$Sasseur Reit(CRPU.SI), A Misunderstood REIT

Sasseur REIT (SR) is the only Outlet Malls REIT listed in Asia. Since its IPO in March 2018, the share price have fallen about 10%. This is despite that Outlet Malls have the highest growth rate in retail sales in China. This REIT’s business and structure is new to Singapore and is not easy to understand. Fortunately I got to attend a presentation by Sasseur REIT’s Head of Investor Relations, Mr Chen Zhen this week to understand more about the REIT. The presentation was arranged by Philips Capital.
Although it’s normal for a Head of Investor Relations to make a pitch for the company, I find his points logical and one can confirm it with information from the prospectus and the Web. From my research on SR, I find that there are a number of concerns about the REIT which is why it’s being avoided even though I think that this REIT’s yield can potentially be one with the best growth in Singapore. I will go through some of these concerns followed by what I don’t like and like about SR.

Competition from e-commerce. This is the biggest concern as online sales are threatening the growth of traditional shopping malls. However Outlet Malls are different, they are selling off season Branded Goods at a discount with prices that are as low as online retailers. The risk of getting counterfeit goods from online purchases also deters shoppers. Most importantly people who buy branded goods love the shopping experience provided by the Malls. They like to feel and try on the products. They also like to be seen carrying the shopping bags of branded products. This is substantiated by independent market research which shows that retail sales growth for Outlet Malls in China are higher than Online Platforms.
Malls are located in Tier-2 cities. Actually this is an advantage. Growth is faster in Tier-2 cities and there is little or no competition. The Sponsor has the first mover advantage in these cities. Retailers use Outlet Malls to clear their excess inventory so there is limited supply of these products. Furthermore the retailer would not like to have many Outlet stores as these may cannibalize the sales of their regular outlets. Therefore it’s difficult for competitors to open another Outlet Mall in the same city where the Sponsor has established themselves. This is an Economic Moat of this REIT.
Financial Engineering? One concern is the complicated 10 year Entrusted Management Agreements (EMA) with the Sponsor which is acts like a Master Lease. The EMA Rental Income consist of:
Fixed Component which is expected to contribute not more than 70% of EMA Resultant Rent for 2018 with a 3% step up annually over 10 years.
Variable Component which will be pegged to 4 to 5.5% of total sales of each malls.
Performance Sharing which is 40% of the remaining revenue after deducting the above and the EM Base Fee for Mall Operation and Maintenance.
The reason for this complicated rental system was explained by Mr Chen. The Sponsor does not collect rent from the Outlet Mall tenants. Instead it collects a percentage (10 to 16%) of the tenant sales as rent. However as most people are not familiar with the malls, to propose a rent structure based wholly on percentage of sales would not be acceptable by SGX or investors. The EMA allows stability in the DPU from the fixed portion and a chance to enjoy any upside from the variable portion and performance sharing. The flipside side is that the upside would not be as great when the sales soars.
An advantageous feature of the EMA for investors is that the rental income for 2018 and 2019 is guaranteed (like income support). If there is a shortfall in the forecasted rental income, there will be top up by the Sponsor to meet the shortfall. This minimum rental guarantee will continue until there are two consecutive years with no top up.
Counterparty Risk. Possible mismanagement or fraud by the Sponsor. The Sponsor has 29 years of history and has been successfully managing outlet malls with CAGR sales growth of 40% from 2009. The sponsor has reputable strategic investors, namely L Catterton, the Private Equity arm of LVMH and Ping Ann Real Estate, a subsidiary of the Ping An Insurance Conglomerate. These companies would surely have done due diligence on the Sponsor.
High EM Base fee paid to the sponsor. The EM Base fee for property operating expenses may go up to 30% of gross revenue before there is Performance Sharing. This may seem high but if you look at Capital Retail China Trust, the total property expenses comes up to 35% of gross revenue. One reason is due to high property related taxes in China. Furthermore Outlet Malls operators have high manpower expenses compared with Retail Malls which I will explain next.
Poor rental collection from tenants. This does not apply to Outlet Malls as all sales are paid to the Mall operator first including the cash. Everyday the tenants will drop the day’s collection into a safe deposit box. The Sponsor’s staff will tally the takings with the receipts everyday which is why it’s manpower intensive. The advantage is great cashflow for the sponsor as they will return to the tenant the balance of the sales proceeds a month or a month and a half later.
Overestimate of Sales Growth by Sponsor. The first quarterly results after the IPO was released one month ago and sales from all four mall exceeded the management forecast. Total tenant sales at all four malls totalled $193.3 million which exceeded the forecast by 8.8% and up a whopping 40.6% YoY. This have shown that the forecast figures are actually conservative. There were also concerns that the Kunming Outlets Mall which opened in Dec 2016 was sold to the REIT too soon as it’s performance was unproven. The Kunming Outlet exceeded sales forecast by 21.3% and increased by 142% YoY.
Short WALE by Gross Revenue of 1.3 years. This is a strategy of the Sponsor as they collect rent based on sales. So if the tenant sales fails to meet expectations even after promotional efforts by the Sponsor, it’s better to change the tenant.
Short remaining Land Lease of around 30 years. This is valid concern and it’s similar to our industrial REITs. To me 30 years is still a long time and if the cash flow generated grows, the valuations on the properties will follow.

