be thought of as the Net Property Income (NPI) in a traditional REIT. After paying the expenses of the REIT such as the managers fees, trustee fees, interest on debt, valuation expenses…etc, what is left over is distributed as dividends to unitholders.
With the understanding of the EM model, initial forecast data and projected growth of each outlet mall provided from the IPO Prospectus, we attempted to build an estimated growth model of the RR.
From the data provided above extracted from the IPO Prospectus, we first start with the annualised figures of FY2018 and FY2019 which are provided by the prospectus. We used the growth rate as given by the Independent Market Research Consultant and used the conservative estimates based on the maturity of the different outlets. We then projected these growth in sales for the next 10 years.
The key assumption in this sales forecast is that all the figures and growth rates continue to hold year-on-year.
With our conservative tenant sales growth estimates above, we can derive a forecast of the Resultant Rent (RR) by estimating the FC and VC components.
Using an exchange rate of SGD1 = RMB4.98, we can translate the above from RMB to SGD. The assumption here is that there will be not be significant changes in the SGD-RMB exchange rate over the next 10 years.
Based on the above conservative forecast, we estimate that Sasseur REIT’s Resultant Rent (RR) could conservatively growth at a compounded growth rate of 5.66%.
We can observe from the forecast above, over time the VC will form a greater percentage of the RR over time.
Sasseur REIT distributed a DPU of 5.128c for FY2018 (or 6.82c on an annualised basis) beating the forecast by 12.6%. We have tentatively ignored the use of Q1-2019 results as it is incomplete. However, judging from the results released yesterday with DPU exceeding the projection by +9.3%, the figures we are using can be considered conservative.
We will use a 15-year Dividend Discount Model (DDM) with a conservative discount rate of 7% and 8% and no terminal value to estimate the fair value with the assumption that the DPU with growth at the same 5.66% rate as the Resultant Rent (RR).
We therefore derive an estimated fair value range of between 85.0c to 91.5c, higher than the the IPO price and current trading price range of 80.0c. Despite us using conservative growth figures to derive our forecast, we still get a fair value range much higher than the current trading range.
Therefore we think that even at the current trading price close of yesterday of 78c, Sasseur REIT could be trading anywhere between 6.7% to 14.5% undervalued based on our valuation models.
When we spot a REIT that is trading far below our fair value estimation, we will also want to make sure that it is supported by other factors that support its longer-term growth potential. Here are some other factors to let to our investment in Sasseur:
We were delighted to read that Sasseur REIT has delivered 4 consecutive quarters of forecast beating results and we expect it to continue its forecast beating streak for the rest of FY2019.
For the Entire FY2018, the DPU came it at 5.128c, beating the forecast of 4.554c by +12.6%.
On an annualized basis based on FY2018 at the current market price of around 80c, this would yield 6.4%.
Again, this doesn't take into account the results released yesterday with DPU exceeding the projection by +9.3%. We continue to expect it to beat its own forecast throughout the entire FY2019.
Sasseur REIT’s gearing presently stands at 29.2% (as of 31-Mar-2019), certainly gives it a good amount of debt headroom. Assuming it exercises debt as a mode of financing and pushes the gearing to 45.0%, the additional debts that can be taken up amounts to ~S$276mil.
Couple this with another cash and cash equivalent as at 31 Mar 2019 of S$163mil, Sasseur REIT is in a good position to acquire its sponsor’s pipeline of assets.
Sasseur REIT has the rights of first refusal (ROFR) properties from its sponsor, namely Xi’an Outlets and Guiyang Outlets. Xi’an and Guiyang Outlets have a Net Leasable Area (NLA) of 71,828sqm and 65,309sqm respectively. Compared to the current NLA of Sasseur REIT’s portfolio of 304,573sqm, an acquisition of either one could easily increase the NLA by 21.4% to 23.6%.
Beside the 2 ROFR properties mentioned, Sasseur REIT also have 3 pipeline properties which is managed but not owned by the sponsor, namely Hangzhou Outlets, Nanjing Outlets and Changchun Outlets. The sponsor has the rights of first refusal to acquire these assets should the owners decide to sell them which could then add to the pipeline for Sasseur REIT to acquire. We think that the probability of Sasseur REIT getting its hands on these assets are much lower than the above 2, hence we would ignore these assets in our analysis for the time being.
Being a small REIT, any acquisition would boost the distributable income of Sasseur REIT significantly providing a good upside.
Just a few weeks ago, Sasseur REIT announced its maiden acquisition of Shop Units at Hefei Outlets for RMB98.3 million (S$19.8 million equivalent), approximately 4.1% lower than valuation. The acquisition is expected to be DPU-accretive on a pro forma basis with the DPU and NAV per unit increasing by +0.99% and +0.04% to 5.179 cents and 90.37 cents respectively.
