SINGAPORE (Mar 26): Xu Rongcan, chairman of shopping mall operator and owner Sasseur Cayman Holding, built an outlet mall in Chongqing in 2008. It was only the second such property in China at the time. Since then, Sasseur has gone on to operate eight more outlet malls in other second-tier cities in China to tap the growth of the country’s middle class and booming sales of fashion brands. Now, Xu is packaging some of these assets into a real estate investment trust (REIT) that will be listed on the Mainboard of the Singapore Exchange.
Sasseur REIT will have an initial portfolio worth $1.5 billion, comprising four outlet malls in Chongqing, Bishan, Kunming and Hefei. The properties have a total net lettable area (NLA) of 3.3 million sq ft. The REIT is selling 266.56 million units at 80 cents each. Of these, 13.75 million units will be sold via a public offer and the remainder will be placed out. Concurrently, cornerstone investors will subscribe for 228.4 million units at the offer price. In total, the REIT will raise $396 million. The public offer opened on March 21 and closes on March 26.
Sasseur REIT will have debt of $522.6 million at listing. At the offer price of 80 cents, it will have a market capitalisation of $944.2 million. The largest unitholder upon listing will be an entity controlled by the REIT’s sponsor Sasseur Cayman Holding and its private-equity backers, with a stake of as much as 58%. Among its cornerstone investors are a unit of Chinese e-commerce giant JD.com, and the ultimate beneficial owner of the Charles & Keith group of companies. The prospectus did not disclose their respective stakes upon listing. Based on the offer price and estimated distribution per unit (DPU), the REIT will have a distribution yield of 7.5% in 2018.
Sasseur REIT has the right of first refusal to two outlet malls in Xi’an and Guiyang. It also has three pipeline properties in Hangzhou, Nanjing and Changchun, which are operated but not owned by the sponsor. These assets could add 7.5 million sq ft in gross floor area to its portfolio.
Xu, who is also chairman and non-executive director of REIT manager Sasseur Asset Management, says the sponsor has plans to open 30 outlet malls in the next five years, which could be offered to Sasseur REIT in the future. However, he warns that some of the new properties might be unsuitable for the REIT, because they could be held under joint ventures.
He had considered listing the REIT in the US or Hong Kong but, after several fundraising discussions with L Catterton, a strategic shareholder of the sponsor, he decided that Singapore was the best place to do so. For one, Xu drew inspiration from CapitaLand, which has several REITs listed here. For another, Singapore is well known as a “REIT hub” in Asia. “Also, the republic is reputed for its world-class financial and legal infrastructure,” he tells The Edge Singapore in a recent interview, accompanied by his wife, Yang Xue, who is non-executive director of the REIT manager.
Sales-based lease model
Sasseur REIT’s listing will increase the number of locally listed China-focused REITs to five. The incumbents are mostly retail REITs such as CapitaLand Retail China Trust and BHG Retail REIT. EC World REIT specialises in logistics assets in China.
Sasseur REIT stands out in this field for its sales-based lease model. In essence, most of the REIT’s tenants pay only turnover rent, while some pay a minimum base rent or turnover rent, whichever is higher. For September 2017, on a pro forma basis, 77% of Sasseur REIT’s property income from its initial portfolio would have come from turnover rent. About 22% would have come from tenants paying the higher of fixed rent or turnover rent. Only 1% would have come from tenants paying a fixed rent.
However, Sasseur REIT is shielded somewhat from this volatility by a so-called “entrusted manager” (EM), which operates, maintains, manages and markets the properties. The entrusted manager is like a master lessor, says Anthony Ang, CEO of the REIT manager. Ang was CEO of ARA Asset Management (Fortune), which manages Hong Kong-listed Fortune REIT. “The only difference is that the income we ask from the entrusted manager is not at a fixed level. Typically, it should be fixed income and you have to step up every year like a hotel REIT, for example. In this case, we have partly fixed income, partly variable income.”
The REIT recognises so-called EMA rental income, which is stipulated under the entrusted management agreements. The EMA rental income comprises the EMA resultant rent and a performance sharing component. The bulk of the resultant rent is fixed, with an annual stepup of 3% over the term of the EMA. The fixed component is expected to contribute up to 70% of the EMA resultant rent for 2018.
