Croesus Retail Trust (CRT) is a business trust listed on the SGX-ST in May 2013. Similar to the investment objective of a real estate investment trust (REIT), CRT’s main strategy is to invest in a diversified portfolio of retail real estate located in the Asia-Pacific region. The Group was listed with 4 completed freehold retail properties namely : 1) Aeon Town Moriya, 2) Aeon Town Suzuka, 3) Luz Shinsaibashi and 4) Mallage Shobu. Since IPO, the Group has since added an additional 4 retail properties in its portfolio including Croesus Tachikawa, Luz Omori, One’s Mall and Torius.
CRT is backed by its strategic partners: Daiwa House and Marubeni Corporation. Daiwa House is one of Japan’s largest real estate business conglomerate while Marubeni is one of Japan’s leading general trading companies.
TICKER SYMBOL: S6NU.SI
MARKET CAP: S$510 million (11 Mar 2016)
MARKET PRICE / SHARE: S$0.80/share (11 Mar 2016)
SECTOR: Business Trust
INDUSTRY: Retail Business Trust
THE BUSINESS: Croesus Retail Trust
As mentioned, Croesus Retail Trust investments in retail properties in Japan but has a longer term strategy of expanding within the Asia-Pacific region. As at FY2015 (ending Jun 2015), the Group generated gross revenues of JPY7.6 billion with net property income (NPI) of JPY4.7 billion. Most of its revenues are generated by Mallage Shobu property, accounting for 40.5% of total revenues. Some of its retail properties can be found below:
1) Aeon Town Moriya: a large shopping mall with ~120 retail units. It is a closed mall, which means that all of its stores are located in a one-roofed building with a supermarket as an anchor tenant and multiple other stores. The property was completed in 2007 and has a current valuation of JPY14.4 billion (as at Jun 2015), with a FY2015 NPI of JPY814.6 million (1 Jul 2014 – 30 Jun 2015). Annualized NPI yield is 6.7% with a weighted average lease expiry of 12 years.
2) Aeon Town Suzuka is the 2nd largest retail property in Mie Prefecture. Opened in Jun 2007, the freehold property has a current valuation of JPY9.65 billion (as at Jun 2015) with a FY2015 NPI of JPY594.6 million (1 Jul 2014 – 30 Jun 2015). Annualized NPI yield is around 7% and runs on a full occupancy rate.
3) Croesus Shinsaibashi was originally constructed in 1987. The property faces the Dotonburi River and the bridge connecting Namba and Shinsaibashi stations along Shinsaibashi Avenue which attract foot traffic in the area. It is a freehold property with a current valuation of JPY10.7 billion (as at Jun 2015) with FY2015 NPI of JPY 458.2 million (1 Jul 2014 – 30 Jun 2015). It has an NPI yield of 5.1% with a weighted average lease expiry of 6.7 years. One of its key tenants is H&M.
4) Croesus Tachikawa is located in Tachikawa City, Tokyo. The property’s mix of leisure and F&B appeals to young commuters travelling through JR Tachikawa station including the increasing number of population moving into Tachikawa City. The property has a current valuation of JPY12.8 billion (as at Jun 2015) with FY2015 NPI of 652.5 million (1 Jul 2014 – 30 Jun 2015). While its annualized NPI yield is 6%, it has a weighted average list expiry of 3.5 years.
Not your usual REIT
Unlike an SG-listed REIT, Croesus Retail Trust is NOT mandated to pay out 90% of its net earnings as dividends.
However, the Group’s dividend policy has stated that it will distribute 90% of its distribution income on a semi-annual basis. Compared to the other REITs listed on the SGX, CRT has a relatively higher dividend yield as compared to the rest. This is probably because of its higher unrestricted gearing ratio of 46.3% while REITs in Singapore have to meet a gearing ratio limit of 45% and tends to average around 40% and below. That said, all 8 of its properties are currently at full or close to full occupancy rate, allowing unitholders to receive a stable form of rental cash flows from these properties.
CRT Lease Structure
There generally 2 types of leases in Japan: 1) fixed-term leases and 2) standard leases. Fixed-term leases have a pre-set terms which cannot be renewed automatically at the option of the tenant at term end. In contrast, Standard leases are renewable at the option of the tenant, and rental rates determined upon renewal are subjected to negotiation between tenant and the landlord. 60% of the Group’s rental income is derived from fixed-term leases which give Croesus Retail Trust greater flexibility to adjust rental income and tenant composition and also allowing the Group to share any income upside with its tenants.
KEY STATISTICS – FY2015 (as at Jun 2015)
Gross Revenue: JPY7.64 billion
Net property income:JPY4.68 billion
Total Assets:JPY100.4 billion
Earning per Share:JPY15.25/share
1) Direct Exposure To The Japanese Retail Property Market
The Group provides investors a direct exposure to the Japanese retail property market. Most of CRT’s properties are well-located in key cities and has been operating close to full occupancy rate for more than 5 years. This gives investors recurring form of cash flow via stable rental income.
2) Investment Mandate Geared Towards Expansion
As Croesus Retail Trust continues to look for viable acquisition targets, this give investors potential for earnings accretion if future target acquisitions prove to be successful. However, as the Group pays out 90% of its net income through dividends, this would compel Croesus Retail Trust to take up rights issue and debt funding which could not only dilute current unit holders but have the Group’s leverage ratio increase as a result of these acquisitions.
1) No Gearing Requirement
Heightened leverage profile. CRT is not required by the Monetary Authority of Singapore (MAS) to maintain its gearing ratio, unlike that of a SG-listed REIT. Leverage ratio could deteriorate if the Group continues to fund future acquisition targets via debt funding. Currently, Group’s gearing ratio stands at 46.3%.
2) Earthquake Risk
CRT’s properties are not covered by insurance as earthquake insurance are generally expensive in Japane. Moreover, Earthquake insurance can only be taken up “where the Probable Maximum Loss (PML) for a property is >15% of the current building replacement construction cost. None of the properties of CRT has a PML of more than 10%.
3) Currency Mismatch
Inflow in Japanese Yen but payments and payouts in another currency.
While its gross revenues are received in JPY, this may create a currency mismatch for unit holders and debt service payments. While Croesus Retail Trust has a hedging policy in place, it does not fully hedge currency mismatch and still exposes the Group to some form of foreign currency risk.
THOUGHTS ON VALUATION
1) Saizen REIT (residential properties in Japan)
2) Fortune REIT (Hong Kong retail malls)
3) Capitamall Trust (Singapore retail malls)
TOP SHAREHOLDERS DIRECT INTEREST
1) Value Partners Group – 6.24%
2) DBS Group Holdings, Asset Management – 5.29%
3) Target Asset Management – 4.26%
Source: MorningStar, Income Statement
Source: MorningStar, Balance Sheet
(Cover Photo Credit: http://www.croesusretailtrust.com/)
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