Wednesday, April 29, 2015

Investing in Japan's Shopping Centres - Croesus Retail Trust Retail Investor Seminar

Have you been to Japan or want to travel to Japan for a holiday? Do you know you can own a part of the many shopping centres in Japan? Yes, you can own shopping centres through a business trust called Croesus Retail Trust (CRT) which is listed on the Singapore exchange since May 2013.

I was at the retail investors day of Croesus Retail Trust (CRT) last Thursday and had the opportunity to listen to what the management team had to say with regards to the situation of the company and its plans for the future. It was quite a fruitful session as I learnt more about the Japanese retail real estate market and the company itself.

Portfolio of Croesus Retail Trust

I've been a shareholder of this trust since November 2013. Initially, CRT owns only 4 shopping centres in Japan, Now, they have 7 properties in their portfolio. 75% of their properties are in Tokyo and greater Tokyo. From last Thursday's session, I heard from the management team that the aim of CRT is in providing a resilient and robust income stream for its investors. It has suburban assets which are defensive in nature. Some of these shopping malls' main tenants are supermarkets and they are very family oriented. This results in the income stream being quite stable naturally.

A recent acquisition of One's Mall into CRT's portfolio

In recent months, CRT has been purchasing properties in Tokyo itself. The main reason for the purchases in Tokyo is to ride the asset appreciation wave in Japan. Property prices have been and are still going up in Japan as seen from the fall of the rental cap prices. The rental cap prices are what we know as rental yield in Singapore. As property prices goes up, the percentage of rental yield falls even as it remains constant in real value terms.

What are the returns like for investors?

CRT has been providing quite a good yield for investors since its IPO in 2013. It has consistently provided investors a yield of 8.4% and 8.7% for FY 2013 and FY 2014 respectively at a closing price of 95 cents. This is on the high side as compared to the other retail Reits in Singapore as well as Japan.

Other Japanese retail companies such as JRF has a yield of 3.6%, Activia 3.2%, Frontier 3.3% and Aeon 3.2%. As you can see, other Japanese retail companies on average only provides a yield of around 3%. One question we may ask is: "Why is there such a big gap between the yield of CRT and the others? Will the gap close?"

Growth of CRT and reassurance to investors

The answer given by CRT is yes the gap will close. They hope to grow the company by doing more acquisitions so CRT becomes an indexable stock which will hopefully drive the stock price up. When the stock price goes up and distribution per unit (DPU) or dividends maintains or grows modestly, the gap will close.

They have reassured investors that they will be responsible in delivering the DPU. They have promised on a 100% distribution for the first 2 years and at least 90% thereafter. They have also limited their gearing ratio to a maximum of 60% and swap all their floating rates to fixed rates to provide a more stable income stream. The gearing ratio is the amount of debt as compared to the equity of the company.

Gearing ratio too high?

The gearing ratio of CRT is around 50% now. Some of us may feel that it is too high. The management of CRT explained that the reason for the high gearing is because cost of borrowing in Japan is cheap now. Their borrowing cost is on average around 1.3% and are all on fixed rate. They reiterate that it is a good time to catch the property price appreciation wave in Japan now.

Also, as one of CRT's strategy is to ride the asset appreciation wave, an increase in the property price will result in a decrease of the gearing ratio.

What is going to drive the DPU?

If we're investing for income, then we have to ask ourselves how CRT is going to maintain and drive its DPU? CRT has given a DPU of 7.86 cents in FY 2014 and is projected to give a DPU of 8.5% in FY 2015. How are they going to drive DPU?

3 Acquisitions

Firstly, CRT has acquired 3 other shopping centres since 2013. This will provide more income stream for FY 2014 and 2015.

Tenant replacement and improvements to Mallage Shobu

Secondly, Mallage Shobu is one of the shopping centres in the portfolio of CRT. It contributes to 34% of the net property income (NPI) of CRT. The size of Mallage Shobu is approximately 2/3 of Vivo City in Singapore.

