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

Saturday, November 23, 2013

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.


The Sun said...

There is a very informative article on CRT published in the latest issue of THE EDGE. You may wish to check it out, especially the part in the article that details the expansion plans that the CEO has for the trust.

AK71 said...

Hi Sun,

Yup, I got a copy of The EDGE but I have been way too busy today to read it until just now.

This issue has articles on both Saizen REIT and Croesus Retail Trust. So, it was a very interesting read for me. :)

I feel that both are good investments and since I got into Saizen REIT at an average price of 13c or so, I cannot wait to see how value will be unlocked for unit holders. Selling to a J-REIT at NAV would value Saizen REIT at about 25c a unit. That would really make my day. ;)

As for Croesus Retail Trust, I believe that things are looking up in Japan. Although there are risks, they could be blown out of proportion by alarmists.

At a unit price of 87.5c, I believe it is a decent enough proposition. If unit price should decline to test the low of 84.5c, that might see more buying interest. I know I would be interested.

Many tend to look at the past and focus on what went wrong. They then project this past into the future even though the future could look very different from the past.

Good examples of REITs which received such treatment in the past are Saizen REIT and AIMS AMP Capital Industrial REIT (formerly MI-REIT). Investors who were able to understand their true values have benefitted.

Of course, crystal ball gazing is always a risky business. However, getting in at fairly good prices should help to mitigate risk. :)

Solace said...

Hi Ak,

After following your blog for quite a way, i realize you have a good and logical investment/trading plan. You will make sure you stick to the plan and ignore the background noises.

Training the mind to be unemotional and to be logical in analyzing news,fact and information is an excellent trait. Not many retail investors can do that.

I too, believe i am lacking in this area. Having a unemotional and logical mind can sometimes be even more valuable than any TA or FA knowledge.

Andy said...

I read from The Edge that CRT is going to buy more malls, with its gearing above 40% are you concern that it might over-geared itself?

yeh said...

U still holding marco polo. Today I saw it moving up.
Prospect looks good?

AK71 said...

Hi Solace,

Pardon the tardy reply. I was called away for work in the Philippines and just got back at 8pm this evening.

Thanks for the encouraging comment although I do feel that you think too highly of my ability to control my emotions. :)

AK71 said...

Hi Andy,

Being a business trust, CRT does not have a ceiling in terms of gearing which is imposed upon them. However, internally, they have decided not to have a gearing level greater than 60%.

Is 60% over geared? It would depend on the circumstances. Broadly speaking, if property values should fall by more than 40%, I think the Trust would be in deep trouble, in such an instance. What are the chances of this happening in Japan? Need some logical thinking.

Well, even S-REITs which have received credit ratings are allowed to gear up to 60%. :)

Gearing, used judiciously, is a good thing. If the use of debt is able to greatly improve returns for investors while keeping risks manageable, I would agree to it.

AK71 said...

Hi yeh,

Marco Polo Marine is one of my largest investments. :)

I haven't had time to look at the stock market or read reports in the last few days. I suspect I might not have time to do so in the next couple of days either. :(

Keep me posted, ok? ;)

Gary said...

Hi AK,

Received prompters from Marco Polo Marine that dividends to be given out is $0.014 per share. I have not read the full financial statements but I guessed that the price went up perhaps due to dividend.

AK71 said...

Hi Gary,

I have not been able to keep track of things in the last few days and maybe the next couple of days too.

Gregg has been kind enough to keep me posted. You might want to read his comments as well as his email exchange with the IR department: HERE.


AK71 said...

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

Thanks to Raymond Ng for tip off.

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