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Croesus Retail Trust and Perennial China Retail Trust.

Saturday, February 8, 2014

I had a discussion with a friend over dinner last night regarding Croesus Retail Trust (CRT) and why I feel relatively good about it as an investment for income. 

In the conversation, one of the things I did was to compare it against Perennial China Retail Trust (PCRT).

When PCRT had its IPO, I said that only "Red Star Macalline Global Home Furniture Lifestyle Mall, Shenyang, which was completed on 30 Sep 2010 is income contributing at listing date. The rest of the initial portfolio is expected to be completed from 3Q 2010 to 2Q 2014. If we are investing for income, this is not very reassuring."


And I also said that a "distribution yield of 4.88% to 5.51% in the years 2011 to 2012 also does not provide enough compensation for the risks which investors are being asked to bear, in my opinion."
See: Perennial China Retail Trust.

Mr. Market sent PCRT's unit price down 12.86% on its first day of trading from its IPO price of 70c to just 61c. See: PCRT: Weak debut.

Unit price went on a continual decline and was under 40c at one stage. Pua Seck Guan increased his stake while Kuok Khoon Hong and Martua Sitorus became substantial shareholders. I initiated a long position some time later at 47.5c a piece.

"I initiated a long position in PCRT at 47.5c because the distribution yield of 8+% at that price offered a more acceptable level of compensation for the risk I would be asked to assume."
See: PCRT: 1H 2013 DPU 1.9c.

Mr. Market is rather efficient in pricing PCRT's stock. The latest reported NAV/unit is 77c which means PCRT's stock is now trading at a 31.2% discount to NAV! 

Why? Mr. Market has priced in a risk premium.

Although annualising the half yearly DPU of 1.9c will give us a distribution yield of 7.16%, most of the distributable income is from earn out deeds and I highlighted that "current DPU is being sustained by earned out deeds which will be exhausted by end 2014". 

So, what happens then? Income distributions to investors will most probably take a hit. 

See: PCRT: Progress in Q3.


Now, for readers who have been following my recent blog posts on Croesus Retail Trust, they will be able to see the difference I am trying to point out between CRT and PCRT easily. 

CRT's portfolio consists properties which are mature and generating income, all of them. The level of risk which investors are being asked to assume here is very low compared to PCRT's.

Having said this, investing in CRT is not without its risks and I blogged about it briefly before. See: Croesus Retail Trust: Motivations and risks.

I am invested in both PCRT and CRT. So, to some, it might appear silly that I am talking down PCRT but, in my opinion, I am not talking down PCRT or talking up CRT, for that matter. I just say it as it is.

PCRT could do better over time but unit holders must be prepared for a much lower DPU next year as earn out deeds are depleted by end of this year and if the properties completed are not able to pick up the slack fully by then.

CRT offers a much higher level of certainty for the next 2 to 5 years for anyone investing for income and although it is a business trust like PCRT, it is not the same as PCRT. This is why my investment in CRT is about 8x bigger than my investment in PCRT now.

Both PCRT and CRT are business trusts. Same but different. We should not over-generalise.

Related posts:
1. Croesus Retail Trust: What is my plan?
2. Croesus Retail Trust: Overnight BUY order filled.
3. Croesus Retail Trust: Initiated long position at 87c.

22 comments:

Solace said...

Hi Ak,

nice post! succinct.

i think by now, you are aware that i am vested in PCRT.

After reading yesterday results, i think management is doing their best to increase occupancy rate and to increase distribution yield.

Despite saying this, the risk still remains in view earn out deeds is expiring soon. my purchase price is 50 cents, i believe it offer a reasonable safety margin.

i am quietly confident that the trust will do better in the future.

AK71 said...

Hi Solace,

I still like the Chinese consumption story but it is definitely works in progress.

I said before that investing in PCRT, one should have the patience to see it through 2015 at least.

As long as we get in with a reasonable margin of safety, I think PCRT is one stock that will benefit from the rise of the Chinese consumer. ;)

Singapore Man of Leisure said...

AK,

I am not vested in either counters but I like this post.

1) For the RIGHT price, all shares can be a buy - just as long we are clear whether it's an investment or speculative trade.

2) We are the ones who decide the price we are willing to pay for the amount of risk premium/margin of safety we seek.

No difference from bargaining at Bangkok's weekend market. Price not OK; just walk away to another shop. Not like there's only 1 shop.

3) The position size we commit is part of risk management.



For the choir boys who are not so alert in reading between the lines ;)

Capricon said...

Hi AK,
I met someone who had live in china and work for a china property developer, his opinion is that China has a lot of malls and offices, rental is very competitive with new malls, offices coming up every now and then.

Just FYI.

inquisit0 said...

Hi AK71,

Do you think PCRT is better than MapletreeGCC or even CapRchina?

Could you do a comparison of the three counters?

Thanks.

AK71 said...

Hi SMOL,

Love the three points you made. My rejoinders, point for point:

1) All investments are good at the right prices. Always know our motivations.