Based on the projections, China’s outlet mall industry is expected to grow at a compounded rate of 24.2% until 2021 and there-after 17.9%. Per capita consumption expenditure of Chinese households is also expected to grow in the high single digits.
Sasseur REIT has released its Q1-FY2019 1st Quarter results yesterday on 13-May (Monday) and its DPU beat forecast by 9.3%. We expect that it will continue to beat their forecast figures in the range of 4.5% ± 0.5% at least if not more through FY2019 especially after its maiden acquisition. Again, we are being conservative here with our forecast.
Based on this positive macro-economic outlook and combining with 4 consecutive forecast beating quarters, we think that this outperformance is likely to continue throughout 2019 for the existing portfolio of assets.
Source: Sasseur REIT Inside Trades
We had noticed that the CEO, Mr Anthony Ang has purchase 100,000 units on 15-November and another 100,000 again on 18-January.
Source: Sasseur REIT Inside Trades
Besides the CEO, Sasseur REIT sponsor Sasseur Cayman Holding Ltd has also increase its stake in the REIT by 600,000 units on 22-October.
Both actions provided us with the confidence to also take a position in Sasseur REIT.
Investors should always take a balance view towards their investments. As they say, “if you manage your downside, the upside will take care of itself”. Therefore, we should also be cognizant of the risk in Sasseur REIT.
While there are benefits of using the Entrusted Manager (EM) model, we need to be aware that the EM itself is a private entity and therefore investors have no visibility of its accounts, finances and management. As the EM is the sole “master tenant” of Sasseur REIT, there is a counter-party risk involved in this structure.
Similar counter-party risk are present where “master tenants” structures are used such as with Parkway Life REIT and First REIT. First REIT as an example is certainly a good case study on the risk of counterparties. We have covered First REIT in our articles below:
Based on the breakdown of the tenant mix, it is obvious to us that International Brands, Fashion, Sports, Children constitute retail. Traditionally, these sectors are considered to be economically sensitive and closely follow the economic cycles.
We understand that Sasseur REIT has taken effort to explain that the outlet mall business is recession-resilient, even during the global financial crisis. They quote US outlet mall Tanger’s CEO Steven Tanger, “In good times, people love a bargain, and in tough times, people need a bargain”.
Take note that anywhere from 30% to 45% of Sasseur REIT’s income are derived based on a percentage of tenant sales, any impact to tenant sales figures will impact Sasseur REIT’s income.
It remains to be seen how Sasseur’s outlet business performs during the next recession. Until then, this large concentration in retail remains a risk that investors should take note.
Source: Sasseur REIT
Sasseur REIT has a built-in minimum rent structure where the first 2 years rental are guaranteed by the sponsor until 31-December-2019. If the assets Resultant Rent (RR) falls below the Minimum Rent, Sasseur REIT shall be entitled to receive the shortfall.
However, investors need to be aware that this Minimum Rent condition will fall away if the initial portfolio achieves the Minimum Rent for two consecutive years; i.e. FY2018 and FY2019.
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 Resultant Rent. Should sales fall below expectation, the shortfall will be made up by the EM and/or the sponsor while the Minimum Rent condition is in force.
However, in the event 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 during the 3rd year of listing, there will not be any Minimum Rent conditions to buffer this DPU.
Given that Sasseur REIT has already announced 4 consecutive quarters of beating the forecast, we are already aware that the Minimum Rent for FY2018 has been achieved. This means that should the Minimum Rent be achieved again in FY2019 (which we think is highly likely), the Minimum Rent condition will fall away in FY2020 onwards.
Investors should note that risk of tenant sales volatility is transferred to unitholders from FY2020 onward if FY2019 also exceeds the minimum rent.
Sasseur REIT distributes 100.0% of its 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.
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 aware of the performance of the REIT.
As Sasseur REIT’s income is derived in RMB and paid out in Singapore Dollars, investors also need to be aware of potential foreign exchange risk arising from this arrangement. Our assumptions in the forecast model does not take into account foreign exchange risk.
We expect Sasseur REIT's DPU and yields to continue to growth throughout FY2019 given that we believe in the growth of the Chinese middle-class consumer spending power, knowledge of DPU accretive acquisition, market acquisition of the CEO and sponsor, 4 consecutive quarters beating forecast and a price significantly below our fair value estimates.
However we also remain cognizant of the risk involved in this REIT and we endeavour to monitor the performance of this REIT closely quarter on quarter. Risk to watch out for include exchange rate risk, concentration risk in retail, counter-party risk of the entrusted manager and impact of the removal of the rental support and reduction of the payout ratio.
All in all, at the current price that Sasseur REIT is trading at, we think we will likely see upside for Sasseur REIT throughout FY2019.
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