Expanding Its Presence In Japan

Croesus proposes to acquire One’s Mall in Chiba, Japan for SGD132.5m with a NLA area of around 52,000 sqm and a 99.4% occupancy rate. It will fund this acquisition partly via the issuance of 78.9m new private placement shares at SGD0.89-SGD0.92 a share, raising around SGD71m and the rest by local and Japanese debt. With this, gearing drops to 50% from 52% while DPU rises marginally to SGD0.09 from SGD0.0898. Maintain BUY with SGD1.15 TP.

• Private placement at SGD0.89-0.92/share. Croesus Retail Trust (Croesus) will partially fund this acquisition via a private placement of around 78.9m new shares at SGD0.89-0.92 per share, which will raise between SGD70.2m and SGD72.6m. It represents a 2.7%-5.9% discount to the adjusted volume weighted average price (VWAP) of SGD0.945 per share on 1 Sept (after deducting SGD5.4 cents from 2H14 declared dividend and advanced distribution). In addition, about SGD74.1m will be raised from new Japanese local debt (interest rate of 1.3% per annum) and the remaining SGD6m will be tapped from the existing local medium term note (MTN) programme (interest rate of 3.8% per annum).
  
• Large-scale retail shopping complex. One’s Mall is a freehold, largescale retail shopping complex with 52 tenants across a NLA of more than 52,000 sqm and a weighted average lease expiry (WALE) of 5.8 years. Opened in 2000, it is one of the largest retail facilities in Chiba Prefecture with a 99.4% occupancy rate. The property is situated in Inage Ward, one of the six wards in Chiba City, located within a suburban residential area with high population density. With 1,534 car park lots and a frontage along the National Road Route 16, a major arterial road, it provides visibility and easy accessibility to customers with cars.
  
• Maintain BUY with a SGD1.15 TP. We believe that this proposed acquisition is positive and in line with management’s strategy for Croesus, as it is marginally yield accretive (+0.002%), despite the fact that new shares are being placed out. Gearing drops to 50% from 52%, giving it more debt headroom for potential acquisitions down the road. Lastly, it allows the company to further expand its asset base and ride on any potential tightening of capitalisation rates. Maintain BUY with a SGD1.15 TP.

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.

High-Yield Proxy To Japan's Retail Scene

With Japan being the 3rd biggest retail market in the world with 127m consumers contributing an average of USD54k per household, Croesus Retail Trust, with a 8% dividend yield and close to 100% occupancy rate, is the first Asia-Pacific retail business trust and only proxy in SGX into the Japanese retail scene with 6 Japanese retail mall assets. Initiate coverage with a BUY and a DDM-backed TP of SGD1.15, with a 7.9% cost of equity (COE) and a distribution yield of >7%.

• Proxy to Japanese retail mall scene. With Abenomics monetary policies in place to create inflation and boost the Japanese economy, Croesus Retail Trust is poised to be one of the key beneficiaries as traffic flow at its malls has been increasing while capitalisation rates for its existing malls and other malls in Japan have been decreasing. It is the only business trust in the SGX that provides a proxy for investors who are interested to enter the Japanese retail mall scene.
• Long WALE of 10.2 years and highly resilient. Its portfolio has a weighted average lease expiry (WALE) (by NLA) of 10.2 years, which ensures long-term stability. Moreover, all its six retail malls are conveniently accessible via major highways, rail stations, and arterial roads or in suburban regions with high population density. This helps its malls to attract steady traffic flow and maintain demand for its properties, which reached approximately 100% occupancy as at 31 March 2014.
• Superior dividend yield of >8% far surpasses its peers'. Compared to its peers, particularly Japanese REITs in Japan, Croesus Retail Trust offers a far superior dividend yield of >8% at the current share price vs 3- 5% for the majority of its Japanese peers.
• Initiate coverage with a DDM-backed TP of SGD1.15, 7.9% COE. Our SGD1.15 TP represents a 20% potential upside from the current price of SGD0.96. At our TP, its distribution yield should stay at an attractive 7%. We like Croesus Retail Trust for its: i) stability, ii) attractive dividend yield, iii) transparent structure, iv) experienced management team, and v) potential positive rental revisions from the Mallage Shobu mall and asset revaluations. Initiate coverage with a dividend discount model (DDM)-backed TP of SGD1.15, with a 7.9% COE.