Sasseur REIT – My Short Take on this Messy China Retail Outlet REIT
砂之船 Sasseur REIT is a REIT that is currently in progress of IPO.
If you wish to, you can apply for it. The end date is on 26th Mar 2018, Monday.
It seems that many people are interested in this REIT, they give me the idea that I am missing out on the REIT of the year.
I believe many bloggers have covered it extensively. Thus, there is not much value for me to cover it in detail.
This post will be short, and consist of some of the things that I could pick out.
- Has an attractive dividend yield of 7.5% for FY 2018 and 7.8% for FY 2019
- Its WALE by Net Lettable Area is 3.2 years and by Net Property Income is 1.2 years. This is rather short, which works to the landlord’s advantage if demand is so good that you can always find tenants that are willing to pay more. The opposite is true as well
- Net Debt to Asset of 32%
- You face currency risk since all of the assets is paid in RMB. The debts are denominated in RMB
- The land lease on average is around 30 years. For most properties in China, the land lease expires in 2047
- Total number of outstanding shares: 1.18 bil shares
- IPO consist of 4 properties and they are concentrated in the Chongqing District
Sasseur REIT’s Complex Rent Structure
Personally, I do not understand a lot of things for this REIT. Particularly its rent structure.
The manager leases out the space to retail outlets that caters to middle income household and tourist. From what we understand from friends and family, retail outlets not just in China, but in USA are very popular with tourist.
Thus, Sasseur REIT is a play on the growth of the middle income in China.
The rent is a combination of fixed rent, variable rent and performance sharing. Not more than 70% of the rent is fixed and the rest of the rent is variable, depending on the percentage sales of the outlet. The percentage sales differs for each of the 4 properties, ranging from 4 to 5%.
In Singapore, some of the retail REITs also have a revenue sharing structure but the ratio between fixed rent and variable rent should be higher towards fixed rent.
How we can see this could be closer to those hospitality REITs, whose rents are more variable.
From the description above, shareholder benefits if there are excess revenue earned from the retail outlet. The shareholders get to enjoy 40% of the excess from [gross revenue – EMA resultant rent – base fee]
Thus this provides an incentive to ensure the properties do well.
This Fixed Component has been determined by the Manager and Sponsor taking into account the forecast Gross Revenue and Property Income of each of the Properties for Forecast Period 2018. To ensure that Sasseur REIT receives an EMA Resultant Rent with a certain level of stability, the Fixed Component has been fixed at not more than 70% of the EMA Resultant Rent for Forecast Period 2018. Beyond Forecast Period 2018, the Fixed Component shall increase at an escalation rate of 3.0% per annum, in line with inflationary expectation.
This sounds like the fixed component will have a floor of what was determined in FY2018, and then increasing at 3%.
To further guarantee the stability, Sasseur REIT introduced a Minimum Rent.
From what I understand. the sponsor will guarantee that you earn a minimum rent. This minimum rent is forecast based on what they will earn in the coming year.
If the REIT earns less than this minimum rent (calculated on a portfolio basis), then they will make up for the short fall.
If Sasseur REIT is able to achieve rent that is higher than the minimum rent forecast for 2 years running, the minimum rent goes away. Otherwise it stays.
So the danger is that we have 2 good years, and then the minimum rent goes away and eventually we have poor sales and thus poor revenue.
The minimum rent can be looked upon as some income support.
This rent structure is a mess. You are likely to benefit from this if the story painted by management is true. Eventually the baseline sales is higher than what it is now.
Sasseur REIT would be a splendid investment.
However, the skeptical brain tells me if its so complex, how much leakage could there be? Much of what happens in China is opaque and a lot of the parties (as we will see) are interconnected.
Value on the Book Largely Determine by its Potential Cash Flow
Since the land lease for the properties are short, the depreciation of the properties are likely to increase in an increasing pace.
Thus, the value of the properties will be based upon the future cash flow that the properties are able to earn. Their value becomes that of ships and toll road concessions. Ships and Toll road concessions typically have very short usable tenure.
I have a feeling that these properties are a dime and a dozen.
And much of all this depends on Sasseur at group level. Since they created this N+1 retail concept, should something happens to the parents, it might be rather difficult for the REIT to get untangle.
Some News on Sasseur and Customs Crackdown on the Chinese Front
I am rather bad with Chinese, but a friend of mine search up Baidu on Sasseur and found this article on some smuggled luxury goods being investigated.
The summary is that on March last year, the customs in Chongqing sized tens of thousands of top grade clothing and bags. These brands include Gucci, Armani, Prada, Ferragamo.
On the same day, the “Italian Space” in Western Pavilion D in Chongqing was sealed by the police. The news reporters got to know that operator of the Italian space is 装典百货有限公司. It should be known that the Chongqing customs did not officially state the company in question.
装典百货有限公司 is related to Sasseur in that, Yang Xue heads 装典百货有限公司. Yang Xue in the Sasseur REIT prospectus is listed as the wife of Xu Rongcan, the chairman and non-executive director of Sasseur REIT’s sponsor and Sasseur REIT. Yang Xue is also the non-executive director of Sasseur REIT (She is known more as Sasseur Yang in the Sasseur REIT realm. Google that up).
What the customs uncovered was a big smuggling ring. The article tries to uncover the identity of 装典百货有限公司, tracing its WeChat address, and who was registered behind the company. It also tries to piece together that 装典百货有限公司 turns out to be one of the biggest supplier for Sasseur in 2016.
You can read on your own.
Sasseur listed on China’s Third Board
In the same article, the report listed the ownership structure or Sasseur. We can see the Chongqing segment to the right. The Hangzhou Sasseur is on the left.
And it is listed on China’s Third Board.
Now I am conflicted as to why if this company is going places, it would be listed on not the Shanghai or Shenzhen exchange or HKSE but on China’s Third Board.
One of my readers added the following about the decision or perhaps lack of a choice to list on the third board:
“One of the benefits for issuers from raising capital via the third board (新三板) in China is that the regulatory reporting requirement is less stringent as compared to SZSE or SSE and needless to say, investor protection measures are less robust relatively but people who invest in otc markets (anywhere in the world) ought to also be aware of the higher risks associated with it.”
To contrast to that perspective, L Capital Asia, the asian private equity arm of LVMH and Warburg Pincus decide to take a minority stake in Sasseur Cayman in 2015.
I don’t believe that they did not do much work before investing their money in Sasseur Cayman.
They could very well have advised Sasseur of the great opportunity to list their property in Singapore to improve their cash flow, or to backed out their cash flow.
A Messy Structure
There are layers and layers of structure. If you are very interested in the REIT, do read up on this.
This is not my usual analysis and I got to admit I am off form on this. At times, I wonder what am I doing going through this rent structure and shareholding structure and whether there is a pot of gold at the end of the tunnel.
The pot of gold would be if you believe in the retail outlet growth rate.
I try to counter balance this with some of the things you should bear in mind.
For those who likes this, let me know your perspective in the comments below.
I shared more about stuff on REITs like this in my section on REIT where I go deep into the weeds of investing in REIT. It is FREE and available: