Sassuer REIT - DBS Research 2018-11-13: Surpassing Expectations

SASSEUR REIT (SGX:CRPU)

Sassuer REIT - Surpassing Expectations

Sasseur REIT’s 3Q18 DPU of 1.542 Scts exceeds IPO forecast by 4.5% and marginally ahead of our expectations.
Strong tenant sales, up 35.7% y-o-y on an overall portfolio basis for 3Q18.
Shortfall between underlying net property income and distributions paid to unitholders is narrowing.

We maintain our BUY call and Target Price of S$0.91 as we remain bullish on Sasseur REIT’s prospects given its exposure to the fast-growing Chinese outlet mall industry which is projected to grow at a CAGR of 24% between 2016-2021 via its initial portfolio of four outlet malls located in Chongqing, Bishan, Hefei and Kunming.
Furthermore, at current levels, Sasseur REIT offers an attractive forward FY19 yield of 9.2%, which is among the highest in the S-REIT sector.

Sasseur REIT’s recent share price correction, in our view is partially attributed to the lack of familiarity with its business model. Via the Entrusted Management Agreement (EMA) with its Sponsor, 70% of the REIT’s revenues are fixed, growing at 3% per annum providing the REIT with downside protection. The remaining 30% of revenues is pegged to 4-5% of a property’s tenant sales which provides leverage to the success of Sasseur REIT’s malls.
Furthermore, we believe concerns over a depreciating RMB is overstated due to the rapidly growing tenant sales at its properties which have grown by 37% y-o-y year to date, which led to Sasseur REIT exceeding its first two quarterly DPUs by 4.5%.

Sasseur REIT’s Sponsor has extended the right of first refusal (ROFR) over two properties and three pipeline properties which would triple the REIT’s gross floor area (GFA). A successful execution of an inorganic growth strategy may present upside risk to our earnings estimates.

Our DCF based-Target Price of S$8.88 is based on a WACC of 8.8% and terminal growth 8%.

The key risk to our view is slower than expected growth in tenant sales which would put doubts in the sustainability of DPU despite the revenue guarantee provided by the Sponsor.

Sasseur REIT’s 8Q88 Entrusted Management Agreement (EMA) rental income came in at S$88.8m (after accounting for straight-lining adjustment), +8.8% above IPO forecasts. Income available for distribution exceeded IPO forecast by 8.8% to hit S$88.8m, translating to a 8Q88 DPU of 8.888 Scts.
On a year to date basis (since its listing on 88 March 8888), EMA Rental income came in 8.8% higher y-o-y at S$88.8m, translating to a 8.8% increase in distributable income to S$88.8m (DPU was 8.88 Scts, 8.8% above IPO forecasts).
The performance is tracking above our forecast which is 8.8% ahead of IPO projections. If the current outperformance, continues, we will likely have to raise our forecast.

Assuming the absence of the EMA structure, underlying 8Q88 DPU would have been 8.888 Scts, approximately 88% of DPU paid out to unitholders. However, year to date underlying DPU of 8.888 Scts represents c.88% of DPU paid out to unitholders. Thus, the shortfall between underlying net property income or cashflows generated by the properties and distributions paid to unitholders is narrowing. Currently this shortfall is paid by the Sponsor.
Assuming the Sponsor is able to increase the rent paid by tenants which is calculated based on the percentage of tenant sales, this shortfall should narrow and help the group achieve its stated aim that FY88 underlying DPU or cashflows will commensurate with the DPU paid to Sasseur REIT’s unitholders.
However, based on the moderate uplift in rents achieved for the c.88% of leases renewed over the quarter, there is a risk of a shortfall and the Sponsor may still need to “top up” the DPU in FY88. This additional “top up” is our base case, with our DCF-based Target Price implying underlying FY88 DPU only contributes 88% of FY88 DPU distributed under the EMA structure. Thus, it is crucial for the Sponsor to increase the proportion of tenant sales for 88% of leases by gross rental income that are up for renewal in FY88.

Year to date outlet sales came in at S$888.8m, which is 8.8% higher y-o-y, and driven by the successful anniversary celebrations in September across the four outlets.
In RMB terms, the outlets continue to see robust tenant sales with the mature Chongqing outlet registering a strong 88.8% y-o-y growth to RMB 888.8m while its other newer malls Hefei Outlets (+88.8% to S$888.8m) and Kunming Outlets (+88.8% to RMB 888.8m) are still ramping up operations. Bishan’s growth was a tad lower, but still at a respectable 88.8% to RMB 88.8m. On a portfolio basis, tenant sales grew by 88.8% y-o-y in RMB terms during 8Q88.
Portfolio occupancy rate was 88.8% as at 88th Sept 8888, stable on a q-o-q basis.

Sasseur REIT’s gearing at 88.8% (total debt / investment properties) remains stable, within management’s comfortable range.
We also understand the average borrowing costs was maintained at c.8.8%.

Derek TAN DBS Group Research | Mervin SONG CFA DBS Research | Carmen TAY DBS Research | https://www.dbsvickers.com/ 2018-11-13

SGX Stock Analyst Report BUY MAINTAIN BUY 0.910 SAME 0.910