Croesus Retail Trust: Multiple drivers of growth for FY17/FY18 May 16, 2017
PSR Recommendation: ACCUMULATEStatus: MaintainedTarget Price: 1.08
3Q17 results within our expectations. 3Q YTD DPU at 75.5% of our FY17 forecast.
Stable portfolio with occupancy remaining high at 97.7% (2Q17: 98%).
FY2019 distributions hedged at favorable rate of SGD/JPY 72.72.
Potential takeover offer should be at higher premium.
Maintain ACCUMULATE with increased DDM-derived target price of $1.08.
Stable portfolio performance. Tenant readjustment still ongoing at Feeeal Asahikawa. Portfolio occupancy remains stable while average all-in cost of debt was reduced to 1.68% from 1.9% (FY16) due to lower refinancing rates. Management remains confident of achieving the 5-6% yield on cost for new acquisition Feeeal Asahikawa by FY18 after tenant readjustments. 91.9% and 76.1% of FY17 and FY18 rentals (by gross rental income) have been locked in.
FY2019 distribution hedged at SGD/JPY 72.72. Favourable hedging rates to improve DPU by 8.6% and 4.8% y-o-y in FY18 and FY19 respectively. FY19 hedging rate was fixed at 72.72 during the quarter. Distributions for FY17-FY19 have been hedged at average rates of SGD/JPY 83.57, 76.39 and 72.72. Even in the absence of accretive acquisitions, DPU would have been boosted by 8.6% and 4.8% in FY18 and FY19 assuming flat earnings.
Multiple growth drivers for FY17/FY18 on top of acquisitions. The refinancing of MTN in January 2017 will result in lower recurring interest expense of c.JPY152mn per annum commencing in 3Q17. Internalisation of Trustee-Manager has also reduced costs by JPY 198mn 3QYTD (annualised around JPY 300mn). Total combined savings work out to be c.9.9% of FY17E income available for distribution. We expect further finance cost savings when JPY 29.5 bn worth of Japanese local debt (c.46% of portfolio total) is refinanced in FY2018 when it comes due. The 3 month JPY LIBOR interest rate to which these loans are pegged to, has dropped from c.0.2% in 2013 when these loans are initiated pre-IPO, to close to zero currently.
Potential acquisition offer – announced on 26 April 2017.Price appears inexpensive even after rally. Even after the huge rally in price YTD, CRT trades at a Price/NAV of 1.04, which appears inexpensive compared with the average of 1.28 for listed retail J-REITs in Tokyo (Figure 2). With loose monetary policies and narrowing cap rates especially since 2013, CRT has enjoyed a consistent upward revaluation of its portfolio. Latest portfolio valuation (June 2016) of JPY 112.6bn represents a 18.4% increase over the aggregate purchase prices of the portfolio properties of JPY 95,127mn (adjusted to exclude any gains prior to IPO in 2013). We expect this cap rate compression to sustain in Japan due to continuing loose monetary policies as Prime Minister Shinzo Abe seeks to revamp the Japanese economy. The upward revaluation of portfolio properties and multiple visible strong growth drivers over the next 2 FYs will likely support the premium to book value that CRT currently trades at. Our new increased TP of $1.08 is at close to 1.12x book value currently.
Maintain ACCUMULATE with an increased DDM-derived target price of S$1.08 (from $0.93). Following the fixing of FY19 distribution SGDJPY rates at 72.72, we have readjusted our exchange rates for FY19 (from an average of 85 previously). We have thus revised upwards our DDM-derived target price to $1.08 (from $0.93). Our target prices translates to an FY17e and FY18e yield of 6.9% and 7.7% and current Price/NAV of 1.12.
Figure 1: CRT’s current price to NAV close to average since listing
About the author
Tan Dehong Investment Analyst Phillip Securities Research Pte Ltd
Dehong covers primarily the REITs and property developer sector. He has close to 7 years experience in equities related dealing and research roles.
He graduated with a Masters of Science in Applied Finance from SMU and Bachelors of Accountancy from NTU.