Sasseur Real Estate Investment Trust (SGX: CRPU) which has a portfolio of four outlet malls in China, currently has one of the highest annualised distribution yields among REITs in Singapore, at 9.3%. However, as most investors will tell you, the current yield should not be the sole driving force behind any investment decision. The more important thing to consider is whether the investment can maintain or even grow its distribution in the future.
I decided to take a closer look at Sasseur REIT’s distribution to see whether it can be sustained in the years ahead.
EMA rental income
To answer this question, we first need to familiarise ourselves with the unique approach by which Sasseur REIT achieves its income.
Unlike traditional retail REITs, Sasseur REIT has an entrusted manager that aids the REIT in managing its properties. The entrusted manager pays the REIT an entrusted manager rental income that has a fixed and a variable component. In return, the entrusted manager is paid an entrusted manager base fee and a performance bonus based on Sasseur REIT’s distribution per unit. Any remaining rental income belongs to Sasseur REIT.
The entrusted management agreement’s (EMA) fixed component has an annual increment rate of 3% a year. However, the variable component is more volatile and dependent on tenant sales. In 2018, the variable component was RMB153.5 million, around a third of the total EMA rental income earned that year.
As the fixed component of the rental income is, of course, fixed, investors’ only concern is whether the variable component of the EMA rental income can be sustained.
How is the variable component calculated, and will it decrease?
The variable component of the EMA rental income is calculated as a percentage of total retail sales in each property. The table below shows how the EMA variable rental income is calculated.
Source: Author compilation of data from Sasseur REIT prospectus
As you can see, the variable component of its portfolio is between 4% and 5.5% of total sales, depending on the property. While tenant sales can fluctuate over time, Sasseur REIT’s prospectus shows that based on past experiences, tenant sales in outlet malls have tended to rise as the outlet mall matures.
The table below shows tenant sales growth based on independent market research.
Source: Sasseur REIT prospectus
The prospectus also showed forecasted sales growth in its four outlet malls in 2018 and 2019.
Source: Sasseur REIT prospectus
At first glance, the prospectus forecasts may seem quite optimistic. Yet, higher occupancy rates and shopper traffic resulted in the four malls in Sasseur REIT’s portfolio outperforming the 2018 forecast. The table below compares actual figures with the prospectus growth forecast.
Source: Author compilation of data from Sasseur REIT’s 2018 Q4 Earnings Presentation
As you can see, full-year tenant sales beat forecast in each of its four malls by a fairly wide margin. On top of that, VIP membership volume increased between 22% to 202% in its four malls. As VIP members contribute around 50% of total tenant sales, the huge spike in VIP memberships should provide a boost to 2019 tenant sales. The fact that actual tenant sales were so far ahead of the forecast suggests that 2019 forecast growth is also likely to be met.
The Foolish conclusion
There are pros and cons to the EMA rental variable component. While the variable component provides upside potential if tenants generate higher sales volume, there is also the risk that the outlet malls underperform, which will result in lower overall EMA rental income.
Thankfully for investors, based on shopper traffic growth and 2018’s better-than-forecasted sales growth, the outlook for tenant sales in its portfolio for 2019 looks bright. Outlet mall sales are also more resilient than traditional shopping malls since the goods sold in outlet malls are highly discounted. As such, outlet malls tend to continue to perform favourably even in a slowing economic environment.
Based on what I’ve seen so far, I believe Sasseur REIT’s distribution looks sustainable, and it’s even likely it will be able to increase its DPU in 2019.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Jeremy Chia owns units in Sasseur Real Estate Investment Trust.