Croesus Retail Trust - Phillip Securities 2016-11-14: Life after internalisation of Trustee-Manager begins

CROESUS RETAIL TRUST S6NU.SI

Croesus Retail Trust - Life after internalisation of Trustee-Manager begins

4 newly acquired malls in the past year drove earnings growth in 1Q17.
1Q17 gross revenue/NPI/DPU came in at 25%/24%/24% of our FY17e forecast.
2Q17 to see full-quarter impact of cost savings from internalization of TrusteeManager.
Lower interest costs from re-financing of debt due in FY17 to kick in fully from 3Q17.

2Q17 to see full-quarter impact of cost savings from internalization of TrusteeManager. Lower interest costs from re-financing of debt due in FY17 to kick in fully from 3Q17.
Croesus Retail Trust (CRT) refinanced close to half of the JPY7.45bn debt due in FY17 at a lower average interest rate of c.2.8% versus the previous 3.83%. We expect CRT to be able to reduce its annual financing cost by c.JPY80mn, should they be able to refinance the remaining debt due in FY17 at the same or lower rates. This translates to 1.7% of annualised distributable income (or 0.03 SG cents in DPU) based on 1Q17 results. We expect to see the full-quarter impact from this financing cost savings by 3Q17.
In addition, internalisation of the Trustee-Manager was completed in August 2016. CRT achieved a one-month cost savings of JPY29.9mn from the internalisation. Full savings of c.JPY90mn per quarter should start to kick in from 2Q17 onwards.

The 2 noteworthy events in an otherwise stable portfolio of retail malls are the upcoming
AEI works for Torius mall and the ongoing tenant replacement works at Feeeal Asahikawa.
Management is evaluating plans to construct a new annex building to increase overall net lettable area by c.600 tsubo (c.2.6% of current NLA 23,300 tsubo).
Management is also actively engaging several prospective tenants from other malls in the vicinity who are terminating their leases to join Feeeal Asahikawa (see below figure) and other CRT properties.

CRT’s property portfolio has a long WALE of 6.8 years. 88.1% and 79.1% of FY17 and FY18 rentals have been locked in.
Portfolio occupancy stands at 97.8% versus 98.1% in 4Q16, primary impacted by the drop in occupancy at Feeeal Asahikawa due to tenant replacement works.
Gearing ratio stands at 44.6% (4Q16:45.3%) and 100% of debt is hedged on fixed interest.

Maintain ACCUMULATE with an unchanged DDM-derived target price of S$0.93.
We continue to like CRT for its long WALE and visible strong growth drivers over the next two FYs.
Full cost savings from reduced financing costs, and internalisation of TrusteeManager would gradually kick in over the next few quarters, which would improve distributions.
SGD/JPY hedge rate of 83.57 for FY17 represents a c.1.7% improvement from FY16.

Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2016-11-14

Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 0.930 Same 0.930