2) Buy at a price we won't sell at and sell at a price we won't buy at.

3) Don't buy anything with money we cannot afford to lose.

Pass or not? ;p

AK71 said...

Hi Capricorn,

Indeed, it is a valid concern. This is not the first I have heard this. No smoke without fire. :)

AK71 said...

Hi inquisit0,

Well, it wouldn't be an apple and apple comparison. PCRT is a business trust while the other two are REITs but I did do a comparison between PCRT and CRCT before. You will find the link to that post in this blog post. It is the first link in the blog post and is titled "Perennial China Retail Trust".

Remember that investing in PCRT is really more for growth while investing in CRCT is more for income. :)

inquisit0 said...

Ic. Then what about mapletreegcc do u think its better than crct?

Singapore Man of Leisure said...

AK,

Ah! Now my comments look a bit long-winded :(

LOL!

My English teacher was right - he who is concise is more intelligent than those who are verbose.

And by the way, nice kicking the tyres in Osaka. (Wink, wink)

Next time I go I also must pay my respects to the Instant Noodle holy ground :)

AK71 said...

Hi inquisit0,

Well, to be honest, I have not looked at that one in detail.

You could do a quick comparison yourself. Compare:

1. Distribution yields. You want a high distribution yield.

2. Compare NAV. You want to buy at a discount to NAV if possible.

3. Compare gearing levels. You want lower gearing levels.

There are other things you want to look at but these will do a quick scan for you.

Go to my blog's right sidebar and read up on investing in S-REITs. There is a whole section on "Invest in S-REITs" and also a section on REITs I invest in.

The latest blog post on an S-REIT I did was for UOB C-REIT. You might be interested in reading this too to see some of the considerations that go into assessing a REIT. :)

See:
OUE C-REIT.

AK71 said...

Hi SMOL,

Aiyoh, don't say until liddat leh. ;p

I believe that there is a time to be succinct and a time to be verbose. They serve different purposes. ;)

Simi is kicking tyres in Osaka? I don't remember doing anything so violent wor. Hmmm... -.-"

Tien Song Chuan said...

Ak, are you a male or female?

AK71 said...

Hi Tien,

Yikes! I am trying to think of a reason why that might have any bearing on this blog post. -.-"

Why do you ask? ;p

AK71 said...

Target Value Fund bought 1,000 lots of Croesus Retail Trust on 4 Feb 2014. Total cost: S$873,500.

Now, Target Value Fund holds direct interest in 34,180,000 units of Croesus Retail Trust (or 8% of total voting shares). The Fund is managed by Target Asset Management Pte Ltd.

Teng Ngiek Lian is a majority shareholder in Target Asset Management Pte Ltd.

SnOOpy168 said...

I will agree with Capricon , having worked in that land-of-everything-fake for the past 9 years.

Malls in Tier 2 二线诚 & smaller towns pops up like mushroom after thunderstorm, with a lots of fan fare. Then with a year or so, the "good tenants" like McD or Wall-Mart, may be attracted elsewhere that is new & with almost free rental (as anchor tenants to bring in the crowds). The entire space will see more of those shoebox shops selling DVDs & cheap socks & noodles stalls, then fell into disuse and subsequently, another relic of it's better days.

Had all the properties be held in major city like Beijing & Shanghai, i will have more faith.

AK71 said...

Hi SnOOpy168,

Anecdotal evidence tells me that yours are valid concerns. I will wait to see if PCRT will deliver the goods.

Having received many rounds of income distributions by now and having entered at a price a bit lower than what we see now, I have my MOS. I wouldn't get in now if I do not yet have a position in PCRT, for sure. :)

Capricon said...

AK,
FYI, PCRT CEO also express concerns in meeting the DPU after earn out deeds. Strong headwinds.
Check out this week's The Edge.

Cheers

AK71 said...

Hi Capricorn,

Oh yes, the writing is on the wall and I have been saying for a year or more that DPU could reduce by half once earn out deeds are exhausted by end 2014, if you remember. :)

I actually spent quite a bit of time crunching PCRT's numbers this weekend and to consider my next move. I can do this better now with their mall in Foshan having commenced operations which means having clearer guidance on future income.

I came across the article in The EDGE after I was done with the number crunching which meant having to add a few paragraphs to the new blog post I am working on.

Will have to sleep on this and if I am quite sure about it, I will publish it tomorrow.

Capricon said...

Looking forward to it ... I learnt about your blog early last year, my investing mindset was changed as we'll which I think is the greatest I benefitted. Unfortunately I am late to find your blog but better than never. :)

Thanks.

AK71 said...

Hi Capricon,

I am happy that you have found my blog useful.

How was your mindset as an investor changed? Would you like to share? :)

AK71 said...

Reader:
Being a new investor, I have much to learn. I would like to know what gave you the conviction to have such a big investment in Croesus. Thank you.

AK:
You can search for my past blogs on Croesus Retail Trust. For example, this blog provides some insights as well as an important lesson if you are an investor for income.

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