The variable component of Sasseur REIT’s EMA resultant rent is 4% to 5.5% for each outlet mall’s total sales. Meanwhile, the performance sharing component of the EMA rental income is the difference between the gross revenue and EMA resultant rent, after deducting the EM base fee.
Also, under the EMA, if the EMA resultant rent falls below a certain minimum rent, the sponsor will top up the shortfall to Sasseur REIT. The minimum rents are RMB472.9 million ($98.2 million) and RMB611.4 million in 2018 and 2019, respectively. This minimum rent condition will fall away if the initial portfolio achieves the minimum rent for two consecutive years commencing this year.
Wouldn’t the uncertain underlying revenues translate into higher perceived risk for investors? Wouldn’t that result in the REIT trading at high yields? Ang does not agree. The way he tells it, having a significant element of rental income pegged to sales is “not risky”. On the contrary, it aligns the interest of Sasseur REIT with its tenants. “So, you actually work hand-inhand,” he says.
The top 10 tenants at the four outlet malls that will form the initial portfolio of Sasseur REIT sell a variety of well-known international brands. They include Adidas, Bally, Coach, Columbia, Elegant Prosper, Fila, Jack Wolfskin, JNBY, Michael Kors, Nike, The North Face, Ports, PUMA and Polo Sports. These 10 tenants contributed 13.4% of the initial portfolio’s property income for September 2017.
Interestingly, tenants at Sasseur REIT’s malls do not have long leases. As at Sept 30, 2017, Sasseur REIT had a weighted average lease expiry by committed NLA of the initial portfolio of 3.2 years. WALE by property income for September 2017 is 1.2 years. Again, while many investors might see this as a risk, Ang insists it is positive. “Since you are sharing revenue with your tenant, you want to have a short lease, so that if the tenant’s business grows fast, you can quickly renew your lease with a little bit more commission. Then, your income will go up. With a short lease, you can do that more rapidly. [On the other hand], those tenants who are not doing well, you don’t renew [their leases],” he explains.
Sasseur REIT’s manager earns a base fee equivalent to 10% of the REIT’s distributable income. The manager also stands to earn a performance fee equivalent to 25% of the difference between the DPU in a financial year and the DPU in the preceding full financial year multiplied by the weighted average number of units in issue. The performance fee is payable if the DPU in any financial year exceeds the DPU in the preceding financial year, even though the DPU in the financial year where the performance fee is payable may be less than the DPU in the financial year prior to any preceding full financial year.
Combining art and business
Xu, 53, started his career as an arts lecturer at a local university in Chongqing, where he grew up. Subsequently, he went into business by setting up a café infused with music and art themes in 1989. “It was frequented by foreigners,” he recalls. But his love for art and business eventually drove him to venture into the world of fashion after a visit to Shenzhen, which was a centre for fashion manufacturing and exports. He left the café business to open a fashion apparel shop in Chongqing and went on to become a distributor of foreign fashion brands such as Armani and Boss. He also developed his own fashion brands.
While in the fashion business, he was often forced to deal with an unwanted problem: excess inventory. That led him to discover the outlet mall industry, where fashion brands are sold at big discounts. Xu believes that the next 10 years will be the “golden era” for outlet malls in China. This is because the outlet mall industry there is still nascent. He points out that there are many provincial cities that lack outlet malls. Xu is convinced that the “tremendous” response seen at the REIT’s outlet malls could be replicated in other provincial cities too. “We want to seize the growth opportunity.”
To stand out in all his business ventures, Xu always tries to incorporate the element of art in them. This is no different for Sasseur REIT’s outlet malls, which incorporate interesting architecture, he says. For instance, the Chongqing outlet mall is designed to reflect an Italian architectural style with fountains and floral designs.
But more than that, Xu tries to deliver an experience to consumers who visit the outlet malls. This is through the “1+N” model, with “1” representing the outlet mall business platform and “N” reflecting the various lifestyle options. For instance, the newer Bishan outlet mall comes equipped with a Super Children’s Centre, which has an enrichment centre, children’s playground, children’s photography centre and children’s theatre.
This is to help draw in the crowds and retain traffic footfall, says Xu. It also helps differentiate Sasseur REIT’s outlet malls from the “ cookie cutter” malls in China. “We want our outlet malls to be landmarks in their respective geographical areas,” he says. “We want to create an emotional link with consumers.”