Now for the negatives.
High Borrowing Cost. The Average Financial Cost is 5.4% which leads to a low Interest Coverage Ratio of 2.1 times. This is rather low compared with ICR of above 4 times for most REITs..
Foreign Currency Risk. The REITs income is in RMB and distributions in SGD would be affected by the exchange rate. With the current trade war with US, the RMB has fallen slightly and may drop more when the trade war escalates. About 25% of the loans are in SGD and a drop in RMB will increase the debt burden of the REIT. I am glad that the REIT management didn’t decide to take a larger portion of debts in SGD even though the borrowing cost is lower in SGD.

What I like about Sasseur REIT
Alignment of interest with Sponsor. The sponsor holds 57.5% of the REIT which is very high for a sponsor and ensures that interest are aligned with minority shareholders. The REIT management fees are also aligned with shareholders as the base fee is 10% of distribution income and performance fee is 25% of the increase in DPU. This is in sharp contrast with many REITs where the fees are based on assets under management which is totally not to shareholders interest.
There are also many cornerstone investors like Charles and Keith and e-commerce players like JD.com and Secoo. This confirms that e-commerce platforms thinks positively of Outlet Malls. L Catterton has also taken a direct stake in SR.
The macroeconomic indicators like a growing middle class population and increase in consumption expenditure are both positive in the long term.
Lastly is the high yield, which is above 8.5% based on the Q2 results and the last closing price of 72 cents. Mr Chen has shared that historically the 2nd quarter results are the weakest in the year due to two reasons. It’s when they sell Summer wear which is lighter and therefore cheaper and there are less sales promotions compared with other quarters.
I also like that the management team which are all Singaporeans are actively promoting the REIT. According to a NextInsight report, the CEO is leading a group of analyst and investors on a 3 day visit to the malls in Nanjing, Hefei and Chongqing. That's why he was not at the presentation. This means that Nanjing Mall which is one of the pipeline properties which the Sponsor has a ROFR will likely be the next acquisition target for the REIT after IPO. Hopefully the analysts will come out with positive reports.
Although more time is needed to monitor the performance, I think it’s worth taking a nibble.
Vested 25k shares. Please DYODD.

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layers

nv underestimate sgx investor avoidance. thw price can stay depress forever

clim

Reply to @Pizzaprata : haha thanks for the advice... will consider that if i could sold some of holdings without loss lol. now can just hodl....

