Sasseur REIT’s rental income is based on the entrusted management agreement (EMA) model. The starting point is the cash flow from tenant sales (less expenses) of its four outlet malls: Chongqing Liangjian Outlet, Chongqing Bishan Outlet, Kunming Outlet and Hefei Outlet. Unlike the retail REITs in Singapore, where base rent comprises the main part of their gross rental income, Sasseur REIT’s rent comes mainly from tenant sales. The “entrusted manager” takes all the cash flow from tenant sales and, after expenses and fees, pays this out to unitholders.
The EMA comprises a fixed portion and a variable portion. At IPO, the fixed portion was 70% of the REIT’s income and the variable portion was 30%. The fixed portion grows by 3% a year. In good times, the fixed portion is less than 70% as the variable portion rises and in bad times, the fixed portion is a bit above 70% because the variable portion falls. The variable portion comprises 4% of the Chongqing LiangJiang Outlet’s sales, 4.5% of the Chongqing Bishan Outlet’s sales, 5% of the Kunming Outlet’s sales and 5.5% of the Hefei Outlet’s sales.
“We wanted to give unitholders a link to the underlying leases with the variable portion but also protection in income with the fixed portion,” says Cecilia Tan, CEO of Sasseur REIT’s manager.
During a results briefing on Feb 20, analysts asked about the strength of the sponsor and its ability to support the REIT. To demonstrate the sponsor’s resilience, Tan says that the sponsor gave its staff a group bonus of RMB77 million ($14.2 million) in 2024.
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The sponsor group also supported its refinancing because it owns 57% of the REIT. In 2023, during a refinancing exercise, the REIT unbundled Kunming Outlet to keep it unencumbered with a sponsor loan. The Chongqing Liangjiang Outlet, Chongqing Bishan Outlet and Hefei Outlet were bundled together for a syndicated loan. Part of the reason was to have staggered debt maturities.
“The sponsor offered a short-term loan as we sourced for a permanent loan structure. Subsequently, the sponsor gave us a five-year extension. There was no mortgage or share pledge to the sponsor and it took away the concentration risk,” Tan elaborates.
Earlier this year, Sasseur REIT obtained an AAA rating from China Lianhe Credit Company, a major rating agency in China. “The rating agency sent people to visit our four malls and talk to the management team. They stress-tested the interest cost and sales to see if we are of investment grade. After stress testing, they concluded that we qualify as AAA,” Tan says.
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She acknowledged that a rating paved the way for the issue of panda bonds. Sasseur REIT’s next refinancing is in 2026 when the REIT could diversify its sources of debt with a panda bond.
The REIT’s capital management is part of its conservative stance under Tan. To grow DPU though, tenant sales have to rise, and this is directly related to China’s consumer spending.
