Following up to the Mapletree Greater China Trust, now we have another retail trust coming to IPO. It is the Croesus Retail Trust which focuses on Japanese retail properties. This comes at the right time as the Japanese PM is pushing aggressive expansionary fiscal and monetary policies to boost the economy. Increasing spending generally bodes well for the retail sector.
The offering price is $0.93 per unit, giving it a market capitalization of about $375 mil to $414mil. The NAV of CRT is approximately $0.90 per unit, so the listing is pretty much at NAV. The interesting thing about CRT is that it positions itself as an Asia Pacific retail trust with an initial portfolio in Japan.
Business Trust vs REIT
While it is a business trust and not a REIT. The trust deed does contain certain restrictions similar to a REIT. There is a leverage limit of 60% for CRT, while for SREITs it is 35% limit non rated and 60% rated. The distribution policy is 100% of distributable income for 2014 and 2015 and then at least 90% going forward. That is again similar to a REIT, but as a business trust, it does have the ability to change it policies.
There is also development limit where the development component cannot exceed 20% of the trust value. This is good as it limits the risk of the trust from greenfield developments.
CRT Property Table Summary
One of the interesting note is that all the properties are freehold properties unlike SREITs where most of the retail properties are leasehold properties. It eliminates any risk of decreasing value and spending due to renewal of land leases. The WALE is very long at 11.3 years, which generally translates to very stable rental income, but lower upside for rental. Not only are the purchase consideration below valuation for all the properties, the blended capitalization rate is relatively attractive at 6.2% compared to 5% or lower for many of the retail properties in Singapore and Malaysia. In fact, for MGCT, Festival Walk was purchase at 4.1% cap rate.
Based on the cap table, the leverage ratio is around 43.7%, which is very similar to MGCT leverage level. It seems like MGCT has hit a sweet spot with investors and CRT is trying to follow the same formula for a successful listing. For stable rental levels and decent cap rates, it is less risky for the properties to devalue, so a higher leverage level can be acceptable.
Revenue increases by 0.7% in 2015, which is indicative of a slow rate of rental increase. That is probably due to the long WALE and substantial portion of the leases being fixed rental. It is good in the sense that the revenue is stable, but it does not exhibit the kind of growth that retail SREITs show. The higher current yield and cap rates will have to make up for the lower growth.
The distribution yield is expected to be 8.0%, which is very attractive compared to all the retail SREITs currently. At the same leverage levels as MGCT, the yield is at least 200 basis points higher making CRT look even more attractive.
Japanese Sales Trend
Looking through the industry report, it is no surprise that the sales attributed to shopping centers are rising steadily even though overall sales remain stagnant. The potential growth to retail properties will come not only from a stimulated economy by expansionary fiscal and monetary policies but also the shifting trend towards buying in shopping centers.
One of the key risks is that JPY may depreciate against the SGD. Up until last year Dec, JPY was seen as a safe haven currency which kept the currency stable against the SGD. However, after the LPD party won last year Dec, they weakened the JPY with the intention to boost exports and stimulate the economy. This is a double edged sword for us as foreign investors as we will be concerned with a depreciating yen, but at the same time a healthier economy does help to improve consumer confidence. The right balance is the key to making it work.
My Take On This
As always, I am generally bullish about anything to do with consumers, especially retail properties. The CRT is a good opportunity to get exposure to the Japanese economy without having to buy any Japanese stocks. The yield of 8.0% is extremely attractive against SREITs, MREITs, JREITs as well. While the yen could depreciate against the sgd, but it is the same for any foreign investments. The key is always to have investments which can generate positive returns after the currency conversion. Like MGCT, I am definitely subscribing.
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