Croesus expects growth, stability after Japan expansion

Torius Property (right), a large-scale suburban retail mall in Fukuoka, boasts prime tenants such as Costco and Daiso. The acquisition will expand CRT's portfolio in Japan to eight retail properties.
Torius Property (above), a large-scale suburban retail mall in Fukuoka, boasts prime tenants such as Costco and Daiso. The acquisition will expand CRT's portfolio in Japan to eight retail properties.PHOTO: CROESUS RETAIL TRUST

Croesus Retail Trust (CRT) bosses say it is well buffered against capital market volatility, arguing that its portfolio expansion in Japan over the past two years has been managed with prudence.

Its latest acquisition, Torius Property in Fukuoka prefecture, will incur four billion yen (S$47 million) in debt, but investors need not worry about interest rate volatility, said Mr Jeremy Yong, the director of the trust's manager, Croesus Asset Management.

He told The Straits Times yesterday: "We've been growing our asset base in a very responsible manner. First, all our debt is denominated in yen, so we have a natural hedging as our assets and liabilities are matched in the same currency.

"Second, we always engaged in fixed-rate borrowing to reassure investors that, should there be any interest rate hikes, they would not be subjected to that volatility. The debt on Torius has a fixed rate of 0.95 per cent per annum."

CRT's total gearing (a measure of its debt level) for this financial year has dropped from 47.3 per cent to 46.5 per cent on a pro-forma basis following the deal - a long way from its self-imposed limit of 60 per cent.

CRT also engaged in equity financing for the deal, with a rights issue of about 114.2 million units. The exercise will grant 22 units at 61 cents apiece for every 100 existing units held by unit-holders.

The outlook for real estate and commercial trusts has been under scrutiny as rising interest rates could strain such investments, which are typically laden with debt.

But CRT's investors can look forward to stability and growth following its 9.35-billion-yen acquisition of Torius, Mr Yong said.

The mass- and mid-market retail hub in suburban Fukuoka, which has a land area of about 257,000 sq m, had an occupancy rate of 95.3 per cent as at June 30 this year. The acquisition, announced late last month and set to be completed next week, will give CRT eight retail properties in Japan.

Torius' net property income yield, on a pro-forma basis, will be about 7.8 per cent, above the 5.3 per cent yield from CRT's existing portfolio, Mr Yong added.

He noted asset-enhancement opportunities. CRT's existing assets are 10 years old on average. As Torius is about 16 years old, CRT can add value through asset-enhancement initiatives, which would boost rental income over time.

Asset enhancements are part of CRT's growth strategy. After the upgrading of Mallage Shobu in Greater Tokyo, its increased contribution helped CRT raise gross revenue 25.5 per cent year-on-year to 1.99 billion yen for the April to June period. One's Mall in Chiba is also slated for enhancement works.

Japan's retail scene remains a valuable proposition, despite persistent economic and demographic uncertainties there, Mr Yong stressed.

"Suburban retail is a very defensive segment, and our assets are based in areas where there is still population growth. That is why we are projecting a rental uplift, potentially by 20 per cent, at Mallage Shobu in this financial year following its rental reversion."

CRT will continue to seek out acquisition opportunities.

"We are a lot more open-minded now to value-added acquisitions where we can buy slightly neglected assets, do our work and enhance yields. We are seeing plenty of opportunities for that," said Mr Yong.

A version of this article appeared in the print edition of The Straits Times on October 10, 2015, with the headline 'Croesus expects growth, stability after Japan expansion'. Print Edition | Subscribe