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Croesus Retail Trust: What is the forward yield?

Thursday, May 15, 2014

Not feeling 100% tonight. So, I am just going to zoom in on what bothers people most and skip the rest of the stuff which look OK anyway.

So, what bothers people most? The latest quarterly DPU of 1.76c.

If we were to simply annualise 1.76c, we would get 7.04c and based on a unit price of 93c, that is a distribution yield of only 7.57%. This definitely falls short of the IPO forecast of an 8% distribution yield.

An 8% distribution yield based on 93c would mean a DPU of some 7.44c per annum or 1.86c per quarter. Yikes! With only 1.76c, we have a shortfall of some 0.1c and this is after purchasing 2 more properties in the last quarter too!

There is a simple explanation. There are costs involved in the purchase of those 2 malls and they only contributed to income in the month of March. Of course, we can say something about the Japanese Yen being weak but currency hedge has already been put in place by the management.

In the quarter April to June 2014, the 2 newly acquired malls will contribute a full quarter of income. This will bump up quarterly DPU. Annualising that DPU will more accurately reflect the annual DPU and hence the distribution yield of the Trust.

The monthly NPI for the 2 newly acquired malls is estimated to be JPY 72.2 million. Refer to page 14 of the slides presentation.

With distribution income for January to March 2014 at JPY 619.78 million which gives us a DPU of 1.76c, an additional NPI of JPY 144.4 million (JPY 72.2 million x 2) will have some positive impact on DPU for the quarter April to June 2014. Even assuming that costs go up by some JPY 50 million (additional management fees and financial costs), we would still be looking at some additional JPY 94 million which can be distributed to unit holders. This is an increase of about 15%. So, we are looking at a DPU of possibly 2.024c.

Annualising 2.024c gives us 8.096c or a yield of 8.7% based on a unit price of 93c.  This is some 8.75% higher than the 8% distribution yield dangled during the Trust's IPO.

Having said this, I won't buy more at 93c a unit. It could be that I have anchored myself at 87c and 87.5c, my entry prices, but I feel that 93c is not all that compelling.

Wait a minute, wasn't the distribution yield estimated at 8.5% when I initiated my first long position at 87c last November? Why do I now say that an 8.7% yield is not compelling? Well, back in November, the gearing level was about 42%. Now, at 53.5%, to a simple minded person like me, getting another 0.2% in yield just doesn't cut it.

For a Trust that has a gearing level of 53.5%, I need a much higher distribution yield to be able to sleep better at night. Everything else remaining equal, a 9.5% distribution yield could, perhaps, entice me to add to my long position.

See presentation slides: here.

Related posts:
1. Croesus Retail Trust: 87c.
2. Luz Omori and Niz Wave I.


The Sun said...

Looks like the recent run up in price to 93 cents had factored in the future additional income that the trust will obtain from its two new properties...

AK71 said...

Hi Sun,

I would be lying if I were to tell you I know what Mr. Market was thinking. LOL.

It could be that Mr. Market was pricing in the additional income from the 2 newly acquired malls or it could be just a bout of speculative fever. Your guess is as good as mine. ;p

Cory said...

The local Retail Reit fever spreading out to the last frontier of better yield ?

Probably they are ones who will ride the increasing interest rate environment better than other sector. They can continue to do well even if local rates doubled under improving economy condition.

Howard said...

A bit disappointed. Ascendas HT too.

AK71 said...

Hi Cory,

I believe that is what Croesus Retail Trust has going for it. The Japanese economy looks like it will improve but slowly.

In an improving economy, property prices will rise and consumption should improve. All these are good for Croesus Retail Trust.

Expecting more positive rental reversions at Mallage Shobu in the next financial year, DPU could receive another bit of a push upwards then.

AK71 said...

Hi Howard,

I don't follow Ascendas HT closely but I believe its weakness is due to the weak A$. Having some trouble in meeting DPU forecast, I think Mr. Market has punished the Trust's unit price which seems to be bottoming now.

Of course, this is a dangerous thing to say since it could just be a floor. -.-"

For sure, people who got in during IPO have suffered losses but I would say that all investments are good at the right price and we shouldn't write it off just yet. :)

AK71 said...

Hi Capricon,

Because the quarter being reported already has 1 month worth of income contribution from the 2 newly acquired properties. So, we only have to add 2 months' worth to see what the next quarter's NPI will look like, all else remaining equal. :)

seefei said...

AK, there is a mistake in the post. the reported 72.2M is not monthly NPI, as stated in the post.

the monthly NPI should be 24.07M. refer page 14, if annual NPI for the 2 new mall is 71.4 + 217.4, then monthly NPI should be 24.07. 24.07 x 3 is the quarterly NPI.

AK71 said...

"Croesus Retail Trust (“CRT”) was voted Singapore’s ‘Best Smallcap Company’ in a 2014 annual survey by FinanceAsia, a monthly Hong Kong-based publication focused on news and developments in the Asian financial and capital markets.

"FinanceAsia’s Best Managed Companies Poll is an annual survey that identifies Asia’s best
companies in the region, and was based on responses from 247 investors and analysts who
specialise in Asia."

AK71 said...

Hi seefei,

That is not the annual NPI of the two properties, if I remember correctly. That is the estimated NPI for 4 months from March to June 2014. I think it is stated in the footnotes.

seefei said...

OK thanks for the clarification.

Your post had set me thinking cos i never look at the debt ratio and link it to the pricing. totally agreed that a higher debt ratio should come with better compensation, ie higher yield. 93 ct at 8% yield is different now and during the IPO due to the lower debt ratio then.

thanks again.

AK71 said...

Hi seefei,

One of the things I do to help me make sense of what is out there is to do comparative analysis. I do this a lot when I have to decide between investment opportunities as well as whether to add to an investment or to trim it. It makes good sense to do comparative analysis especially when our financial resources are limited. Glad you like it. :)

Stanley Tay said...

DPU looks good except (A) NAV has reduced from 74.09 yen to 70.95 Yen (4.2% loss), (2) latest assets acquired in Toyko are lease hold properties & (3) cost of debt increase much with latest S$ bond (not hedged) from 1.59% to 2.15%.

AK71 said...

Hi Stanley,

You might be interested in this:

"In order to hedge its interest rate and foreign currency exposure, CRT has entered into 5-year interest rate swaps for each of the Japanese Yen debt and has entered into swap transaction to swap the Singapore dollar proceeds of the Notes into Japanese Yen proceeds at a JPY fixed interest rate of 3.83% per annum."

On page 16 of:

One of the properties in Tokyo is very curious because it sits on 4 parcels of land, if I remember correctly, and only 1 parcel is leasehold. The other parcels are freehold. So, it would be interesting to see how the matter is resolved when the time comes. :)

Zaanan said...

Hi AK, with the recent run-up in price for Croesus, what price will you seek to take some profit?

AK71 said...

Hi Zaanan,

Honestly, I did not invest in Croesus Retail Trust with a view to sell for capital gains. The motivation was to invest for regular income.

I guess I might sell if I feel that it no longer does the job I want it to do well enough. When might that be? Right now, I don't know.

AK71 said...

The impact of the sales tax rise -- Japan's first in 17 years -- had been no worse than expected, while the BoJ's stimulus drive was "having the effect it was designed to have", Kuroda added.

"Our view is that individual consumption will remain fundamentally solid with an improvement in employment and income conditions," the BoJ chief told reporters.

"The impact of the rush demand ahead of the consumption tax hike will diminish after summer," he added.

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