Croesus Retail Trust - Phillip Securities Research 2015-11-13: Higher rental reversions at Mallage Shobu kicking in

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CROESUS RETAIL TRUST S6NU.SI 

Croesus Retail Trust - Higher rental reversions at Mallage Shobu kicking in

Croesus Retail Trust (CRT) reported their 1Q16 results yesterday morning. 

Key highlights: 

 Effect of recent acquisition of Torius Property and Rights Issue to be fully reflected in 2Q16 numbers. 

• About 30% of Torius’ leases offer a variable rent component as compared to 9.9% on a portfolio wide basis. This offers CRT higher income upside potential should tenant sales improve with Prime Minister Shinzo Abe’s push for higher real wage growth and consumption spending in Japan. 
• Downside risks are minimal as tenant sales for Torius over the past 5 years have stayed pretty stable. 

 Drop in occupancy rate at Croesus Tachikawa due to transitional fit-out period. 

• Occupancy at Tachikawa dropped to 88.4% from 100% in 4Q15. Management pointed out that this is transitional due to the termination of an existing tenant. A new replacement tenant has already been signed on in October at the same rental rate at the previous tenant. 
• The other malls in CRT’s portfolio have close to 100% occupancy. 

 No major tenant expiries in FY2016 and FY2017. 

• Post the Torius property acquisition, weighted average lease expiry (WALE) of CRT’s enlarged portfolio would have been reduced from 8.6 years to 8.2 years as at 30 June 2015. 
• In addition to the stability of the long WALE, we expect minimal non-renewal risks over the new 2 years as c.95% of FY2016 and c.92% of FY2017 rentals have been locked in. 

 Occupancy costs remain low, at the low end of sustainable range. 

• Management reported that occupancy cost of the entire portfolio has declined slightly from the 8.3% as at 4Q15. The average suburban occupancy cost in Japan ranges from 12-15%. 

Investment Actions 

• We maintain our BUY call with a reduced DDM-derived target price of S$0.93 from $0.96, adjusted for the 22-for-100 rights issue undertaken for the Torius Property acquisition. 
• We also adjusted our forecasted payout ratio upwards to 100% (from previous 90%) for FY16 to FY18 (thereafter from FY19: 90%). 
• At a forward FY16F yield of 9.5%, CRT offers an attractive yield for a stable portfolio (WALE of 8.2 years), with distributions hedged on a fixed SGD/JPY exchange rate until FY17.

Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2015-11-13

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.93 Down 0.96