Mallage Shobu, the largest mall in CRT's portfolio

CRT has embarked on a significant movement in tenant composition with tenant renewal exercise for 155 out of 242 leases during FY2015 at Mallage Shobu. They have introduced 69 new brands, 28 refreshed store transfers, 58 renewed leases and also recent additions of new tenants such Muji, KOE (fashion apparel brand) and Jelly Beans (women’s shoe retailer); Toys R Us expected to commence in June 2015.

Improvements to Mallage Shobu will result in downtime in 2015. This will negatively affect DPU but the management has said that to minimize impact, they have spread the improvement works across different quarters. In 2016, we should see a 20-25% positive rental uplift which will result in a 4% rise in DPU.

Currency Hedge until June 2016

Since DPU is in Japanese Yen, it is subjected to fluctuations of the currency. The Japanese Yen has depreciated against the Sing dollar and this will affect DPU. But, CRT has hedged against it to stabilise the DPU.

However, once the currency hedge ends in June 2016, will DPU be affected? The management has said that they will hedge again when there's a good rate but their main strategy is still to focus on growing organically which is to acquire more assets to improve DPU.

In my opinion, there's still a lot of room to grow for CRT. The management seems to know what they are doing and gave a clear picture of their plans for the current and future growth of the company. During the seminar, someone asked if there would be a possible rights issue in which the management said they would consider it and it would be possible.

Also, they mentioned that 20% of the investors have chosen to reinvest their dividends which shows shareholders' trust in the company's future. If there are any rights issue or opportunity to invest more at lower prices, I would continue to invest in this company for a resilient and robust income stream which CRT provides.

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Related Posts:
1. Short interview with Jeremy Yong, Co-founder of Croesus Retail trust
2. Croesus retail trust and Saizen Reit - SG Young Investment
3. Looking to invest in Japan's real estate


  1. the gearing levels of 50% seems really high... if they go to 60% that would be twice the levels of a typical reit with 30% gearing, which may be even be more than twice the riskiness

    weaker yen could also lead to their assets being worth less, in SGD terms
    just be careful man

  2. the stock is also trading at 10% premium to book value

    what do you think is the fair value for this stock?

    1. Hi Felix,

      Yes the gearing ratio of 50% is pretty high but if things turn out well, where asset prices in Japan continues to go up, it'll be good for the trust.

      The Yen has gone down quite a lot since the past 1-2 years. It has somewhat stabilised for now. The fair value is around 87 cents which is the price I initiated position back then. Bearing in mind of the risk, I have positioned my sizing of the stock at no more than 10% of my total portfolio holdings. Thanks for the reminder on the risk.

  3. I see, ok
    thanks for the reply man

  4. wow.. great investment..
    Maybe I'll try it later

  5. I might be wrong but I think the 60% gearing is referring to the debt over equity not the debt over assets like many reits are using. I doubt they want to leverage that high anyway since its a reit afterall.

    1. Hi B,

      I checked again. Their gearing is long term debt over total assets. They are a business trust so there's no limit to the amount of debt they can have but they set their own limit at maximum 60%. I hope the gearing ratio goes down soon with property prices going up.

  6. SGYI : Thanks for the coverage from their seminar, another REITS in my watchlist, a bit too high (stock price) to plunge in now ;-)

    1. Hi Richard,

      Yup agree its a bit too high now. Wait for some dips and you can consider.

  7. In the macro view, the low exchange rate of yen has increased overseas tourists traffic. The upcoming casino proposal which may clear in their parliament soon and together with the Olympics at Toky in 2020, the retail industry will most probably enjoy and ride on these waves. I believe CRT will benefit from higher rental n appreciation in their property valuation in the near future.

    1. Hi HS,

      Wow, I didn't know about the casino. Thanks for telling me. Yes the Olympics effect will drive up property price. During the seminar, they did talk about this too.