We were in China to visit two out of four of Sasseur REIT’s (Sasseur) outlet malls, Chongqing mall and Hefei mall, in March 2019, during their annual Spring sale. Sasseur’s outlet malls not only offer large discounts on branded goods targeted at the middle class, brand-conscious consumer, but also incorporate numerous activities and entertainment programmes to engage different age group. Unique to Sasseur is its revenue model which is based on an Entrusted Management Agreement (EMA) guaranteeing a minimum revenue level.
Listed on the SGX Mainboard on 28 March 2018, Sasseur’s portfolio consists of four retail outlet malls located in second-tier cities in China, namely; Chongqing, Bishan, Hefei and Kunming. The REIT’s sponsor, Sasseur Cayman Holdings, opened the first Sasseur outlet mall (Chongqing mall) in 2008. The Sponsor’s wholly owned subsidiary, Sasseur Shanghai, currently manages 10 Sasseur-branded outlet malls (including the four malls in the REIT’s portfolio) in China.
Site Visit Highlights
Chinese consumers account for 33% of luxury spending globally. Pre-2019, much of the spending has taken abroad versus in the PRC due to the lofty taxes imposed on luxury items. Recent governmental policies to reduce import tariffs, lower personal income tax and the imposition of stricter laws on daigou (personal shippers who purchase luxury goods abroad to be resold domestically at a profit) are primed to benefit the domestic luxury good market. Luxury outlet malls such as Sasseur’s, which already have an advantage over luxury-retailers due to the large discounts offered, will also stand to benefit from these policies aimed at spurring domestic spending. The malls carry a modest number of international luxury and sporting brands (Figure 28). The most sought-after international brands such as Coach, Kate Spade, Nike, Skechers and Adidas enjoy a constant flow of customers and high conversion rates (number of customers who end up purchasing items).
Although there is a minimum rent guaranteed under the EMA Model, 80% of the gross revenue from which the EMA Resultant Rents (RR) are derived are based on tenant sales. Hence, active management of tenants and tenant mix is vital. Managers of the malls exhibited exemplary knowledge of tenant sales and customer spending patterns, evident that they have been actively engaged in the tenant’s day-to-day operations.
Sasseur’s malls range form 45,000sqm to 140,000sqm and the number of tenants in each mall ranges from 200 to 400. Their strategy of organising promotional days one a month (which include 4 mega-sale events called “Super Days”) had helped to set them apart from the competition, with competitors attempting to replicate the success of the stellar sales raked in during the Super Days. During the Spring sale in March, stages for performance and entertainment (lucky draws and live performances) were erected in common spaces (atrium or outside the malls). Popular brands such as Coach also had tentages which featured clearance items with discounts up to 90%. Children-centric attractions such as guppy-fishing and children rides were also available outside the malls.
No stock rating or price target provided, as we do not have coverage on Sasseur.
Sasseur currently trades at an annualised 8.4% yield which is higher than the 7.4% forecasted yield for 2018. There are no comparable S-REITs focused on outlet malls in China. China-centric retail S-REITs trade at yields between 6.8% to 8.5%.
An introduction to China’s outlet mall scene
Outlet malls are a relatively new and underdeveloped market in China. In 2016, the China outlet mall industry was worth US$7.4bn, which paled in comparison to the UK and US outlet store industry of US$16.6bn and US$47.4bn, respectively. While China’s population is approximately four times that of the US, Chinese spending per capita at outlet malls was only US$6 compared to vs US$140 in the US in 2016. This points to a supply gap in the China outlet industry.
Outlet malls in second-tier cities
Sasseur’s outlet malls are located in Tier 2 cities (Chongqing, Hefei and Kumming), characterised by rapidly expanding middle-class populations. For example, Hefei outlet mall is located near China’s second largest national science centre which is zoned for companies focusing on research in information technology, energy, health, quantum communications and cancer treatment. Subsidies of up to RMB20mn (US$3mn) were announced in June 2018 to attract high-tech companies to set up factories in the area. Located five minutes away from this hi-tech zone, Hefei will stand to benefit from the workforce that new companies setting up in the hi-tech zone bring. As Tier 2 cities develop, the area will stand to benefit from the increased infrastructure, connectivity and accessibility.
Entrusted Management Agreement (EMA) Model
The manager and the trustee of the REIT and entered into a Master EMA with the Entrusted Manager (EM), Sasseur Shanghai, for all four of the REIT’s malls. The EMA has a 10 year term commencing 1 March 2018, with an option to extend for another 10 years. Under the EMA, the EM is responsible for the end-to-end-operations of the malls, including but not limited to:
Rationale for entering into the EMA
As the EM has more than 10 year of experience operating outlet malls in the PRC, the REIT will be able to leverage on the operational experience and capabilities of the EM. The EM also guarantees the MR, and hence the risks and uncertainties of the outlet mall operations are transferred from the REIT to the EM.
Ancillary tenants such as cinema, zoo and F&B operators are charged a fixed rent with an additional variable component after a predetermined sales level is met. Most of the retail tenants have short term, sales-based leases, whereby the rent is determined solely on gross turnover (GTO). As such, the EM has to actively manage the properties and carefully select and calibrate the tenant mix in order to maximise rental income. The EM also has to work closely with the tenants to help drive and maximise sales.