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$Sasseur Reit(CRPU.SI) hit it's IPO price of 0.80 today after CIMB issued a Buy call yesterday. Sold 15k shares as it hit 20% above my average price. Still holding 20k shares as I like their business model. See my previous post https://www.investingnote.com/posts/1019661
Another reason I took profit is that I am concerned that some investors may think that last quarter's DPU of 1.99 (28% above forecast) will be the norm. The increase was mainly due to the company no longer have to keep Statutory Reserves and lower taxes. So some new shareholders may be disappointed with the upcoming results and sell. Furthermore now that the share price is higher, there might be a Rights Issue coming as the sponsor has a pipeline of properties waiting. If there is one, hopefully it will be DPU accretive Expect a DPU of 6.2 cents this year which would yield 7.75% at current price which is decent but might not be enough for some to buy a S-chip. Please DYODD

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Although the STI did no go up much (<2%) for the month of February, my portfolio performed much better (+11%) this month thanks to the following counters:
$AEM(AWX.SI)
$Sunpower(5GD.SI)
$Accordia Golf Tr(ADQU.SI)
$Silverlake Axis(5CP.SI)
$Sasseur Reit(CRPU.SI)
$Oxley(5UX.SI)

My conviction and patience have paid off. Even Oxley which have been on the downtrend for so long has finally started to move up, however it’s still underwater for me. Last week I took 23% profit for AGT. Today, I sold all my Silverlake shares at 31% profit. I also sold 20% of my AEM share at 33% profit. And for Sunpower, my average price is 0.44 and I will sell my 2nd batch after the results release tomorrow.
As for Sasseur Reit, I will be keeping them for now. It is still CD with a 3.541c dividend coming up. I believe their outlet sales can continue to grow and it should be able to payout a dividend yield of at least 8.5% after XD.
I first bought Sasseur reit 5 months ago. I did not buy much as there is no track record and the malls are in China, it will be difficult to monitor how there are doing. However I believe in their business model and even added more during the recent price drop before the results release. The results were better than expected and it proves that the Outlets model is resilient to online shopping and even the trade war! The 4Q DPU is 28% above forecast. This is despite the fall in the RMB/SGD exchange rate. The reason for the good performance is that the 4Q is historically the period with the highest sales and also that they no longer have to keep reserves in case of poor performance. This REIT is difficult to understand and is not for everyone, please see my previous post if you want to know more: https://www.investingnote.com/posts/1019661

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Here's an update to my post last week on $Sasseur Reit(CRPU.SI) : https://www.investingnote.com/posts/1019661
At the end of my post, I said that the REIT CEO will lead a group of analyst to visit the outlet malls in Nanjing, Hefei and Chongqing. There are some mixed reactions from those that went on the trip.
First, DBS Research initiate coverage with a BUY call and a Target Price of $0.91. That's a 26% upside excluding the above 8% in dividend yield. What they mentioned in their report was basically similar to what I have mentioned in my post last week.
Two days ago, NextInsight published a glowing report on the visit especially on the huge crowds at the Chongqing Outlets anniversary sale.The Chongqing Outlet achieved sales of RMB130 million on Day 1 of the sales. This is supposed to be a National record for Outlet Malls and is 44% more than Chongqing's Day 1 sales last year. They also released videos of all the four outlets they visited.
I have an analyst friend who visited two of Sasseur's Outlets, the Xian and Hefei Malls and his experience is the opposite. Although the Malls are very good, they were quite empty. Although he did not visit during the fist day of sales but it was still during the anniversary sales period which will end only on Sep 24. He also chatted with some locals to find out more. He found that their wages are low and the branded goods sold are not affordable and they visit the malls more for the food. If you watch the NextInsight videos carefully, it's true that other than the Chongqing and Bishan Outlets, the other two outlets are quite empty.
As mentioned in my post more time is needed to monitor the sales performance of the Outlet Malls. Good thing is the minimum performance guaranteed by the Sponsor till end of next year while we observe.

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