During the six-month period, the REIT’s 1HFY2023 entrusted management agreement (EMA) rental income totaled $63.5 million, marking a y-o-y decrease of 3.6%. The decline can be primarily attributed to an 8.7% depreciation of the Chinese renminbi (RMB) against the Singapore dollar (SGD).

However, in local currency terms, EMA rental income displayed an encouraging growth of 8% y-o-y. This growth was driven by an in-built 3% annual escalation in rents and a substantial 20.8% increase in the variable income component. The latter was supported by an impressive 20.5% surge in 1H23 outlet sales.

Distribution income to unitholders experienced a modest decline of 1.6% y-o-y, amounting to $41 million. This decline was attributed to higher interest costs and a larger amount of retained income, totaling $2 million.

The payout ratio for 1HFY2023 was 93.3%, resulting in a distribution per unit (DPU) of 3.32 cents.

“We cut our FY2023 to FY2025 DPU by 4.67% to 6.07% to factor in a weaker RMB to SGD exchange rate of RMB 5.20 to $1 (versus RMB 4.90 to $1 previously),” notes the analyst in her report dated Aug 14.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/s-reits-not-yet-vogue-dbs-continues-favour-industrial-and-retail-subsectors?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>S-REITs not yet in vogue, DBS continues to favour industrial and retail subsectors</a>

The analyst also points out that despite the challenges posed by currency depreciation, Sasseur’s outlet mall sales demonstrated robust growth throughout 1HFY2023.

Portfolio occupancy improved q-o-q to reach 97.2%, and this growth was primarily driven by increased take-up at the Kunming outlet, aided by enhanced F&B offerings. Tenant sales within the portfolio experienced a significant y-o-y surge of 20.5%, reaching RMB 2.25 billion ($413 million).

Lock observes that this is “significantly higher” than China’s overall retail sales growth of 8% in 1HFY2023, according to the National Bureau of Statistics of China.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/brokers-calls/uob-kay-hian-lifts-comfortdelgros-tp-161-upon-seeing-improving-rail-and-taxi?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>UOB Kay Hian lifts ComfortDelGro’s TP to $1.61 upon seeing improving rail and taxi ridership</a>

Notably, the Hefei Outlet exhibited the most notable growth of 30%, driven by a low base in 1HFY2022, whilst Chongqing Liangjiang achieved a remarkable 20.3% rise in tenant sales.

The analyst understands that the REIT effectively managed lease expiries for 2HFY2023, with 90% of these leases already pre-committed.

The REIT’s focus on curating diverse and experiential brand concepts is expected to further enhance shoppers' experience and contribute positively to the REIT's performance. A series of mega sales events planned for 2HFY2023, including the signature anniversary sales, bolsters the REIT’s optimism for the latter half of the year.

Sasseur's gearing stood at 26.2% at the end of 1HFY2023, offering a comfortable level of debt headroom for future growth.

Meanwhile, the REIT has a debt maturity profile of 3.3 years, with no significant refinancing requirements until FY2026.

Notably, approximately 77.2% of its borrowings are pegged to stable rates or hedged into fixed rates.

“We estimate Sasseur has potential debt headroom of around $811.4 million (assuming 50% gearing). This will enable Sasseur to focus on inorganic growth drivers for the REIT, in our view. Within its sponsor portfolio, it has a right of first refusal for the Xian and Guiyang outlets,” adds Lock.

For more stories about where money flows, <a class='gtm_see_also_3_inread' style='text-decoration: underline;' href='/section/capital?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>click here for Capital Section</a>

The analyst likes Sasseur for “its exposure to the more resilient outlet mall segment of the retail value chain” while its EMA rental income structure provides a stable base.

Re-rating catalysts include better-than-projected tenant sales that will boost its variable income component and a highly visible sponsor asset pipeline for inorganic growth.

Conversely, downside risks include a high cost of capital that will erode Sasseur’s positive accretion yield gap, slower-than-expected sales at its outlet malls or a slowdown in discretionary consumption in China , that can lead to declining tenant sales at its outlets.

Shares in Sasseur REIT closed 2 cents lower or 2.83% down at 68.5 cents on Aug 16.

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