Business Model of Croesus Retail Trust
Croesus Retail Trust is a business trust listed on the SGX in 2013. Croesus Retail Trust manages and operates a portfolio of 8 suburban malls and collects rents from the tenants of the malls. These rents, after netting operating expenses, are then paid out to unitholders. Therefore, it behaves exactly like a REIT and should be considered a high dividend stock in one’s portfolio. It should be noted that a business trust is similar to a REIT but differs in several ways:
- A business trust is not limited to only income-producing real estate assets. Therefore, examples of some business trusts listed on SGX that are not in real estate are Hutchison Port Holdings Trust and First Ship Lease Trust.
- It has less restrictive covenants. For instance, a business trust does not have to abide by a 45% gearing ratio unlike a REIT. In addition, a business trust is not obligated to pay out 90% of its distributable income under the Income Tax Act.
Despite these key differences, retail investors often view business trust and REIT in the same domain. Indeed, Croesus Retail Trust is most similar to Frasers Centrepoint Trust in Singapore. Its portfolio of 8 suburban retail malls can be considered defensive in nature and hence it is largely tethered to the Japanese local consumption expenditure.
Diagram 1: Location of Croesus Retail Trust’s Portfolio (Source: Croesus Retail Trust)
Investment Merits of Croesus Retail Trust
High Dividend Yield
When it comes to REITs and business trusts, the first question on most investors’ minds is “What is the dividend yield?” At a stock price of $0.79, readers will be pleased to learn that Croesus Retail Trust currently provides a 9.4% dividend yield based on trailing 12 months. This is one of the highest yielding dividend stocks on SGX right now and remains an attractive proposition to yield hungry investors such as Heartland Boy. Of course, there is a danger that the Distribution Per Unit (DPU) for 2H 2016 may be reduced given the recent rights issue following the acquisition of Torius Property in Oct 2015.
2.Excellent Track Record
The performance of a REIT or business trust is often judged by a single metric only- DPU. Since its listing, Croesus Retail Trust has managed to outperform the forecasts made in its IPO prospectus. Investors who have bought in during IPO would have therefore benefited from this surprise upside.
Diagram 2: Croesus Retail Trust has outperformed its IPO forecasts
Nonetheless, Heartland Boy is also certain that many readers will be familiar with this term that “past performance may not be indicative of future performances”. However, as shown below, it is still possible to look at some indicators to give us a glimpse into the future performances of Croesus Retail Trust.
Indicator 1: Proactive Capital Management
As a Business Trust that collects rental revenue in Japanese Yen but pays unitholders in Singapore dollars, the volatility of the Japanese Yen is the singular concern on top on everyone’s minds. Unitholders will be pleased to learn that dividends for FY2016 and FY2017 are already hedged at 85.03 and 84.16 Japanese Yen per SGD respectively. The recent appreciation of the Japanese Yen is also good news as it meant that less Japanese Yen will be needed to pay unitholders in Singapore dollars.
Croesus Retail Trust also enjoys a very low all in interest cost of 1.9%, and its liabilities have all been hedged and converted to fixed interest costs. There is hence no interest rate risk. As of 31 Dec 2015, the debt maturity profile of Croesus Retail Trust is 2.6 years. This implies that it takes an average of 2.6 years for all of Croesus Retail Trust’s debt to expire. It also has no refinancing requirements in 2016. All the above are strong indications that its Capital Markets department is hard at work.
Indicator 2: Astute Asset Management
As at 31 Dec 2015, Croesus Retail Trust has a Weighted Average Lease Expiry (WALE) of 8 years. This implies that it takes an average of 8 years for the tenants’ leases to expire in its portfolio of malls. This is a very strong sign of stability to unitholders that, ceteris peribus, future DPU can be sustained. Moreover, Heartlandboy is particularly impressed with the Asset Enhancement Initiative (AEI) performed at Mallage Shobu, one of the biggest malls in its portfolio. Mallage Shobu underwent a major AEI exercise in 2015 to refresh its image by revamping certain areas of the mall. From this exercise, Croesus Retail Trust generated positive rental reversions by renewing over 100 leases. This is no mean feat as shopping malls can be a tricky asset to manage since shoppers are usually the most fickle minded lot. Just look at Marina Square in Singapore. 😀
The Trustee-Manager also recently informed unitholders that it is looking to undertake AEI in One’s Mall and Torius Property.
