Sasseur REIT - DBS Research 2018-09-26: Litigation At Sasseur (Hefei) Outlets An Unfortunate Scenario

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SASSEUR REIT SGX:CRPU

Sasseur REIT - Litigation At Sasseur (Hefei) Outlets An Unfortunate Scenario

• Litigation by contractor due to disagreement between contractor and Sponsor on the final construction sum payable for Sasseur Hefei outlets.
• Sponsor indemnity of the REIT of any potential losses that arise from this lawsuit should calm nerves.
• We understand that there has been minimal impact to operations.
• Unfortunate episode could dent investor confidence in the near term as the newly listed REIT looks to build up its track record.

What has happened

• Sasseur REIT announced last evening that Hefei Sasseur Commercial Management Co Ltd (Sasseur Hefei) has received notice from Zhongjian Sanju No.2 Construction Engineering Co., Ltd (ZS2) for the initiation of legal action against it in the Anhui Higher People’s Court, Anhui City.

~ SGinvestors.io ~ Where SG investors share

• The action by ZS2 arose out of a disagreement between the Sponsor and ZS2 over the final construction sum payable in respect of Sasseur (Hefei) Outlets, which was completed in May 2016. ZS2 claim is for a sum of c.RMB 148.4m (S$29.6m) and its legal costs and ZS2 has sought and obtained interim orders from the court to freeze some of the bank accounts of Sasseur Hefei which Sasseur Hefei has successfully applied and gotten the same courts to lift the freeze on the key bank accounts. The manager believes that there will not be any disruptions to the operations of Sasseur Hefei and Hefei outlets.
• The manager understands from the Sponsor that it believes that the ZS2 claims are baseless and without merit, and will vigorously defend the case. The Sponsor is seeking advice from its legal counsels regarding this claim.
• Pursuant to this case, the sale and purchase (SPA) between the DBS Trustee (as Trustee for Sasseur REIT) and subsidiary from the Sponsor on 16 Nov 2018, for the acquisition of Hefei Outlets, the Sponsor has irrevocably and unconditionally undertaken to indemnify Sasseur REIT against other things, construction payables that were not payable for in the SPA. An amount of RMB117.5m was provided for in respect of the construction payables incurred by ZS2, the claim of RMB148.4m is RMB30.9m over the amount provided for in the SPA, which we believe will be indemnified by the Sponsor.

Our thoughts on impact

No material impact to operations for now; indemnity from Sponsor in place.

• This action arising from a dispute on the monies payable between the sponsor and the contractor is an unfortunate scenario but we note that the manager has been fast in addressing any potential disruptions. As such, as the bank accounts at Sasseur Hefei have been unfrozen, daily operations should continue without any material disruptions.
• In addition, as we understand that the construction sums payable of RMB117.5m have been provided for previously and the Sponsor will further indemnify the REIT for any further claims of RMB30.9m if it comes true, there is likely to be no material impact to the distributions to the REIT.
• As Hefei mall contribute close to 25%-28% of Sasseur REIT’s cash revenues over FY18F-19F, any potential disruption to cashflows and the ability for the onshore entities to pay tenants and repatriate monies back to unitholders to be declared as distributions in Singapore, will not be viewed positively by investors.

~ S G investors . io ~ Where SG investors share

Not helpful in building investor confidence for now.

• Newly listed, with a short operating history and looking to mint a track record of solid performance to investors, we believe that the timing of this news might dent investor confidence in the near term. That said, we believe there should be ample safeguards in place to prevent any impact to distributions.
• We will be tracking closely any further updates on this matter and we look forward to an amiable solution to this case.

Derek TAN DBS Group Research | Mervin SONG CFA DBS Research | Carmen TAY DBS Research | https://www.dbsvickers.com/ 2018-09-26

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