Sasseur REIT is the first outlet REIT listed in Asia. Its property portfolio comprises four outlets with an estimated appraised value of RMB8.5 billion ($1.6 billion) as at Dec 31, 2021, and net lettable area of 310,242 sq m as at Sept 30. The outlets are strategically located in China’s high-growth cities of Chongqing, Hefei and Kunming. Sasseur REIT is managed by Sasseur Asset Management, an indirect wholly-owned subsidiary of Sasseur Cayman Holding, the REIT’s sponsor, which is part of Sasseur Group, one of the leading premium outlet operators in China with 15 outlets under management.
1. Please describe Sasseur REIT’s recent financial performance.
The third quarter of 2022 was exceptionally challenging for Sasseur REIT’s outlets, with Covid-19 control measures causing the unfortunate shortterm temporary closures of the Kunming and Chongqing Bishan Outlets.
Despite that, Sasseur REIT’s financial performance has been resilient. Sasseur REIT achieved 3Q2022 ended Sept 30 distributable income of $23.5 million, up 1.2% y-o-y and declared distribution per unit (DPU) of 1.838 Singapore cents, up 0.4% y-o-y. The increase in distributable income was mainly due to an income tax refund of $2.1 million relating to Chongqing Liangjiang Outlets’ reduction of tax rate from 25% to 15%. This was part of the government’s tax incentive to encourage investments in selected industries in western China.
For the January to September 2022 period (9MFY2022), Sasseur REIT’s distributable income was unchanged y-o-y at $68.6 million while DPU was up 0.8% y-o-y. During this period, the portfolio’s outlet sales declined by 6.3% y-o-y to RMB 2.8 billion. Sales from Chongqing Liangjiang, Chongqing Bishan and Hefei Outlets were relatively resilient despite challenges arising from Covid-19 curbs and shortened operating hours.
Our balance sheet remains robust with low aggregate leverage at 26.4% leaving a high debt headroom, a healthy interest coverage ratio of 4.9 times, and close to 71% of borrowings pegged to stable and fixed interest rates as at Sept 30.
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2. What are some key highlights and milestones achieved by Sasseur REIT in recent months?
Sasseur REIT continues to deliver a stable and growing DPU profile since its listing in March 2018, supported by the strength and resilience of the unique Entrusted Management Agreement (EMA) model. For 3Q2022, Sasseur REIT achieved the highest 3Q DPU of 1.838 Singapore cents in four years despite disruptions to outlet operations and lower outlet sales due to an extremely challenging operating environment in China relating to stringent Covid control measures and unprecedented heatwaves.
The annual Anniversary Sales event at Sasseur REIT’s four outlets continues to be a sales highlight in 3Q2022. The portfolio’s first day combined Anniversary event sales registered RMB 207.8 million, up 12.5% y-o-y. The Chongqing Liangjiang Outlets and Kunming Outlets generated record sales of RMB147.1 million (+10% y-o-y) and RMB34.6 million (+19.1% y-o-y) respectively on the first day of their anniversary sales events, notwithstanding the volatile and uncertain operating environment.
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Sasseur REIT’s portfolio was resilient, with 3Q2022 portfolio occupancy hitting 96.9%, the highest in four years, surpassing pre-Covid levels. As at Sept 30, the majority of leases expiring in 2022 have been renewed, with minimal lease rollover of only 4.4% (by gross revenue) expiring for the balance of 2022.
We continue to hit new milestones on the corporate governance front as well. In 2022, Sasseur REIT was awarded Runner-Up of the Singapore Corporate Governance Award, REITs & Business Trusts Category, for the second consecutive year at the Securities Investors Association (Singapore) Investors’ Choice Awards and was ranked 19th out of 44 REITs and Business Trusts in the Singapore Governance and Transparency Index.
3. What is Sasseur REIT doing to help build tenant loyalty while attracting new tenants?
The majority of the outlets’ leases are sales-based whereby tenants pay an agreed percentage of their sales revenue as turnover rent. This ensures alignment of interests among the tenants, REIT manager and sponsor.
We have a unique leasing strategy whereby we optimise resource allocation to cultivate tenants who have the potential to be brand champions. We help tenants boost sales through advice on merchandise, store-front displays and inventory levels; provision of promotional spaces; loyalty programmes; and digital platforms.
The sponsor’s industry position as one of the leading premium outlet operators in China is attractive to new tenants. We conduct regular market research on consumer trends and are always on the look-out for new and unique brands who can deliver higher sales margins and commissions. We are able to leverage on the sponsor’s brand management expertise as well as a database of more than 3,500 international and local brands.
