• Revenue and DPU growth on the back of contributions from newly acquired malls and tenant renewals.
• Non-property related savings such as savings from internalisation of asset manager and cheaper refinancing costs to boost bottom line in FY17 and FY18.
• Concerns about the longer term prospects of the last 2 acquisitions due to deteriorating demographics.

What is the news and how do we view this?

• Revenue and DPU growth on the back of contributions from newly acquired malls and a successful tenant renewal exercise. Croesus Retail Trust (CRT) made 4 acquisitions since 2Q16, with these 4 properties Torius, Fuji Grand Natalie, Mallage Saga and Feeeal Asahikawa pushing 4Q16 revenue up 34.5% y-o-y. The higher expense ratios of these new malls are due to the multi-tenanted nature of the malls and the cooler weather conditions in Hokkaido, resulting in higher utilities expenses.

• Non-property related savings such as savings from internalisation of asset manager and cheaper refinancing costs to boost bottom line in FY17 and FY18. Management guided that cost savings from non-property related aspects such as cheaper refinancing costs, more favourable FX hedge rates and internalization of asset manager could bring about as much as JPY 800m-1b in cost reductions annually by FY18. This compares with an income available for distribution of c.JPY 4b for FY16.

• Concerns about the longer term prospects of the last 2 acquisitions due to deteriorating demographics. Saga City and Asahikawa City, where the latest 2 acquisitions Mallage Saga and Feeeal Asahikawa are located, are cities with small declining populations, unlike most of the other cities where CRT’s other malls are located. We think this could pose a concern for the longer term prospects of the latest 2 acquisitions. Notwithstanding the longer term repercussion, management has previously pointed out that the historical sales for these 2 malls have been stable. We will be closely monitoring the performance of these two malls closely. These 2 malls take up 6% of the total valuation of CRT’s portfolio.

Investment Action:

Upgrade to ACCUMULATE with an unchanged DDM-derived target price of S$0.93. Though with some longer term concerns about the latest 2 acquisitions, these 2 malls take up only 6% of CRT’s total portfolio by valuation. We continue to like CRT for its long WALE and visible strong growth drivers over the next two FYs.