19 August 2014
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The sun is rising

We initiate coverage on CRT with an Add rating. CRT offers investors a pure play into the reflating Japan retail real estate sector through a capital-efficient platform that can provide earnings and NAV growth. Potential yield-accretive acquisitions could catalyse its share price while prospects of a cap rate compression should drive NAV uplift.

Our 4.6% revenue CAGR projection over FY14 (annualised) to FY16 is premised on positive rental reversions from Mallage Shobu renewals in FY15 as well as additional contributions from two new assets. Our DDM-based target price of S$1.16 implies a fair value FY15-16 DPU yield of 7.1-7.2%, attractive when viewed against retail J-REITs and other retail REITs in the region.

A pure play Japan retail real estate vehicle

Croesus Retail Trust’s (CRT) portfolio comprises six assets located in the Greater Tokyo and Osaka areas with high access to transportation. In addition, not only does the trust have a stable income profile with c.85% of its leases derived from base rent, 67% of its portfolio leases are fixed-term structures, allowing its Trustee-Manager flexibility and negotiating power to optimise occupancy and rents.

Locked-in earnings growth

CRT’s key asset is Mallage Shobu, which accounts for 37% of portfolio NPI. 50% of this asset’s leases (148 of 242 tenants) are due to be re-contracted in Nov 14. Tenant remixing, by replacing the bulk of existing tenants with higher profile brands or new names to draw shopper traffic, as well as higher rental terms and positive rental reversions (over the previous post GFC low base) for the remaining leases should drive earnings growth. In addition, income from the two recent acquisitions should provide another earnings booster.

Acquisition train chugs on

The trust has a visible acquisition pipeline in Japan, and in the medium term, China. It has two Japan assets under right of first refusal (ROFR) – Mallage Saga and Forecast Kyoto Kawaramachi; together these could expand its current portfolio NLA by c.25%. This have not been factored into our current numbers and would provide further upside potential. With a gearing of 53.5% (vs. its self-imposed ceiling of a 60%) and

potential NAV uplift through rising capital values and cap rate compression, CRT’s balance sheet is robust and is well placed to drive this wing of growth.



4 August 2014
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Grinding out stable income

  • 2Q14 results beat IPO prospectus forecasts, in line with our estimate
  • Slight dip in occupancies; 85% of NLA expiring in FY14 have been renewed
  • Low gearing implies headroom for acquisition
  • BUY, TPS$0.89


2Q14 results beat forecasts. Gross revenues and net property income grew 0.9% and 3.4% to S$16.7m and S$14.0m, respectively. The stronger performance was driven by (i) additional rental income from Tellus Marine which was acquired in May, (ii) rental escalation at master-leased properties (Solaris / Beng Kuang Marine ) and higher rents at Eightrium@ Changi Business Trust, West Park Biz Central. These offset weaker occupancy at Tuas Connection. Interest costs were 3.7%higher than forecasts because the REIT drew down an additional S$15m debt for the Tellus Marine acquisition. But as the loan is on floating rate, average cost of debt edged down to 3.08%. Distributable income beat our estimate by 6.1%, at S$12.6m (DPU 1.50 Scts), and was 1.3% above prospectus forecast.

Our View

Dip in occupancies; minimal lease expiry in 2014. The nonrenewal of a lease at Tuas Connection reduced occupancy to 93.2% by end 30 Jun’14 vs 100% upon IPO. But the manager is actively seeking new tenants to take up the vacated space quickly. The weaker occupancy was partially offset by improved take-up at Eightrium @ CBP and West Park Biz Central. Looking ahead, SBREIT has renewed, forward leased and pre-committed 85% of leases expiring in 2014, implying strong earnings visibility going forward. Rental reversions for renewals and new leases for its factory space in were strong in 2Q14 at 22%-32% because of low expiring rents.

Focus on renewals in FY15F. With most of its leasable area taken up in FY14, we would focus on the forward renewal of c29% of NLA in FY15, the bulk of which is in West Park BizCentral and Tuas Connection. We take comfort that expiring rents are >15% below current transacted market rents, suggesting renewals should remain stable.


BUY, TP S$0.89. We like SBREIT’s higher-than-average industrial REIT yields of 7.5%-8.1%, which are relatively secured. Gearing is at c.30% currently, implying sufficient headroom to fund selected (future) acquisitions.


31 July 2014
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A firm set of 2Q14 results

  • 2Q14 numbers ahead of IPO forecast

  • Positive rental reversions
  • Maintain BUY at S$0.88 FV


2Q14 numbers looking firm

2Q14 distributable income and DPU came in at S$12.5m and 1.43 S-cent, respectively, which is 5.5% and 5.1% higher than forecasted in its IPO Prospectus and in line with our expectations. 2Q14 gross revenues were S$18.7m, marginally lower (-0.3%) versus the forecast, while NPI of S$14.3m is 4.6% ahead of the forecast. The trust pays its distributions on a semi-annual basis, and the book closure for its first distribution of 2.43 S-cents per unit will be on 7 Aug-14.

Positive rental reversions seen at both assets

Overall portfolio occupancy remained fairly healthy at 96.8% as at end Jun-14, and management indicates that only 2.9% of the portfolio, by gross rental income, is up for renewal over 2H14. OUE Bayfront remains 100% occupied as at 2Q14, with average passing rents for the office component increasing to S$10.66 psf from S$10.61 psf last quarter. Management reports that newly committed rents over the quarter for OUE Bayfront ranged from S$11.50 to S$15.20 psf which is, on average, 6.1% higher than preceding rentals. Lippo Plaza saw its occupancy rate dip QoQ to 92.9% as at end Jun-14 from 95.9% due to some tenants not renewing their leases, though renewal rents in 2Q14 still showed a 4.3% increase versus preceding rents.

Maintain BUY

OUE-CT’s aggregate leverage dipped slightly to 39.5% (versus 40.8% as at end Mar-14) while average cost of debt edged up to 2.59%. Management has indicated that they are focused on executing and stabilizing existing portfolio assets in FY14 and will only expect their first acquisition to come in FY15 and after. We continue to believe that OUE-CT shows attractive relative value versus peers. Despite providing one of largest exposure to the premium office space in Singapore, OUE-CT offers a consensus forward yield of 6.7% – the second highest in its peer group (average: 6.0%). Its price-to-book ratio of 0.77 is also lowest amongst peers. Maintain BUY with an unchanged fair value estimate of S$0.88.

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