CRT – CIMB

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.