• SASSEUR REIT (SGX:CRPU)'s rental income rose by 5.2% on the back of strong operational metrics.
• DPU up 6.4% to 1.64 Scts; 74% of our YTD FY19 forecasts.
• Portfolio occupancy rates dipped 0.4% which is transitionary in nature; outlet sales increased 18.7% q-o-q, 9.4% y-o-y.
• Gearing at 29.0%; significant capacity to acquire with headroom of over S$276m.

9M19 Outlet Sales Increase by 20.9% (y-o-y)

• Sasseur REIT (SGX:CRPU)'s total outlet sales of RMB1,218.4m for 3Q19 was RMB105.0m or 9.4% higher than that of 3Q18. The outlets held successful two-week-long major sales promotions in September 2019 for the anniversary celebrations. The combined first-day sales of all four outlets surpassed last year’s sales record by 8.9%.
• On a YTD basis, Sasseur REIT reported a 20.9% increase in outlet sales led mainly by strong double-digit growth at Bishan (32.7%), Hefei (28.8%) and Kunming (44.4%). The 30% of variable rental component played to the advantage of Sasseur REIT as it contributed to a 4.3% (RMB terms) upside to earnings.
• The Chongqing outlet was the only one to see a fall in sales, of 5.4%. We understand that the sales decline was caused by the unusually bad weather during the quarter. Due to the unexpected high temperatures during the period, sales of winterwear was significantly affected probably because shoppers were expecting a warmer winter.
• Despite the slight dip in occupancy from 95.8% to 95.4% (q-o-q), all outlets reported increased sales. The dip in occupancy was mainly due to lower occupancies at Bishan and Kunming.

7.6% Increase in Distributable Income; 6.4% Increase in DPU

• Distributable income for 3Q19 was up 7.6% (q-o-q) to 19.6%. This translates into a q-o-q increase in DPU of 6.4% to 1.64 Scts. On a YTD 3Q19 basis, DPU came in at 4.904Scts. This is a 7.8% outperformance as compared to Sasseur REIT’s projections, and the sixth consecutive quarter of DPU outperformance.
• Earnings would have been stronger if not for the weaker RMB in the year. As compared to projected exchange rates, the SGD strengthened by 1.9% YTD 3Q19.

Gearing Improved 0.7% Q-o-q

• During the quarter, Sasseur REIT completed all refinancing due in 2019, and only S$8m remains to be refinanced in 2020. The average cost of borrowing also fell marginally to 4.43% from 4.45%, due to the 4-bp improvement in the SGD Offshore interest rate. The improved gearing gives Sasseur REIT a debt headroom of S$276m to pursue the 11 potential ROFR and other pipeline properties in the future.

Watch Out for Leasing Momentum

• In 3Q19, 35.7% of leases (by property income) were renewed, and only 6.6% remain to be renewed in 4Q19. In line with Sasseur REIT’s strategy to sign short leases to give it the flexibility to optimise tenant mix, leases expiring in FY20 increased to 68.8%.
• In our view, a high number of expiring leases in any single year could pose a potential risk, especially given the economic uncertainties surrounding China.
• We maintain our BUY call with a Target Price of S$0.97.

Source: DBS Research - 15 Nov 2019