Sasseur REIT - UOB Kay Hian 2020-05-15: 1Q20 Recovery In Sales From Pent-Up Demand

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SASSEUR REIT (SGX:CRPU)

Sasseur REIT - 1Q20 Recovery In Sales From Pent-Up Demand

• Unlike other retail REITs, Sasseur REIT (SGX:CRPU) kept its payout ratio at 100% and did not retain cash. Its unique EMA rental model provides income stability. Fixed component income increased 3.9% y-o-y to Rmb102.4m and accounted for 80.5% of total EMA rental income, which cushioned Sasseur REIT from the negative impact of mall closures.
• Sasseur REIT’s four outlet malls re-opened in mid-March. It will benefit as consumers return with renewed fervour.
• Maintain BUY with a higher target price of S$0.96.

Sasseur REIT's 1Q20 Results

1Q20 DPU of 1.334 S cents (-19.4% y-o-y).

• The results represented 21.9% of our 2020 forecast. It was in line with our expectations as the negative impact from the temporary closure of outlet malls had already been baked into our forecast. See Sasseur REIT Announcements.

Post-lockdown outlet sales show signs of normalisation.

• Total outlet sales for the four malls came in at Rmb534.5m for 1Q20, 55.7% lower y-o-y. Sasseur REIT’s total sales for 1Q20 was at Rmb232.5m for Chongqing (-61.8% y-o-y), Rmb51.9m for Bishan (- 58.4% y-o-y), Rmb128.4m for Hefei (-47.2% y-o-y) and Rmb121.8m for Kunming (-46.8% y-o-y). This is largely a result of temporary closures of Sasseur REIT’s four outlet malls over a period of 44-49 days, representing 48-54% of the total operating days in 1Q20.

Portfolio occupancy remained stable

• Sasseur REIT's portfolio occupancy remained stable at 94.8% (-1.2ppt q-o-q), demonstrating the positive partnership between the tenants and entrusted managers of each outlet mall.
• Occupancy for 1Q20 was at 100% for Chongqing (flat q-o-q), 86.5% for Bishan (-6ppt q-o-q), 95.5% for Hefei (- 0.8ppt q-o-q) and 96.0% for Kunming (+1.1ppt q-o-q). Furthermore, total VIP members increased 4.8% q-o-q to 1.66m in 1Q20 despite the lockdown.

EMA rental model provides income stability.

• Under Sasseur REIT’s unique Entrusted Management Agreement (EMA) model, the fixed component income comprises approximately 70% of resultant rent with an annual step-up of 3%. This model cushions Sasseur REIT’s unitholders from excessive fluctuations in sales, which provides downside protection from unexpected business interruptions, such as mall closures.
• For 1Q20, fixed component income increased 3.9% y-o-y to Rmb102.4m, which accounted for 80.5% of total EMA rental income.
• Sasseur REIT has maintained a payout ratio of 100% and has not retained any cash.

Healthy balance sheet with low gearing maintained.

• Sasseur REIT’s aggregate leverage in 1Q20 stood at a healthy 28.5% (up 0.7ppt q-o-q). Interest coverage ratio also remained healthy at 4.7x. Debt headroom increased to S$379m (vs S$305m in 4Q19) due to the recent relaxation of leverage limit from 45% to 50% for S-REITs, which provides Sasseur REIT with more flexibility to pursue yield-accretive acquisitions.

Lives are returning back to normal as new COVID-19 infections ease.

• Reopening of businesses is a top priority for the Chinese government so as to get the economy back on its feet. Consumers are catching up with their shopping, which they sorely missed for two months. Retail sales have improved from -20.5% y-o-y in February to -15.8% y-o-y in March. The figure looks set to further improve in 2Q20 as more malls reopen.

All four outlet malls re-opened by 2Q20.

• Sasseur REIT resumed full operations of all outlet malls after obtaining approvals from the respective provincial authorities. Chongqing and Bishan outlet malls were re-opened on 15 March and Kunming and Hefei were re-opened earlier on 11 March and 13 March respectively. Management has stated that the financial impact due to the 7-week closure period is unlikely to be material for 2020.

Strong first-day sales recorded in March and April.

• Following the closures of Sasseur REIT’s outlet malls in late-January which saw operations suspended between 44-49 days in a bid to curtail the spread of COVID-19, Sasseur REIT’s mall re-openings have been met with sustained shoppers’ enthusiasm.
• Combined re-opening first day sales in March came in at Rmb11.5m, 129% higher from the corresponding period in 2019. Combined first-day sales in April for all four outlet malls came in at Rmb47.2m, 411% higher from March’s sales.
• In addition, the healthy rebound in foot traffic signals a recovery in the retail outlet segment and the overall effectiveness of Sasseur REIT’s intensive digital marketing efforts to engage with their customers.

Stringent hygiene and safety protocol implemented across outlets.

• Sasseur REIT has no reported cases of COVID-19 in any of its outlet malls since re-opening in March. Management has increased the frequency of cleaning and sanitising within the malls. It has a sufficient stockpile of face masks and disinfectants for tenants and employees. Customers are also required to wear face masks and undergo temperature screenings prior to entering the outlet malls.

AEI initiatives to start in 2Q20.

• Sasseur REIT plans to commence asset enhancement activities in May for the Chongqing outlet, in order to reposition the property as a lifestyle and shopping destination for both locals and domestic tourists. The Hefei outlet is also slated for AEI works in June, with plans to reposition one block into a sports-themed shopping complex and construction of a pedestrian walkway to increase shopper traffic.

Maintain BUY

• Maintain BUY on Sasseur REIT and target price of S$0.96, based on DDM (required rate of return: 8.5%, terminal growth: 1.5%).
• See Sasseur REIT Share Price; Sasseur REIT Target Price; Sasseur REIT Analyst Reports; Sasseur REIT Dividend History; Sasseur REIT Announcements; Sasseur REIT Latest News.
• We expect Sasseur REIT’s tenant sales to remain flat y-o-y in 2Q20 and 3Q20 before recovering by 5% y-o-y in 4Q20. Overall, we expect tenant sales to fall 13% in 2020 (previous: -22%). Thus, we raise our 2020F DPU forecast by 4.3% to 5.8 to 6.1 S cents.
• Sasseur REIT trades at attractive 2021 distribution yield of 9.1% and P/NAV of 0.78x.

Nicola Ho UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-15

SGX Stock Analyst Report BUY MAINTAIN BUY 0.96 UP 0.920