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Croesus Retail Trust: Luz Omori and Niz Wave I.

Thursday, February 27, 2014

I really shouldn't be blogging now because I am so sleepy but I just couldn't resist looking at the announcement and, then, I'm trapped. OK, this will be a short one (I hope). Here are some things which got my attention.

DPU Improvement

In an earlier blog post, I said that the Trust would probably use the funds from the MTN they issued soon. Otherwise, we could see a 5% decline in DPU.

Now, with the acquisition of 2 new properties, Luz Omori and Niz Wave I, we will see a 5.7% increase in DPU instead of having to worry about a 5% decline. Good news for income investors!


The two properties are purchased at a slight discount to valuation which is good. However, the total value is still some $176.3 million. This is much more than the $100 million MTN the Trust issued last month.

In an earlier blog post, I was wondering if a placement or a rights issue would happen. Instead, the Trust has taken on more onshore debt, specifically, a 5 year debt facility with Mizuho Bank. They were able to borrow rather cheaply and the effective interest rate for this debt facility and the MTN together is 2.96% per annum.

With these purchases and borrowings, by my estimate, gearing level has gone up from 42% to approximately 55%.

The properties

The information provided by the Trust is mostly clear enough. I really like the fact that the Trust chose to purchase both the properties in Tokyo. These properties are located in areas which have seen growing populations in recent years and are within a few minutes walk to train stations.

What I want to point out is that Luz Omori's land is not freehold but leasehold in nature. This probably explains the relatively small price tag of S$42.7 million which is also at a slight discount to the valuation of S$44 million. The lease on the land expires in July 2059, 45 years from now.

As for Niz Wave I, the situation is bizarre because the building sits on 4 parcels of land of which 3 are freehold and 1 is leasehold and this lease expires in December 2029, 15 years and a few months from now. Would they have to tear down a quarter of the building then and return the land in original condition? Bizarre.

I am inclined to believe that the owner of that particular land parcel would probably allow the lease to be extended when the time comes since that one parcel of land is unlikely to be of much use to anyone if the surrounding 3 parcels of freehold land are owned by the Trust. Then, the question of price will have to be answered but it can only be answered when the time comes.

NPI Yield

These two buildings together have quite a decent NPI yield of some 8.1%. The 4 malls in the Trust's initial portfolio have an average NPI yield of about 7.8%. So, in addition to being DPU accretive, the purchases are NPI yield accretive but it could possibly have something to do with the fact that Luz Omori sits on land with a relatively short lease. Yields for leasehold properties are generally higher since they are usually cheaper to buy.

See Media Release: here.
See Acquisition Announcement: here.

Related post:
Croesus Retail Trust: Cap rates and growth.


Capricon said...

Appreciate your post . I am puzzle that the forecast yield is 7.01 to 7.41 cts. For 7.5months from IPO till 31-dec-13, the DPU was 5.24 cts, annualising it gives around 8+ cts.

Can you enlighten us ? :p


SGYI said...

2 properties in Tokyo and increased DPU sounds good. Only the gearing ratio at 55% seems a little bit scary.

AK71 said...

Hi Capricon,

I believe that the numbers are based on a weaker exchange rate for the JPY to S$.

At IPO, they used the rate of $12.76 to JPY1,000. Now, they use $12.3 to JPY1,000. There is a difference of some 3.6%.

But the forecast is just an estimate and I won't be surprised if they are being conservative.

I expect DPU to come in higher, expecting more positive rental reversions at Mallage Shobu this year although I am not sure that we will see more savings in taxes and expenses seen in the first few months of operations.

Please feel free to share if you have found something I might have missed.

AK71 said...


Well, it is a business trust and they don't have an issue with gearing like S-REITs do. However, they try to work like an S-REIT in order to look appealing to investors here.

They set a gearing cap of 60% for themselves and I guess after these acquisitions, they might have to take a break. If they wish to buy more properties, they will probably have to do equity fund raising if they wish to stay under the 60% gearing cap.

I think they realise how people might react to a gearing level of 55%. You know, I was looking for this information but could not find it anywhere and had to calculate it myself. Hope I am wrong and that it is actually lower. ;p

seefei said...

hopefully CRT will have a financing exercise like right issue and market push down the price a bit for us to pick up more at a discount. :)

AK71 said...

Hi seefei,

I will have to evaluate the merits of the rights issue if it should happen. It should result in higher returns for existing unit holders. :)

AK71 said...

Hi Capricon,

I was reading the announcement again. I missed this:

"Adjusted for the increased finance cost due to the interest associated with the Notes that were raised in anticipation of the Acquisitions and the remaining amount that is not applied towards the Acquisitions which will be used towards general corporate and working capital purposes."

DPU forecast was adjusted downwards not only because of exchange rate consideration. It was adjusted downwards also because of the $100 million MTN issued (i.e. finance cost) and this has being taken in.

Remember, I said that if the MTN was not utilised effectively and in a timely fashion, the DPU would suffer a 5% decline? Assuming that the MTN was there from day one would give us this new forecast. :)

For the 4 months period from March to June 2014, the 2 newly acquired properties will bump up distribution yield by about 5% for the 1st year of operation.

However, in the 2nd year, we should see the distribution yield going up some 17.4% as the two newly acquired properties contribute a full year of income then.

Hope this clears things up. :)

Capricon said...

Croesus is featured in this week's The Edge again for the acquisition. And you are right on the gearing, it is 54% as published. I am surprise they can have rental revisions of 30~50% up, 2 tenants by 80 % ... Wow ... Abenomics effect ? Kind of ridiculous as how much it will affect consumers ... BUT ... I am happy about it !

"This is not the end. More will be coming." As mentioned by Crosesus ... More acquisitions coming soon.

Anyway, we still have watch whether whatever published can be materialized.


AK71 said...

Hi Capricon,

Ah! I was hoping I am wrong. Well, I am slightly off by 1%. Good news! LOL. ;p

The Trust has potential to do very well as an investment for income and to do even better next year. If gearing can be used judiciously to achieve higher returns, it is a good thing. :)

In an environment of very low interest rates, especially in Japan, and with the economy beginning to recover, it is the perfect time to gear up.

However, with a self imposed gearing limit of 60%, Croesus Retail Trust might really have to do some equity fund raising which will be costlier than raising debt.

Capricon said...

Equity fund raising = rights issue and new shares ? Why would it cost more as it is one off exercise while debts is annual interest to the banks ? Rights gives the existing holders choice to increase their holdings too without dilution.


AK71 said...

Hi Capricon,

Going to unit holders for money is a good idea when the unit price is higher. That is when yield is lower. The Trust raises more funds while paying out the same DPU. So, it is cheaper then.

So, imagine going to unit holders for money when the distribution yield is some 9%. It would be a better idea to do this when distribution yield is compressed lower with a higher unit price.

If the cost of debt is lower than what we have to pay to equity holders, then, debt is cheaper. If the Trust could go to a bank for a loan with an interest rate of 1.6% or to issue an MTN with a coupon of 4.6%, then, these options are cheaper.

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