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NRA Capital Pte Ltd

Written by: NRA Team

Thursday 17 Apr 2014

Croesus Retail Trust - Quick take

Defensive player

Key takeaway from meeting with management...

Croesus Retail Trust is a real-estate retail investment trust backed by Daiwa House Industry Co. (1925.TO) and Marubeni Corp. (8002.TO).  It currently owns six retail properties in Japan.  We met management last week and here are our key takeaways and view:

Key takeaway from meeting with management:

  • 2Q FY06/14 DPU was S$0.0202, together with it 1Q FY06/14 DPU of 3.26 Scents, which translates to an interim dividend yield of 5.9% at current price of S$0.89.  Dividend distributed was higher than the forcasted S$0.0508 in the prospectus.
  • Forecast dividend for 2H FY06/14 is S$0.0211, translating to a full year DPU of 7.39 S cents or 8.3% total dividend yield.
  • Going forward, FY15 dividend projected to grow about 1.3% to 7.49 S cents with distributions to be paid semi-annually.
  • Croesus distribution policy is to distribute 100% for the first two years from IPO and at least 90% thereafter.
  • It acquired two properties in Tokyo in February this year for a total of JPY14,250m (Luz Omori and NIS Wave I), fully funded by borrowings. It expects these two malls to contribute to positive earnings for its 2H FY06/14.
  • Subsequently, gearing increased from 41.8% as at end Dec-13 to 54% after the acquisition.  Croesus is allowed to gear up to 60%.  In comparison, SREITs are allowed to gear up to 35% unless they are rated by a major rating agency (S&P, Fitch or Moody’s), in which case they can gear up to 60%.  
  • Loans are at fixed rate around 1.5% for 5 years and all loans are in JPY, hence natural hedge with property and rental income.
  • Currently just focusing on the Japan market but has rights of first refusal for two retail malls in Shenyang and Shanghai, China.
  • To minimise the exposure to fluctuations in exchange rates, Croesus has hedged 80% or more of the distribution for the two forecast periods, from the Listing Date up to 30 June 2015.
  • Two majors customers, Aeon and H&M were contributing 30% and 9% of total gross rental incomes, respectively.
  • About 30% of its total NLA with more than 10 years master lease agreements.
  • Choice to list in Singapore was because J-reits are restricted to acquire Japan properties only and the group’s long-term prospect is to grow its business in the Asia Pacific region.

Our view:

First of all, as a dividend play, we like Croesus offers an attractive yield at 8%, upper range as compared to other SREITs (SREITs’ dividend yields range between 4.5% and 9.1%).  We do not expect much volatility, at least in JPY terms, of its rental income.  If factoring in the 3.5% growth in variable rent, the overall growth in total income will be around 1-2% for FY15.  Potential catalys includes capital appreciation given the cap rates compression recently as a result of Abenomics.

Moving on to risks, first and foremost, all its income are denominated in JPY and hence dividend payouts will be subjected to currency fluctuations.  There is also the overhang from the sales tax hike from 5% to 8% that took effect on 1 April this year that could lead to a slowdown in retail spending and could derail economic growth.  Lastly, its gearing of 54% is the highest amongst its SREIT peers.  In comparison, SREITs gearing range from 20% to 44%.  

In summary, we like its stable business and income.  An attractive dividend yield of around 8% should compensate for forex risks.  We think the high gearing will be a main overhang on the stock but could be mitigated by the upward revaluation of its assets at financial year end.  Cornerstone investors for its IPO includes Citadel Asset Management, D.E. Shaw Valence International, Eastspring Investments and Hong Leong Asset Management.


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