Croesus Retail Trust - DBS Research 2016-06-13: Internalisation of trustee-manager

Croesus Retail Trust - DBS Research 2016-06-13: Internalisation of trustee-manager CROESUS RETAIL TRUST S6NU.SI 

Croesus Retail Trust - Internalisation of trustee-manager

  • Proposes to bring management of trust “in-house”.
  • To acquire trustee-manager from Sponsor/Strategic Partners for S$50m, partially funded by underwritten non-renounceable preferential offering.
  • 1% accretion to proforma FY15 DPU.
  • Maintain BUY, TP of S$0.90


What’s new


Bringing day-to-day operations “in-house”

  • CRT announced that subject to unitholder approval, it intends to internalise its trustee-manager, i.e. bringing in- house the overall management and day-to-day operations of CRT. 
  • Post internalization, CRT will achieve costs savings as CRT will no longer pay management fees including any acquisition or divestment fees but instead pay the salaries of CRT’s management and other operating expenses which were previously borne by the trustee-manager/sponsor.

Acquires trustee manager for S$50m, partially funded by underwritten non-renounceable preferential offering

  • As part of the internalisation process, CRT will acquire the trustee-manager from CRT’s sponsor, Croesus Group and Strategic Partners, Daiwa and Marubeni for JPY4,100m (c.S$50m). 
  • To part fund the proposed internalisation, CRT intends to issue between 25,641,026-32,722,285 units (c.3.6-4.6% of existing number of units) to raise gross proceeds of between S$20-22.1m by way of an underwritten non-renounceable preferential offering on a pro rata basis of up to 1 preferential offering unit for every 22 existing units. 
  • The issue price of the preferential offering will be no lower than S$0.7293, or not be at more than a 10% discount to the volume weighted average price for the market day immediate preceding the day (10 June 2016) on which the underwriting agreement was signed. The timing and exact price of the preferential offering has yet to be determined. 
  • The preferential offering will be underwritten by Citigroup. The purchase consideration of JPY4,100 (c.S$50m) is at a 2.4-8.9% discount to the independent valuation conducted by KPMG of JPY4,200.1-4,501.7m (S$51.2-54.9m).
  • The remainder of the purchase consideration for the preferential offering will be part financed by the proceeds from the issuance of S$60m 6% fixed rates notes due in 2020 issued on 13 April 2016.

Retains existing ROFR and management team

  • Following the internalisation, CRT will continue to be supported by its sponsors Croesus Group, Daiwa House and Marubeni through refreshing CRT’s original right of first refusals over various properties. In addition, CRT will retain its existing management team and has entered into service agreements with the following personnel:
    1. Mr Jim Chang (Chief Executive Director) and Mr Jeremy Yong (Non Executive Director) – service agreement valid for initial term commencing from date of completion of acquisition of trustee- manager until 30 June 2020
    2. Mr Testuo Ito (Chief Financial Officer), Mr Kiyoshi Sato (Chief Investment Officer) and Mr Shunji Miyazaki (Chief Asset Management Officer) – service agreement valid for initial term commencing from date of completion of acquisition of trustee-manager until 30 June 2018.


Accretion to DPU

  • Based on CRT’s estimates, post the internalization, proforma FY15 DPU will increase by 1% to 8.02 Scts from 7.94 Scts. The FY15 proforma DPU includes the acquisition of Torius property, Fuji Grand Natalie, Mallage Saga and Feeeal Asahikawa as well as the recent rights, equity placement and bond issuance.


Our take


Fair price for trustee manager

  • While CRT has not disclosed the financial details of its trustee-manager, based on our estimates, the implied PE multiple and percentage of investment properties for the trustee-manager stands at 16.3x*, and 3.9%** respectively. 
  • Considering that ARA Asset Management trades on a FY16F PE of 17.3x and 4.8% of AUM, we believe the purchase consideration for CRT’s trustee-manager is fair. Please note that we believe that ARA deserves to trade on a higher PE multiple given its longer track record as property/REIT manager.

Greater alignment of interests

  • Beyond the expected cost savings from internalising CRT’s trustee-manager, we are positive on the proposed internalisation as it further aligns the interest of CRT’s management team and its unitholders. 
  • We also believe that CRT’s move will likely pressurise the smaller REITs/trusts to internalise.

Maintain BUY and TP of S$0.90

  • Pending further details from the circular to be distributed to unitholders, we maintain our BUY recommendation and TP of S$0.90. 
  • We continue to like CRT for its attractive 8% FY16F distribution yield and exposure to further cap rate compression given negative interest rates in Japan.


* Based on FY15 trustee manager’s fee of JPY700.651m, additional operating costs to CRT post internalization of JPY397,365 and 17% Singapore corporate tax rate.
** Based on FY15 purchase consideration ofJPY4,100m and total valuation of investment properties (inclusive of Torius property, Fuji Grand Natalie, Mallage Saga and Feeeal Asahikawa) of JPY106,450m.



Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-06-13
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.90 Same 0.90


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