EMA Model explained
The Minimum Rent (MR) is guaranteed for 10 years, starting 1 March 2018. However, MR guarantee will cease if the EMA RR exceeds the stipulated MR for two consecutive years. MR for the first 2 years, the Forecasted Period 2018 and Projection Year 2019 (Figure 3), are S$96mn (RMB472.9mn) (pro-rated) and S$124mn (RMB611.4mn) respectively. The minimum rent for FY2020 onwards (if applicable) shall be equivalent to the Projection Year 2019 Minimum Rent. For FY2018, the REIT has surpassed the MR for the past 3 quarters since listing.
The EMA Resultant Rent (RR) (FY2018: S$96mn) comprises of two parts – the fixed component (FC) (FY2018: S$65mn) and the variable component (VC) (FY2018: S$31). The FC is determined by the Manager and Sponsor, based on forecast Gross Revenue and Property Income of each of the Properties for Forecast Period 2018, and will grow by 24% to S$80mn in 2019. From 2020 onwards, the FC will grow at 3% (in line with inflation). However, since the MR capped Project Year 2019’s MR of S$124mn (RMB611 mn), what this means is that the MR will stagnate from 2019 to the end of the 10 year term (2028); due to the FC growing at 3%, only the proportion of FC to VC changes as illustrated in Figure 4 and Figure 5 respectively. In the event that the malls do not generate enough sales (and consequently the EMA RR falls short of the MR), the MR will be guaranteed by the Entrusted Manager, Sasseur Shanghai. Only after the MR is satisfied does the EM get paid their base fee, which is capped at 30% of the gross revenue.
The EMA Model is structured to provide downside protection while allowing upside potential. Should the malls do better than anticipated, the EMA RR will increase with the VC – as the VC, which is directly pegged to GTO of the malls, has to contribute at least 30% of the EMA RR. If there is surplus after paying the EM base fees and EM performance fees, the balance will accrue to unitholders of the REIT.
EMA Base and Performance Fees
The EMA Base Fee will be paid out to the EM and is the lower of:
In the event that the gross revenue is less than the MR, the EM will not receive any base fees.
EMA performance fees paid to the EM will be 60% of the residual of the gross revenue after the EMA RR and base fees are paid out, the remaining 40% of the residual will flow back to the REIT.
Point-of-sale and cash management system
As an added layer of security, all sales generated by tenants will be collected by the EM and held in the bank accounts of the respective malls. The sales proceeds less rent payable to the mall will be released to the tenants approximately 1.5 to 2 months after the sale.
In the 3 quarters since listing in March 2018, Sasseur has managed to exceed their Forecast Year 2018 sales and gross revenue projections. Figure 8 below summarises the performance of the REIT for 4Q18 and FY18.
Observations from our site visit
The two malls we visited, Chongqing and Hefei mall, boasted many popular international brands. The brands such as Coach, Kate Spade, Salvatore Ferragamo, which are more well-received, were located on the first floor. Despite the large floor area, the malls were indeed well occupied – consistent with the reported portfolio occupancy of c.91.8%. International brands, located on the first floor and basement, were the main draw and had the most shopper traffic. Domestic brands filled the remaining 2 to 4 floors. However, shopper traffic at domestic brand stores paled in comparison to international brands. The cinema and zoo (Hefei mall only) took up the highest floors.
The first Sassuer mall and the crown jewel, brought in RMB1,730mn in FY18 while Hefei, Kunming and Bishan bringing in RMB760mn, RMB570mn and RMB310mn respectively. This is despite Chongqing having the second smallest floor area among the assets in the portfolio. As such, the real estate is more expensive and hence, there is less area allocated for entertainment and exhibitions. There were smaller attractions such as a mini-farm with tortoises, iguanas, rabbits and even an alpaca. Although small, the mini-farm was a hit with younger children and activities and exhibitions such as these help to entertain the children while the adults shop. Located on the higher floors, which were dedicated to retailers of children’s clothes and toys, were shops that provided pay-per-play games such as guppy-fishing and coloured-sand art.
With almost 3 times the NLA of Chongqing mall, Hefei mall is the only mall in the portfolio that boasts a zoo, along with a 17 screen cinema facility. The operators of the Matata Zoo and UME Cinema injected c.S$3mn each into their facility. The most popular stores at Hefei are Coach, Nike, Skechers (Figure 29) and Adidas. These stores and have a consistent flow of customers and are almost always packed. Other notable stores at Heifei are Fila, Under Armour and Kate Spade.
Managers of the malls
We met the respective managers of the malls and it was clear from how well they knew about the tenant sales and customer spending patterns that they were actively engaged in tenant’s day-to-day operations. Active management has been cited as one of the key factors that helped grow tenant sales by 27.6% YoY on a portfolio level. On a portfolio level, Sasseur beat their sales and DPU forecast by 7.9% and 12.6% respectively for FY18 (Figure 9 and 10).