Croesus Retail Trust Placement of 60 million units without Acquisition

Croesus Retail Trust, a business trust in Singapore have on 23 Mar 2016 announced of a potential placement of 60 million shares.

These shares are looking to be placed between $0.745 to $0.77. This is a steep discount in my opinion over the closing share price of $0.81.

Balance sheet wise this will reduce Croesus Retail Trust gearing from 46% debt to asset value to 44%. Note that Croesus as a business trust is not limited to the 45% debt to asset leverage limit for REITs. They adopted a 60% debt to asset limit.

My Take

The narrative of this placement seems to be an unwillingness to take a rights issue for future acquisition and hence a book building for placement The discount to current price for placement suggest the demand, as a strong company with a accretive acquisition may have been able to placed out on par with traded prices or even higher. It might also suggest the capital raising climate currently.

The narrative also suggested that an acquisition could be in the works, although it will depend on whether they can raise the funds.

As shareholders, if there is no acquisition, this will result in roughly 10% dilution, so your potential 9.5-10% dividend yield could be 8.5-9%.

The flip side is that the gearing gets reduced, in the even the asset value plunges, and gearing goes up. That will affect the trust with loans that have covenant tied to it, or future potential borrowing cost.

In the current climate where their Japanese borrowing cost is 1%-1.5%, you wonder if the sensible thing is to reduce gearing for safety?

The logical deduction is that there is an acquisition in the pipeline, however to be accretive to share holders it can be challenging.

To be accretive, the new asset’s individual equity yield have to beat the DPU dividend yield of nearly 10%.

Most of Croesus assets are bought at 6-7% NPI Yield, so suppose Croesus is able to find a long lease Retail Mall that has a good Master Lease Tenant for 6% net property income yield.

This above is my leverage calculator, which I normally use to compute based on an assets yield, how you vary the amount of debt, the cost of debt will affect the leverage return. The formulas are there for you to deconstruct it.

To beat the 10% current Croesus dividend yield we are enjoying, they would probably have to match the 60 mil shares issue with equivalent debt issue, or 50% leverage at the low interest rate of 1.3%. This will result in a equity yield for the new asset of 10.70%

So balancing very expensive equity, with very cheap debt.

This 50/50 equity/debt acquisition is not really new, and what comes to mind is how Ezion go on acquisition spree. Lets hope this doesn’t blow up in our face.

Let me know if there are any questions or views. Sorry for the lack of posts. Having a very hectic work period and family emergency.

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