Croesus Retail Trust: Motivations and risks........ (Updated on 16 Sep 15 with a video and list of key take-aways.)

I was having a conversation with a friend in a chat box and he asked me what are the risks investing in Croesus Retail Trust. I rattled off a list of risk factors and I am sure it wasn't even exhaustive.

Every investment has risk factors and the important thing for me is to ask if these are acceptable. How do I know if they are acceptable? I would have to know my motivations as an investor.

So, if we are investing for income, then, we should ask which risk factors are more significant to us. What are the things we should be paying more attention to.

If Croesus Retail Trust should consistently produce an 8.5% yield for me as an investor for income, this is one factor that would keep me quite contented. I would have less problem with keeping the status quo.

Over the next two years, with a currency hedge in place, distributable income in S$ terms is more or less predictable. After that, assuming zero growth in distributable income in JPY terms, income received in S$ terms will depend on the prevailing exchange rate. Of course, the manager could continue hedging exchange rate risk and it could be a sensible thing to do at that point in time. It is hard to say anything conclusive about this now.

They might not have to do so since my own experience with the JPY tells me that it is now near its lowest point since I first really visited the country in 1998. The lowest in recent months was S$ 12.20 to JPY 1,000. Although it could go lower, I suspect that it wouldn't go very much lower than that.

As the BOJ has mentioned many times before, Abenomics is not about devaluing the JPY. A devalued JPY would cause immense hardship for the Japanese people and it is not in any government's interest to have hyper inflation.

So, the JPY is likely to strengthen from current levels or stay where it is once Mr. Abe gets the 2% inflation that he wants for the economy. This is all in the realm of reason.

Of course, if Japan should experience a 2% inflation, logically, interest rate should go up. This would translate into a lower level of distributable income in JPY terms, everything else remaining equal.

If the JPY should appreciate against the S$ by then, a higher interest rate could be a non-issue. Otherwise, we could see DPU in S$ terms reducing. How much would interest rate increase to? How much would DPU reduce to in such a case?

Well, if the Trust should pay 1% more in interest on its debt, roughly, we could see a 10% reduction in DPU. What about 2%? Maybe, a 20% reduction. This is the best we can do. Estimates. Then, ask if a 10% to 20% reduction in DPU would still make the Trust an attractive investment for us.

At $1.18, Croesus Retail Trust didn't make my list.

$1.07? Still a "NO".

$0.965? Maybe.

$0.845? Looking attractive but where was the floor?

$0.87? Found a floor, perhaps. Buy some.

Of course, I did consider other risk factors before deciding that Croesus Retail Trust would make a decent investment for income. 

Read related posts and some of the comments generated therein by following the links provided at the end of this blog post, if you are interested.

Once we know our motivations, we know what risks are acceptable and we will know what to do.

Finally, we might not get the best prices but if we could get in at a fairly good price to start with, that is good enough.

Update (16 Sep 15):
Video by PhillipCapital



Key take-aways for me:

- 71.9% leases expiring beyond 2019.

- Mallage Shobu accounts for 20% of GRI.

- Rental reversions upwards of 20%.

- ONE's Mall and Mallage Shobu to contribute to higher income through positive rental reversions.

- Consumption likely to improve due to real wage growth and falling unemployment.

- Shopping habit in Japan changing, preferring large shopping malls.

- Croesus Retail Trust's occupancy cost* is 8 to 9% while CMT is about 17% and FCT is about 15%. Average occupancy cost for sub-urban malls in Japan: 12 to 15%. This means that Croesus Retail Trust has room to increase rent.

*Occupancy cost is the tenant's cost of occupying its space divided by sales.

Thanks to Raymond Ng for the tip off.

Related posts:
1. Invest in Japanese real estate.
2. Added more Croesus Retail Trust.
3. Initiated long position at 87c.

Added more Croesus Retail Trust and reduced Sabana REIT.

I initiated a long position in Croesus Retail Trust earlier this month.

I recently added to this position as I believe that this Trust could do better in the years ahead.

However, I also decided not to increase the size of my investment portfolio as I am close to 75% invested which is not very comfortable for me. So, I had to do some portfolio balancing.

For a while now, I have been thinking of reducing my exposure to industrial properties in Singapore, given the concerns of oversupply.

I have investments in a few industrial properties S-REITs and my two largest are in AIMS AMP Capital Industrial REIT and Sabana REIT.

Of the two, after some thought, I decided to reduce my investment in Sabana REIT because, comparing them, I believe that AIMS AMP Capital Industrial REIT has done a better job of improving value for unit holders in the last two years.

Mr. George Wang regularly buys into AIMS AMP Capital Industrial REIT while in the case of Sabana REIT, the CEO has divested his direct stake completely in recent months. This gives me the impression that the insiders of AIMS AMP Capital Industrial REIT have their interests more aligned with minority unit holders'.



508 Chai Chee Lane

Sabana REIT's recent purchase of a half vacant building in the midst of softening prospects did not inspire much confidence in Mr. Market who has shown his displeasure in the usual way. This compared with AIMS AMP Capital Industrial REIT's development of certain properties to max out plot ratios while securing tenants in advance tells a contrasting story of performance and, perhaps, competence.

Of course, Sabana REIT could still do better in future if they manage to fill up the space left vacant by the non-renewal of 4 master leases as well as the vacant space in the latest property acquired from AMD. I would be very happy if this should happen since I still retain a relatively large position in the REIT, having reduced my investment by about 24% only.

With the partial divestment of Sabana REIT, it means that AIMS AMP Capital Industrial REIT is now my largest investment in S-REITs.

Croesus Retail Trust has become a more significant investment for income in my portfolio but because it is not a REIT, my expected full year income from S-REITs in 2014 will probably see a decline, everything else remaining equal.

Related posts:
1. Croesus Retail Trust: Long position at 87c.
2. Sabana REIT: Initiated long position.