Indicator 3: Favourable Marco Outlook
The recent move by Bank of Japan to introduce negative interest rates is a big positive for asset managers such as Croesus Retail Trust. There is a possibility for its all-in interest cost to trend downwards and also for yield compression to take place in the real estate sector. This can lead to revaluation gains and reduce the gearing ratio.
More importantly, because of the relatively small size of Croesus Retail Trust, there remains a valuation gap between Croesus Retail Trust and its peers such as S-REITS and J-REITS. If Croesus Retail Trust continues to make excellent acquisitions as it has proven with Luz Omori, Croesus Tachikawa, One’s Mall and Torius Property, its Asset Under Management (AUM) will only continue to grow. This valuation gap may close eventually and unitholders will enjoy some capital appreciation along the way. Therefore, the growth story for Croesus Retail Trust remains very strong.
Investment Risks of Croesus Retail Trust
Abenomics may Sink and Not Swim
Prime Minister Abe has fired many arrows already, and it is increasingly evident that his monetary policy of creating 2% inflation is not working! While his clarion call for companies to increase real wages is undoubtedly positive for domestic consumption, it is simply not happening on a sufficiently big scale at the moment. Honestly, even Heartland Boy is frustrated at Abenomics. Therefore, he rather assumes that there is no Abenomics and only focus on the fundamentals of Croesus Retail Trust in his analysis.
High Gearing Ratio
The current gearing ratio of Croesus Retail Trust is 46.3%. Although it is not a REIT that is subject to a 45% gearing limit, there is no doubt that this financial ratio still weigh heavy on investors’ minds. While the Trustee-Manager has introduced Distribution Reinvestment Plan as a means to reduce gearing, it did indicate that with negative interest rates from the Bank of Japan at this moment, it is doing a dis-service to unitholders by not borrowing more! Heartland Boy absolutely agrees, so long it is undertaken to finance yield-accretive investments!
Conclusion of Croesus Retail Trust
Heartland Boy is very relieved to have Croesus Retail Trust in his portfolio. Considering that the broader market has dropped approximately 20% during the same holding period, Croesus Retail Trust is indeed a safe haven that is relatively shielded from this volatility. It’s share price have been relatively stable during this period.
For dividend cash cows such as Croesus Retail Trust, Heartland Boy has no personal target price. Rather, his investment decision is driven primarily on whether there are counters out there on the market that offer better risk-adjusted returns.
Vested at 77 cents (nett of dividends collected) since June 2015
This article was written on 20 Feb 2016.[Update] The Manager has informed that it has appointed an external bank to advise it on a potential General Offer/privatisation of the outstanding units in the Business Trust
thanks for the analysis. it has helped a lot
Thanks Kyith! I love your website investmentmoats too. We share a few common holdings actually!
Vested at 77 cents since June 2015? checked the June 2015 price never hit 77 cents, how did you be able to get that price at that time?
77 cents is the price after lessing the dividends collected thus far and the rights exercise.
Why do you think that management is not increasing their gearing levels since borrowing cost is so low in Japan. Don’t you think it is a concern that the company is repeatedly coming to the capital market to raise funds for new acquisitions, which at the current level that the stock is trading, might not be exactly yield accretive to existing shareholders (depending on equity/debt breakdown)?
Based on my previous interaction with its management, they very much like to take advantage of the low borrowing cost in Japan. However, on the other hand, theirs hands are tied because Croesus is listed on SGX and regulation is that REITS must not surpass 45% gearing level. Strictly speaking, Croesus is a business trust and not a REIT but the truth is, these 2 business models are often mixed up and viewed as the same. Therefore, the mere perception is enough to deter Croesus from over-leveraging beyond 45%. Therefore, they can only go to the capital market to raise fund. Agree with you that given that it is trading near 52 week lows, it becomes increasingly difficult to find yield-accretive acquisitions.Caught between a rock and a hard place I guess.
Nonetheless, I am still a very happy shareholder as I have been very impressed by its acquisition track record as well as its asset management track record. Solid.
Just trying to play the devils advocate here. Not difficult for a property reit or trust per se to generate decent performance in a low interest rate environment. For me a solid reit or trust would be one that doesn’t go back to shareholders for additional funding to grow dpu. Most reits pay out close to 100% of distributable income and unlikely to dispose of assets even when the time is right due to management incentive to grow aum. Do advise if you come across one that can grow dpu without doing rights issuance or placement.
Agree with you that macro factors seem to favor croesus but the reliance on the capital market for growth could turn into a perpetual habit to the detriment of shareholders.