4. Has Covid-19 impacted business operations and how has the REIT rebounded?
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China’s current zero-Covid strategy is a key challenge for sales performance in 9MFY2022, mainly due to mandated temporary closures and inter-city travel restrictions. However, the Chinese government has announced guidelines in November to recalibrate the policy and some cities have started to unwind restrictions in December. We remain hopeful that the government will further ease Covid curbs in 2023 and believe that the long-term potential of growing urbanisation and middle-class consumer spending remains intact.
In the final quarter of this year, we are planning various promotional events at all the outlets to leverage the year-end peak festive shopping season.
5. How is the REIT managing its balance sheet in this rising interest rates environment?
We maintain a prudent balance sheet, keeping our asset values stable despite foreign exchange volatilities.
Our hedging policies help to manage foreign exchange volatilities. We progressively hedge at least 30% and up to 100% of foreign currency exposure on committed net cash flows using hedging instruments with settlement dates within six months from the date of contract, depending on the movements of the foreign currencies.
Our refinancing progress is on track and at advanced stages. We are forging banking relationships with a larger base of lenders, including existing and new lenders. We are also targeting a well-staggered debt profile over time to gradually reduce the concentration of debt maturities in any one year.
6. What are the mid- to long-term expansion plans for Sasseur REIT?
Sasseur REIT has been granted a right of first refusal to acquire Xi’an and Guiyang Outlets from its sponsor, Sasseur Group. If market conditions are conducive, we will explore an acquisition at the appropriate time to grow the REIT’s asset portfolio and enhance longterm value for the REIT’s unitholders. The REIT’s sponsor also operates other third-party owned outlets through its asset-light strategy, presenting an additional acquisition pipeline for the REIT.
We continue to pursue targeted asset enhancement initiatives that can enhance shopper traffic or boost consumer spending such as the revamp of Chongqing Liangjiang Outlets’ VIP lounge which is expected to be completed by end-2022.
7. With ESG increasingly a key factor for investment decisions, how is Sasseur REIT incorporating sustainability into its business model?
As part of the REIT’s overall sustainability strategy, we believe effective Board oversight is critical. As such, in July 2022, we have strengthened the REIT’s sustainability governance structure by establishing a Sustainability Committee. The committee, which reports to the board of directors, is headed by Gu Qingyang, the lead independent director, as chairman; Xu Rongcan, the non-executive chairman and founder of Sasseur Group; as well as Cheng Heng Tan, independent director and chairman of the audit and risk committee.
In 2021, we have also adopted the Task Force on Climate-Related Financial Disclosures framework to assess climate risks and opportunities. This year, we have set up processes to identify, manage and integrate climate-related risks into our business by establishing metrics and targets to measure greenhouse gases and related risks.
We are making headway on our sustainability journey with a roadmap we have established since 2021. We believe that an effective ESG strategy is core to delivering long-term resilience and value for Sasseur REIT’s unitholders.
8. What is Sasseur REIT’s value proposition to its unitholders and potential investors?
China’s outlet industry is expected to become the world’s largest outlet market in terms of sales revenue by 2030, according to China Insights Consultancy. Sasseur REIT provides its unitholders pure exposure to this specialised segment of the retail industry, and the country’s large and rising middle class consumer base. The REIT’s sponsor is also focused on high-growth Tier-2 Chinese cities and has deep industry knowledge and wide brand network.
Sasseur REIT has a unique entrusted management agreement model which provides stability of EMA rental income via the fixed component and upside to be derived from higher sales via the variable component of the EMA rental income.
9. What do you think investors may have overlooked about Sasseur REIT?
Some investors may be unfamiliar with our sponsor, Sasseur Group, who is a leading operator in China’s outlet industry with close to 30 years of experience in focusing on outlet operations in China.
Sasseur Group has won multiple awards and accolades in the past decade. It also has a unique “Super Outlet” business model which merges art, outlet shopping, social spaces, and the use of data technology to provide visitors with lifestyle shopping experiences.
Investors may have also overlooked the Sasseur REIT’s unique EMA model, which comprises a built-in 3% fixed component. It has proven its strength despite Covid-related challenges this year, boosting the resiliency of the REIT’s portfolio.
10. Why should investors invest in Sasseur REIT now?
Sasseur REIT was trading at a discount to net asset value of approximately 15% as at end-November 2022. The REIT makes distributions quarterly and has an attractive distribution yield of about 9%–9.5% based on trading price as at end-November 2022.
Although China’s zero-Covid policy currently presents a key challenge for the REIT, we believe that the eventual reopening of China in the future will provide strong growth opportunities for the REIT.
Candace Li is a research analyst with the Singapore Exchange
