SINGAPORE (Sept 18): DBS is initiating coverage on Sasseur REIT with a “buy” recommendation and a target price of 91 cents.

Sasseur REIT is the first Singapore REIT (S-REIT) with exposure to the fast growing Chinese outlet mall industry, which is expected to grow at a CAGR of 24% between 2016-2021.

Initially, the REIT’s portfolio consists of four outlet malls in China, namely in Chongqing, Bishan,, Hefei and Kunming.

In a Tuesday report, analyst Derek Tan says, “Thus far, tenant sales for the malls have exceeded IPO forecasts, growing at 13-136% y-o-y in RMB terms and we project overall portfolio tenant sales to increase by 16-24% per annum over the next two years.”

In addition, the REIT has a unique model via the Entrusted Management Agreement (EMA) with its sponsor, Sasseur Cayman Holding, which provides upside but also downside protection.

Under the EMA, 70% of the group’s revenues are fixed, growing at 3% yearly, providing downside protection.

The remaining 30% of the revenue is pegged to 4-5% of a property’s tenant sales. This then provides leverage to the success of the mall.

Meanwhile, all operating costs for the mall are borne by the sponsor, with the sponsor guaranteeing a minimum revenue should the REIT not hit its IPO forecast.

The REIT’s sponsor has extended the right of first refusal (ROFR) over two properties and three pipeline properties, where most are in Tier 2 cities. Assuming the REIT acquires all of this, its gross floor area (GFA) would increase threefold.

“With gearing at 33-34%, the SASSR is well positioned to execute its inorganic strategy, providing upside risk to our estimates,” says Tan.

As at 9.40am, units in Sasseur REIT are trading at 70 cents or 27.7 times FY18 earnings with a distribution yield of 6.5%.